The A123 Story: How a Battery Company Jumpstarted its Business
If there’s one Boston-area energy company atop everybody’s list to become the next great New England success story, it’s got to be A123 Systems. The six-year-old Watertown, MA, maker of high-power lithium-ion batteries for applications like GM’s planned Volt electric vehicles and Black & Decker power tools has quickly established itself as a real powerhouse. After accumulating some $132 million in venture funding, it now counts six manufacturing plants in China, 852 employees (at last tally), 120 patents and filing, and the largest lithium-ion R&D team in North America. More to the point, everybody representative of the company whom I’ve met, from the chairman—legendary New England entrepreneur Desh Deshpande—to investors and key execs repeats a mantra you don’t hear all too often in these days of entrepreneurial early exits: “We’re in it for the long haul, and we’re out to change the world.”
Which is why I decided to stop by MIT’s Stata Center last Thursday to hear what Bart Riley, one of A123’s three founders, had to say. His talk, part of MIT Energy Futures Week, was called “A123 Systems: from nanotech to reality.” Which implies, perhaps, that things didn’t start out in reality. And, as you’ll see, that kind of turns out to be the case. Riley is a die-hard engineer, with some 40 patents to his credit. But, reining in his obvious desire to talk technical turkey, he proceeded to unfold a fascinating drama that kept the audience, roughly 60 people who filled the small Stata classroom to capacity, riveted in their chairs. His account amounted to a firsthand case study of entrepreneurship—telling how a little startup that was smart about picking employees, investors, and partners got going around one idea that didn’t really work out, and how it responded to that challenge to become a potentially industry-changing success story.
Before diving into Riley’s talk, a bit more context on A123. As we described the firm back in October, it’s “like some sort of entrepreneurial Energizer bunny: it just keeps on marching through investment rounds and deals.” At the time, the firm had just announced it had closed a new $30 million financing round. That was on the heels of a $40 million round the company closed last January—the largest New England venture deal in the first half of 2007—and brought the total raised since its 2001 inception past the $130 million mark. A123 can also point to a Who’s Who of investors that include General Electric, MIT, North Bridge Venture Partners, Procter and Gamble, Motorola, Qualcomm, and Sequoia Capital, among others.
A123 is planning to use its new funds to scale up production capacity to meet the growing demand for its products and services; a chief goal is fulfilling a big contract with General Motors, announced in August, to co-develop the battery cell for the Chevrolet Volt line of electric cars and other vehicles. The company also plans to, among other things, grow its cordless power tool battery business and rev up its aerospace ambitions.
How it intends to do all that, and its other plans for the future (Riley hinted in the Stata’s pub after his talk that another big announcement is on the way), will have to wait for another time, though. Riley’s account was about how the company got going and persevered—and he says it’s the fullest picture the company has ever revealed of those early days.
The story starts not too far from Stata, in the lab of Yet-Ming Chiang, a professor in MIT’s Department of Materials Science and Engineering. Sometime in 2000 or early 2001, Chiang (who had long been researching lithium battery materials) hit on a potentially revolutionary way to fabricate batteries. More specifically, he discovered that as a result of what are called colloidal surface forces, he could coax a mixture of cathode and anode particles to self-assemble into a battery.
“It’s a big idea,” Riley told the Stata crowd, some of whom (unlike me) probably understood what he was talking about. If it could be pulled off, he explained, the revolutionary new battery architecture would double the energy density of batteries and cut the cost of making them in half. That part, I got.
Fast-forward to the spring of 2001. Riley, who has a PhD from Cornell, was working at Danvers, MA-based American Superconductor, where he was employee No. 27. And despite not having an MIT degree (for which the audience at Stata gave him some good-natured grief), he had known Chiang for quite a while. One night, Chiang came over for one of their periodic dinners and told him about the self-organizing battery idea. The two talked about forming a company around the concept, but didn’t really know how to proceed.
