[Famous Failures] The fascinating story of an automobile entrepreneur who raised $1 billion
Conversations in the Indian startup ecosystem in the past week have been in the scale of billions of dollars. Millions of dollars is passe these days! In the wake of Flipkart raising $1 billion and Amazon announcing an investment of $2 billion the very next day, it seems to be raining money in the private investment space. These are humongous investments by any standard, and all accounts talk about how a war chest of this size precludes failure of any kind. But history has taught us differently. We decided to look back in time and find startups that had giant bets placed on them – either in funding, or in blue chip investors, or in early adoption – yet failed. The series, titled ‘Famous Failures’ will chronicle why they failed, in an attempt to identify lessons for all entrepreneurs.
Imagine that you are driving your beautifully quiet and smooth electric car with zero emissions, on a highway. You notice that the charge in your battery is running low. You look at your custom navigation software on the dashboard and find the nearest charging station. You drive in, and robotic arms swap your depleted battery with a fully charged one, all in a matter of minutes, leaving no need for charging your own batter. You continue on your journey, without even having to get out of your car. Sounds like something straight out of sci-fi? No – that’s exactly what ‘Better Place’ created.
Better Place raised nearly $1 billion dollars in venture funding, was led by Shai Agassi, a charismatic ex-SAP executive who already was a part of the World Economic Forum’s Young Global Leaders and had the ear of the top world leaders from Israels Shimon Peres to Bill Clinton – yet managed to sell all of 1400 cars in its lifetime of 6 years before filing for bankruptcy.
Vision vs. Execution
Better Place was founded about 3 years after its more famous cousin, Tesla Motors was founded by Elon Musk. Shai Agassi, whose startup Top Tier, which managed data and enabled companies to create internal web portals, was acquired by SAP for $400 million, came up with the thought of “how to run an entire country without oil”. This outrageously radical thought led him to research tens of alternatives over 18 months to finally co-author a white paper titled “Transforming Global Transportation”. At the time, the only other electric car company worth its salt was Tesla, whose Roadster, costing a bomb at $100,000 was seen more as a millionaire’s experimental vehicle rather than an affordable mass-market alternative. So the white paper that proposed an affordable family car with a reasonable reach per charge soon became famous. The charismatic Agassi was invited to speak at various conferences worldwide where he got to hobnob with powerful heads of state and other leaders. As the conference circuits applauded his vision, Agassi took that as confirmation of his vision and founded Better Place, with zero market research or competitor analysis. For example, Tesla Motors was doing its own research and Yet-Ming Chiang of MIT founded A123 came up with a nanoscale electrode powders based battery technology, which the team did not even consider for potential alternatives.
Lesson: A great vision can be concocted by a talented fiction writer too. In fact, ideas are cheap and history is paved with startups that had ‘great ideas’ but failed at execution. Flights of fancy on a Davos World Economic Forum afternoon are vastly different from real life.
Steve Jobs’ Reality Distortion Field vs. Shai Logic
Jobs’ biography talks about what his associates, employees and friends referred to as “reality distortion field” where Jobs seemed to almost “bend reality” to get seemingly impossible outputs from his employees by forcing his sheer will on them. Agassi, who seemed to fancy himself the Steve Jobs of the auto industry (he even wore black turtlenecks) also seemed to bend reality – but with a fatal flaw – he would come up with estimations and numbers on the fly without any calculation whatsoever, when speaking at public events. Sample these:
- he started mentioning at press conferences that the first car planned in collaboration with Renault would be priced at $35,000 even before having any pricing discussion with Renault
- at a meeting with GE to explore collaboration opportunities, he threatened them that his cars would be free and hence they should simply stop worrying about capturing any market share with their averagely priced cars
- the initial estimations for building each charging station was $500,000, while the actual cost turned out to be $2 million. These stations were influenced by Apple design philosophy. Further, Renault sold 800 of the same electric vehicles in France in just a month, without battery swap stations, but with a straightforward charging option at home (contrast this with 1400 cars sold in Better Place’s lifetime)
- in his famous TED talk in 2009, even before any infrastructure was in place, he claimed that 100,000 cars would hit the market in the first year of launch in 2011 amidst a rousing reception
Lesson: There’s no bullshitting with numbers and data. Decisions originating in a deep confirmation bias that the market will work, will always be flawed. Believing what your PR story says about your startup as the true state of things is naivety at its worst
(No) Focus, (No) Focus, (No) Focus
Even before a single car was manufactured, Agassi hired teams of managers in Israel, Denmark, US and Australia. Demos were created and executed in China, Japan and Hawaii. He created a 10-member team headed by a VP of Policy, whose job was to influence policy making in any country to enable battery swapping and make it legal. In 2010, he opened a $5 million visitor center in Tel Aviv, with a mile-long track where visitors could drive a prototype, read about plans on futuristic touch screens and even fill up a form stating intent to buy a car whose price and launch date were unknown. He hired expensive PR agencies to have multiple glitzy ‘launches’ in New York, with holograms and other technologies, again, years before the car was close to production. In fact, the complete senior management team did not have a single person who had built a car in his lifetime.
Lesson: While every waking hour and every venture dollar should have been pumped into the one thing that mattered – the car – it was being spent on events, PR stories and visitor centers with absolutely no ROI to show. In the world of easily accessed press and paid media, it is very easy to be distracted from your core product
Any startup, and more so a pioneering one that is attempting to disrupt the market needs partnerships and collaborations. At the very least, it needs a cordial working relationship. Agassi, on the other hand, went about antagonizing and turning away every single potential partner. He rudely sent a text message to a major carmaker “I’ll be offering $20,000 cars in a market where you’re selling $60,000 cars. How many have you planned to sell in Denmark? Because I recommend you take them off your plan”. He was extremely arrogant with the conservative German carmakers Mercedes and BMW, who refused to work with him. He mandated and built a proprietary battery charging station instead of buying it off-the-shelf from GE. He spent $60 million on creating a custom navigation software when an existing $30 navigation software could have been easily customized. His lack of market knowledge also did not give him time to digest one major development – the emergence of the 480-volt super charger that could charge a battery 80% within a few hours, rendering the battery swap investments irrelevant.
Lesson: There is absolutely no point of view in reinventing the wheel as a startup. Build on existing technologies and thought processes. And more importantly figure out how partnerships can reduce the time to market
Of course, there was a lot of dirty linen washed in public before and after the bankruptcy filing. Agassi was unceremoniously thrown out by the Board. The charismatic Agassi who could do no wrong and who was the darling of the media turned into a pariah over the months. Stories of him recruiting family members, his girlfriend and her friends to senior positions, of the CFO position remaining unfilled for 2 years and his supposed extreme narcissistic behaviour surfaced. The Board was blamed for being blinded by his personal charisma. Shai Agassi, on his part, has gone on record at all media interactions even after he was fired from the company, that he still thinks that the battery swap business model is still viable. He is clearly not open to other points of view.
All that is left of this billion dollar experiment is about 1400 cars and dead charging stations in some parts of Israel, and many ruined lives of customers and investors.
What do you think of the Better Place story? How do you think a company like Flipkart with a billion dollars might take a wrong step? Share your thoughts below!