After $150M Raised, What Went Wrong at Fuel Cell Startup Lilliputian

8/14/14Follow @mlamonica

[Updated 8/15/14, 1 pm. See below] Lilliputian Systems had the makings of a successful MIT spinout: novel technology, seasoned entrepreneurs, and plenty of money. Today, the company no longer has a website and next month it will shut its doors after selling off its intellectual property and burning through some $150 million in funding.

If there is a lesson to be learned from the demise of the Wilmington, MA-based company, it’s that one startup can only take on so much. The company had one core innovation—a silicon-based fuel cell membrane with the potential to be manufactured at large scale and low cost—but developing a first-of-a-kind consumer hardware product required taking on myriad manufacturing, engineering, and distribution tasks.

Its story is also a reminder that even in energy, which typically moves more slowly than information technology, market dynamics can change quickly. In the 13 years during which Lilliputian worked on its product, the lithium ion battery industry advanced substantially. That made a more expensive fuel cell product a tougher sell, even with the promise of much better performance.

Lilliputian’s various problems piled up and stretched out its product development time, which scared off investors from putting more money into it. “In some ways, the writing was on the wall for a few years now, and new investors had stayed away for a while,” says Bilal Zuberi, a venture investor at Lux Capital who was not involved with the company. “I also believe the management made too many false ‘we have turned the corner’ promises, and investor patience doesn’t last too long with that.”

When Lilliputian started in 2001, it had what looked like a solid idea for a business: a lightweight, pocket-size charger for mobile gadgets via a USB port. The introduction of the iPhone and other smartphones, e-books, and other small consumer electronics, such as digital cameras, seemed to make its product idea even more compelling. It signed on as investors Kleiner Perkins Caufield & Byers, Intel Capital, Rockport Capital, and, two years ago, a Russian government investment fund for nanotechnologies.

A number of companies have tried to make miniature fuel cells, but Lilliputian’s radically different technology, conceived at labs in MIT, seemed to give it an edge. It used MEMS (micro-electro-mechanical systems) manufacturing techniques to etch a fuel cell membrane onto a silicon wafer, which would allow it to take advantage of chip production equipment. The finished device could convert butane, or lighter fluid, into an electrical current at high temperatures in a gadget small enough to fit in a hand—an impressive engineering feat.

Lilliputian-Nectar-Mobile-Power-SystemThe primary draw of the product stems from how much energy butane stores per volume compared to batteries. Lilliputian boasted that with a single fuel cylinder cartridge—about the same length as a smartphone, but more slender—could provide two weeks of charging for a smartphone.

The potential of this technology in laptops is obvious as well. The business traveler who takes lengthy transcontinental flights could stay powered without having to carry extra batteries, which are bigger and heavier than the fuel cartridges. (The FAA has approved butane cartridges for portable electronics as carry-ons.)

Lilliputian introduced its product, called Nectar, at the Consumer Electronics Show last year and began taking orders after a number of delays. It also signed on a distribution agreement with retailer Brookstone to sell both the devices and recyclable fuel cartridges. It had planned to manufacture its silicon wafers at a retrofitted Intel chip foundry in Hudson, MA.

At the end of the day, though, Lilliputian never delivered its product, and the estimated cost of about $100 for its charger in 2010 ballooned to about $300 last year. Ken Lazarus, an experienced tech executive who had been CEO for nearly 10 years, left last year to head another local startup. [A previous version said Lazarus was replaced by the board---Eds.]

Sohail Khan, who became CEO last May, said in an interview that Lilliputian has licensed and sold its technology and intellectual property and is actively winding down. Khan wouldn’t name the buyer but indicated that the Lilliputian know-how could well be used for applications other than consumer electronics. The Boston Globe first reported that Lilliputian was shutting down.

“The majority of the assets will go to a very large global player who basically can continue to invest and productize,” Khan said. “It could be consumer electronics or industrial applications or other areas.”

When I asked Khan what went wrong, he said Lilliputian was “multiple startups in a startup” because it had to invent so many things. For example, the charger needed a pump to suck fuel into the fuel cell to generate power. But there were no off-the-shelf products that had the reliability, low price, and small size needed for a consumer electronics product. So Lilliputian had to make its own.

“The beauty of a consumer product is that it looks very easy, but it takes a lot of innovation and technology to have it look like that to the end user,” Khan says.