Enter Ric Fulop, who drew applause when he made a guest appearance in the back of the room while Riley was speaking. Fulop (who was still in his twenties back in 2001) had already formed or helped form five companies—all in hardware or software. None had been big winners, Riley related, but he had done well enough apparently. Only now, the Internet bubble had burst and he had decided to get into the energy field. According to Riley, Fulop (whom I later learned was doing an entrepreneur-in-residence stint with Xconomist Howard Anderson’s YankeeTek Ventures at the time) was essentially cold-calling different energy professors looking to start an energy company around carbon nanotubes. That same spring, he pitched the notion to Chiang, who told him, “No, no, no, no—we have a better idea.”
Enter the Naked Fish. That’s the area restaurant where Riley, Chiang, and Fulop met for dinner in July 2001 (Riley said they plan to go back for a celebratory dinner if and when the company goes public). Riley also said it was really Fulop who provided the, um, entrepreneurial spark to jumpstart the battery company. The three talked about their potential roles in the venture and liked the fit: Fulop, the entrepreneur and money-raiser; Chiang, the professor with key technology; Riley, the experienced engineer. As Riley puts it, “we all saw that our roles were different, and that was very good.”
Next step—raise money. The trio joked that they needed a 20-page PowerPoint presentation, so they put one together. Virtually simultaneously, they began negotiating for an exclusive license to Chiang’s core technology from MIT, which they soon got, along with rights to a nanophosphate cathode material that Chiang had recently created in his lab. The nanophosphate didn’t relate to the self-organizing concept, but they licensed it anyway. (How’s that for subtle foreshadowing?)
The group began actively pitching venture investors that September. The investors also played a role in the licensing, which, naturally enough, they made a condition of any financing deal, Riley told me later.
Around this point in his talk, Riley took a step back to outline the key ingredients he thinks charged up the company’s start:
Technology potential: the self-organizing battery concept promised to double energy density and halve the cost if it worked.
Great market: “Everybody wants a better battery, it’s just a basic fact,” Riley said. The green movement was also growing, although it’s far more important now. All this made the exit possibilities very apparent.
Nice timing with key results: Chiang and his students were getting increasingly positive results in their attempts to make self-organizing batteries work; the results added a sense or urgency to investing. “Nothing beats that, it’s that sense of momentum,” Riley said.
Aggressive (perhaps overly so, Riley confessed) business plan: prototype in 2002, product launch in 2003-4; profitability in 2004-5.
“The trick to getting funded is to create an environment of healthy competition between potential lead investors,” Riley later told me. And evidently it worked, as a bevy of venture firms wanted in. When all was said and done, though, the team went with North Bridge Venture Partners, which took the lead in an $8.3 million Series A round that closed in December 2001. It was the first energy and materials play for North Bridge, whose partner, Jeff McCarthy, joined the A123 board. Also taking part in the round was Sequoia Capital, (Sequoia’s Mike Moritz, of Google and Yahoo investment fame, is a board observer), YankeeTek Ventures, MIT’s venture fund, and Sparta Group. Four months later, an additional $4 million was put in by Motorola and Qualcomm, both of which saw the potential of better batteries: cell-phone maker Motorola also became a customer. Riley related how Fulop had run into Qualcomm’s Paul Jacobs (now the company’s CEO) at a conference, button-holed him to pitch the concept, and then asked him to invest. Jacobs now has an A123 board seat as well.
And there was more. At the end of 2001, as all this was underway, Chiang answered a U.S. Department of Energy solicitation that a few months later led to the firm’s being awarded a $100,000 Small Business Innovative Research grant for work on the nanophosphate material also licensed from MIT (more foreshadowing).
Everything, in short, was looking good. “I quit my day job,” Riley told the crowd, meaning he left American Superconductor. “The VCs look for that. They look for getting experienced guys to leap as a gauge on reality.” Not long after that, A123 hired its first additional staff person, a freshly minted MS from Chiang’s group. The company set up shop in the Photonics Business Accelerator at Boston University. The name A123, Riley explained, was derived from the formula (which begins with A123) used to calculate the forces governing the actions of the nanoparticles in the self-organizing battery. There was just one catch at the time, though, Riley said: “We couldn’t tell anybody what the name meant, because it was proprietary.”
