Electric dreams

If Neal Saiki and Tom Tansy get their way, motorcycles of the future will sound more like remote controlled toy cars than monstrous metal Clydesdales.

The two have teamed up to build a line of electric motorcycles that will outperform their gas-guzzling big brothers on the dirt-bike circuit and have just started looking for venture capital dollars. They couldn’t have picked a better time to start pitching their company, Zero Motorcycles.

After years of shunning investments in new modes of transportation, venture capitalists suddenly can’t get enough of the deals. In the past 16 months, they have juiced up no fewer than five companies building electric or hybrid vehicles with a total of $216 million (see table).

Why the sudden rush to fund these startups? Part of it probably has to do with wanting to cash in on the “green” craze. But there are other factors at work too. The price for the most expensive input into an electric vehicle, the batteries, is dropping fast. The 168 lithium ion cells used in Zero’s first bike cost half what they did a year ago, Saiki says. VCs also feel like these companies are more viable now because they don’t have to build everything in-house. Like the PC industry, the auto industry has outsourced most of the production of parts, so a startup can tap into the same supply chain.

“Both Tesla Motors and Think Global rely heavily on automobile expertise, parts and assembly techniques that we would not have had access to in the past,” says Ion Yadigaroglu, a managing principal with Capricorn Management, which has backed both companies.

Tesla kicked off the electric car craze last summer, raising $40 million in first round of financing from a bevy of venture capital firms, including Draper Fisher Jurvetson, as well as big-name private investors such as Google founders Sergey Brin and Larry Page. The company, which is developing an electric sports car, raised another $45 million in May.

DFJ followed Tesla with an investment in India-based REVA Electric Car Co., which has sold about 1,800 of its battery-powered two-door hatchbacks since 2001. The company, which is now test marketing its cars in the U.S., raised $20 million from DFJ and Global Environment Fund Management Corp. in December.

Then came the ultra-aerodynamic Aptera Motors, which raised $20 million in April from Idealab and an undisclosed angel investor. The Carlsbad, Calif.-based car company claims its hybrid three-wheeler will get 230 mpg.

Think Global, a Norwegian electric car maker that touts a plug-and-play commuter car, raised $60 million in July from a host of investors including Capricorn and DFJ Element (DFJ’s cleantech fund), adding to $25 million it had raised earlier in the year.

Both Tesla Motors and Think Global rely heavily on automobile expertise, parts and assembly techniques that we would not have had access to in the past.”

Ion Yadigaroglu, Managing Principal, Capricorn Management

Venture Vehicles, which has developing what it bills as an “iPod cool” hybrid electric three-wheeler, raised $6 million in August from NGEN Partners.

As of mid-August, Kleiner Perkins Caufield & Byers was debating about whether to jump into the electric car fray. KP Partner Ray Lane told VCJ that the firm was “in talks” with Phoenix Motorcars, which makes electric SUVs and sport utility trucks. (KP had not made an investment in Phoenix as of VCJ press time on Aug. 22.)

Alternate routes

Each company is attacking the market in a slightly different way and faces its own set of hurdles.

Tesla recently replaced co-founder and CEO Martin Eberhard with KKR advisor Michael Marks and announced that its roadsters may not be ready this fall as planned. The delay has been caused by “testing, testing and more testing,” Eberhard wrote in a letter to investors.

The sports car company has been spinning its wheels to develop better battery array technologies. Its primary intellectual property consists of creating a method for linking many lithium ion batteries and getting them to stay cool.

Focusing on the power train is a strategy that is already paying dividends for Tesla. It inked a $43 million deal with Think Global to provide a workable array of 3,000 lithium ion batteries that will allow Think Global’s vehicles to travel 110 miles on a single charge. Tesla is shooting to become the “Intel inside” of electric vehicles.

Other new vehicle companies, such as Aptera and Venture Vehicles, couldn’t care less what type of power train drives their cars. They’re focused on creating hip looking vehicles that they can get to market quickly while it’s still hungry for all things “green.”

“We’re saying give us what you got, it doesn’t matter, it doesn’t sell on its battery technology but on its coolness and it’s power-to-weight ratio,” says Venture Vehicles backer Steve Parry of NGEN Partners. “If you go big and heavy, you have to focus on the battery technology first. If you go light, you can focus on getting to market. It’s just far faster to hack the vehicle weight by a third instead of improving the battery by 300 percent.”

If you go big and heavy, you have to focus on the battery technology first. If you go light, you can focus on getting to market.