Cracking the consumer electronics market isn’t easy, either. Anyone who has ever searched for a wall charger while away from home can appreciate the utility of having an auxiliary power source in a purse or backpack, particularly one that could provide dozens of charges. But owning a fuel cell charger still required a change in consumer behavior. A person would have to go buy or order cartridges, which would have been priced at about $10, and remember to have enough on hand with the mobile charger.

Lilliputian boasted of how well its fuel cell worked compared to batteries. But at $300, that’s still a relatively large purchase, especially when you consider that a tablet computer can cost less than half of that. Some people would consider buying a portable charger for camping or during power outages. Indeed, there are a handful of portable fuel cell chargers available now. But that’s a very small market, made even smaller by Nectar’s projected price tag.

Making a hardware product, rather than a Web service or mobile app, also gave Lilliputian higher capital requirements. Given recent advances in prototyping, hardware startups can design products more quickly than when Lilliputian first started.

But the company’s primary challenge has more to do with it being an energy startup, says Bill Aulet, who teaches entrepreneurship at MIT’s Sloan School of Management. Innovating in energy and materials, in general, often includes both technical and business risks, and many venture investors have exited cleantech. At least one other portable fuel cell maker, Mechanical Technology Inc., failed to deliver a commercial product.

“There will be successful hardware companies, especially if they are what we call hybrid innovations that combine software innovation and data analytics, but energy is just really hard,” Aulet says. “Too many people jumped in this pool naively and it is a credit to the Lilliputian team that they treaded water for this long.”

For his part, Khan is confident that Lilliputian’s technology will appear in some other form, even if the business itself is now fading away. That’s not much of a consolation for its investors—or the more than 100 employees the company once had. In the end, Lilliputian, despite its name, suffered not from poor engineering but outsized ambitions.

Martin LaMonica is a national correspondent for Xconomy covering energy and technology. You can reach him at mlamonica@xconomy.com or @mlamonica. Follow @mlamonica

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  • Just_Chris

    This is a real shame, IMO the technology (i.e. a hydrocarbon fueled fuel cell small enough to fit into a package like proposed) was a real game changer hopefully the sale of the assets will result in this technology emerging somewhere else for a different application or who knows maybe even the same application just in a different box.

  • EnergyMan

    By those of us in the business that know this market, this is no surprise, this was expected. The market potential for this technology never, ever, warranted this type of investment for such a limited market. Back four years ago, I could buy an additional battery back for my long flights for $200, so really, where is the large market need here? This is a prime example of the venture capital community pouring money into another dog and simply not understanding the realities of this niche market. You see this pattern again and again. Instead of cutting their losses, VCs seem more intent on doubling down when the signposts say STOP. Meanwhile they are missing so many other opportunities where they could have productively invested $150M. This is a key reason why the venture capital model is broken as it is currently configured. Perhaps, if they totally eliminated VC fees and worked totally on success outcomes only the truly fit VC’s would survive in that business, just like real entrepreneurs do today.

  • tw2014

    I am really impressed with the $150M spent on just one product….this reminds me of another company, who went through about $450M on something similar quite some time ago and then also died (in 2008)… I know of several companies that tried, including the big Japanese electronics firms. I’d say at least over $1 Billion has been spent globally at attempting to bring fuel cell chargers into the market. Amazing. My company (a fuel cell company) produces of a fuel cell portable charger – similar to what Lilliputian attempted, but much lower cost and, although innovative enough – less ambitious in terms of performance… however we also make many (many) other fuel cell products – at least 40 different items for various markets and customer types. In total we spent less than $200,000 and 6 months to develop our handheld fuel cell charger which so far sold and shipped over 20,000 units (and counting to this day). We are probably the only ones that broke through in this area successfully. But let’s be very clear – this is not a be all / end all product nor market…just a small step on our path towards broad-scale commercialisation.

    • green.future

      Horizon Fuel Cell?

      • tw2014

        yup.

    • Martin Langley

      I’d like very much to hear from your company if you can offer a fuel cell which uses LPG or Butane as fuel. No matter that its not as powerful as the Lilliputian product. I was never convinced that the Nectar package for laptops etc was a viable proposition. If anything it undersells the technology by restricting it to consumer electronics. For myself I always thought the prime target should be automotive applications. The very best electric vehicles are those powered by fuel cells (See James May’s video on the Honda Clarity!) The only problem is there’s nowhere to buy the hydrogen (yet). By contrast, there is already a well
      supplied LPG infrastructure around petrol filling stations. Something like one in three has a pump selling LPG here in Europe and I’m sure the States is the same. Result is electric vehicles requiring no recharging which you fill up just like gasoline.