The Answer Was Floating In The Wind; Danotek Finds Its Calling In Wind Power

7/6/11Follow @xconomy

During my brief time here in Michigan, I’ve heard a familiar prediction: The state is poised to become a cleantech powerhouse because of its expertise in manufacturing and automobile engineering.

So far, that’s mostly been talk. Danotek Motion Technologies, however, is walking the walk.

The Canton, MI-based startup has unique technology and Silicon Valley investors, but importantly, the company is making and selling real stuff to real wind power customers and creating jobs in return. In essence, Danotek is practicing what Michigan often preaches.

Danotek “has done an incredible job in building a sales pipeline,” Rachel Sheinbein, a principal in San Francisco-based CMEA Capital and Danotek board member, tells Xconomy. “We’re excited about the prospects.”

Using permanent magnet technology, Danotek is helping wind turbine makers build smaller, less costly, more efficient generators that can produce up to 3.2 megawatts of electricity.

Danotek has come a long way. In 2009, the company generated $450,000 in sales. As of the first quarter in 2011, Danotek boasts a $50 million backlog in orders from customers like General Electric, Clipper, DeWind (a unit of Daewoo), and WinWinD in Finland. Last year, the startup hired 58 employees from 13 countries, bringing its workforce to nearly 100 strong.

Unlike most high tech startups, Danotek successfully transitioned from a research and development firm to a full-fledged manufacturer thanks to one fateful decision, savvy investors, and an experienced CEO.

Danotek was founded in 2001 by a group of former GE engineers, including Daniel Gizaw, who also worked at Cummins Power Generation, General Motors, and Ford Motor. The company was interested in the idea of generating a constant magnetic field, which in turn, could produce a stable, continuous flow of electricity.

But in reality, “they didn’t have a clue of what this was going to be,” says CEO Don Naab.

Danotek dabbled in electric vehicles but in 2008 decided to pursue wind power, signing agreements with GE and Clipper to develop lower cost wind turbines.

Silicon Valley took notice. The following year, Khosla Ventures, CMEA Capital, GE, and Energy Capital Management invested $13.2 million in Danotek, allowing the company to move its headquarters to Canton and build a production plant.

The permanent magnetic technology can be a “significant benefit to wind,” Sheinbein says. “There weren’t a lot of companies in this space. Danotek could be a leader.”

In 2010, Danotek hired Naab, a former group president at Broadwind Energy, as its top executive.

At the time, “we didn’t understand the market opportunity,” Naab says. “There was not a lot of work on the intellectual property front. We needed to develop a company that could develop global products.”

Despite its innovation, Danotek had only three patents. Today, it has 30. Naab also hired scores of designers and engineers to build out the business. According to Naab, only three percent of wind turbines in 2008 used permanent magnets. That number should grow to over 50 percent by 2015, he says.

Danotek eventually hopes to create generators that can produce up to seven megawatts of electricity. In addition to generators, Danotek hopes to offer customers an “integrated solution” of a generator, gear drive, and converter based on its core technology.

The startup is close to raising a $20 million Series B round from its current investors, Naab says. The company plans to start full scale production in 2012.

Wind, however, remains a tricky business, especially in the United States where the industry relies heavily on government tax breaks and investors sometimes must wait a decade before earning a return.

“There’s a lot of volatility in the industry,” Sheinbein says. “There are continuous issues with funding in the wind sector.”

Naab, though, sees great prospects in overseas markets that, compared to the United States, are more amenable to wind energy, including China and Europe. However, Danotek’s main strategy is to become a trusted supplier to its customers wherever they go, he says.

“We’ve been very fortunate to have our clients,” Naab says. “We want to follow their global path. We’re part of that chain. Right or wrong, we’re not going to think ‘where is the entire industry going?’ We’re focusing on customer need.”

Sheinbein says Danotek could eventually be a good candidate for an initial public offering. But for now, the company is concentrating on building out sales, she says.

“I don’t want to think about an exit right now,” Naab says. “Six months from now, I might be able to give you a more detailed answer. But right now, our investors realize there is a lot of growth left for Danotek.”

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