As the pace picked up, Riley said they did some 500 phone interviews to select the first 15 employees. They were looking for technical skills, but they also wanted multidisciplinary people who could help with a variety of tasks. Critically, added Riley, they wanted people with a team orientation.
They hired a CEO—Dave Vieau—in April of 2002, barely three months after the financing closed. Vieau came off of nine years at American Power Conversion, where he rose to become the No. 2 person. He was great at growing a successful company, and he had strong leadership skills, said Riley. (As an aside, a few months ago I was at a private dinner with Deshpande, the chair of A123’s board. He described another key trait in Vieau, which I mentioned at the start seems to hold for the three founders as well—he is in it for the long haul, and cares more about building a big, successful company than making a fast exit.)
Things were really humming at this point, said Riley. “There’s nothing better than being on a small team…and making a run at changing the world.” But toward the end of 2002, the runners developed a cramp, so to speak. It was a big cramp, too, because it was turning out the self-assembling technology didn’t really work very well. The company had some good results, but poor reproducibility, and the batteries it created lasted only a fraction of the time that conventional batteries last “before they faded in performance unacceptably,” he said.
This is where the aforementioned nanophosphate cathode material really comes into play. All along, thanks to the DOE grant, A123 had managed to do a small bit of work on this front—“part of a guy who was scoping out the nanophosphate, under that funding,” Riley said later. Meanwhile, new studies at MIT showed that the material produced surprisingly high power density results in early tests. In fact, Riley told me, an academic paper published around this time about the work stunned the battery community, leading other firms to begin to take an interest in the material. Riley said the results, and the rising interest of other firms, put A123 at a crossroads. “In startups you always want to focus on one thing,” he said on Thursday night. “But now we had two things.”
So what to do? The company got lots of investor advice to stay with the original focus. Still, the new material was highly promising and seemed like it might lead to a product sooner, even if it wasn’t as revolutionary as a self-organizing battery. To try to do both would likely slow down everything. But management decided to form a small team to evaluate the nanophosphate material and validate its manufacturability. Not long afterwards, with the material looking ever-more promising, they decided to put the original self-organizing battery system on the shelf and shift the firm’s focus to the nanophosphate. “We did the student body left decision,” Riley told the crowd. “In a startup you probably get to do that once.”
It was a bold move and it worked. The material proved intrinsically stable and safe. Batteries made with it proved to have 10 times the lifespan of conventional batteries, with twice the power. And, Riley said, because they adhered to conventional battery design, they could be produced with largely conventional manufacturing techniques.
This was the direction the company took off in. Armed with the new approach, A123 focused on bringing in new customers from the aerospace and automotive sectors. In 2005, it signed its exclusive partnership with Black & Decker—first to provide batteries for the DeWALT power tools brand, and later for Black & Decker tools as well—beating out the firm’s incumbent Japanese supplier. “That launched us into the industry,” Riley told the Stata crowd. (Riley says that the company has not given up on its original concept. “We still maintain the position that self-organization may be a great technology, it’s just not ready now,” he says.)
I won’t say the rest is history—but from here the story is better known. The company has closed new rounds of financing. It has made three acquisitions, and opened a series of plants in China. It signed the Volt deal, which targets a 2010 launch. Riley told the Stata audience that Toyota had just announced that it would launch a competitor to the Volt, also in 2010. “So now the race is really on,” he relayed. And, no doubt, more announcements are the way.
At this point, we were running out of time and conference organizers—including Xconomist Bill Aulet, who introduced Riley in the first place—were anxious to get to the food and beer. Riley wrapped up quickly with some more key lessons from his experience:
— hire seasoned technical and business people early
— create a sense of urgency or competition to do business with you, providing momentum for major deals
— find a way to get real (an example here was the first exclusive deal with Black & Decker that allowed A123 to establish a basic level of economies of scale and made it a player in the industry)
— Establish a one-team culture
— Be as open with the board of directors as possible: identify key problems so that they can help you solve them.
— Have fun
“On top of all that,” Riley added, “you get to save the world.”