Steve Parry, Partner, NGEN Partners

One of the best ways to cut down on weight is to go from four wheels to three, Parry says. Both Venture Vehicles and Aptera are aiming to sell lightweight three-wheelers, but the real advantage in that style may be that it circumvents federal testing requirements aimed at carmakers. Three-wheelers are considered to be enclosed motorcycles and only face materials testing requirements. Still, Parry says that Venture Vehicles isn’t going to cut corners and will run its first product through rigorous crash testing.

The three-wheel strategy will help Aptera and Venture Vehicles get to market faster, but there’s no guarantee that customers will like the non-traditional design or handling of the vehicles. Some investors would rather not take that bet. Capricorn believes that the traditional-looking offerings from Tesla and Think Global will be more readily accepted. “Our companies are making things that look like cars,” says Yadigaroglu. “It’s a little disappointing when you get into one of our cars. It drives like a car. It’s a very different experience, but you don’t have to relearn how to drive.”

Yadigaroglu may be unwilling to bet on consumers relearning how to drive, but his investment in Think Global certainly hopes they’ll interact with the car-buying experience differently. “When you go to an EV [electric vehicle], you have to rethink a lot of the aspects of the car from scratch,” he says. “People will increasingly think of cars as a utility instead of something they just own. For example, it makes sense to not own the batteries yourself, but for the car company or the electric utility company to own the batteries so you can pay as you go.”

The batteries are the most expensive component of the Think Global car and are expected to work for three to five years. They may not be reliable for transportation purposes after that, but an electrical utility could still use them to store power and deliver it to the grid during peak demand times. If the power company bought the lithium-ion arrays, it could help defray the up-front cost of a Think Global car. Or at least that’s the hope.

Phoenix Motorcars is hoping to get help from power companies, too, but in a very different way. The company says it has around 500 pre-orders from fleet customers such as California power company PG&E and the Port of Los Angeles. PG&E took four of the company’s prototypes for a test drive in March. Phoenix says it doesn’t expect to sell to consumers until sometime next year.

Potholes ahead

Though manufacturing a car now may be easier now, setting up a distribution and service infrastructure is just as hard as it has ever been. Tesla has been the first to deal with this in the United States. It plans to build showrooms in Los Angeles, Menlo Park Calif., Chicago, New York and south Florida, which it will fully own. Think Global plans to sell its first cars online, build them to specification and deliver them to buyers. Other companies are still working toward a strategy.

Then there’s always the chance that any one of these startups that gets traction will draw the attention of one of the big car makers. The same applies to Zero Motorcycles, says Doug Kelly, a partner with Alloy Ventures. “You need to be very worried that if you had any market traction at all, Honda, Yamaha, Suzuki or any of the other Japanese manufacturers could build a competitive bike in less than a year and put you out of business immediately,” he says. “They would apply whatever they learned against all of their other lines of business such as generators, farm equipment, cars and oil pipeline turbines and amortize the $10 gazillion it cost them across all of that, and sell a cool electric bike at retail for 25% of your cost, even if they didn’t make money for 5 years.”

Presumably, General Motors, Toyota and the other major car makers could do the same thing to electric vehicle startups. In fact, GM is already working with Sequoia-backed A123 Systems to co-develop nano-phosphate battery cells for automobiles.

You need to be very worried that if you had any market traction at all [with an electric motorcycle], Honda, Yamaha, Suzuki or any of the other Japanese manufacturers could build a competitive bike in less than a year and put you out of business immediately.”

Doug Kelly, Partner, Alloy Ventures

But that’s not what really bothers Kelly, an avid Ducati rider: “No guy is going to get laid pulling silently up to a bar with his electric bike smelling vaguely of ozone and electrical tape—that would not exactly be the bad-boy image a lot of riders so desperately try to cultivate.”

SIDEBAR: REARVIEW MIRROR

Despite the flurry of recent venture investments in electric vehicles, most VCs are reticent to jump into the race. That’s probably because no venture capitalist has ever funded a successful transportation startup. In fact, there’s a line of failures a quarter-mile long.

Immediately after WWII, angel investors backed Tucker Corp., in its bid to build a safe, high-performance automobile. The company failed, in part due to an SEC investigation of its IPO. This despite the fact that founder Preston Tucker managed to secure many of the capital assets he would need to launch the company at bargain-basement prices and had developed truly innovative improvements to existing automotive technology.

Then there was the De Lorean Motor Co. Founded by a former General Motors executive, the company designed an innovative auto body with iconic gull-wing doors and stainless steel exterior. But a dip in demand, followed by an entrapment scandal sank the company in 1982, costing investors over $100 million.

Ben Rosen, founder of Sevin Rosen Funds, tried his hand at creating a new car company in the mid 1990s. He partnered with his brother, a former Hughes aeronautic engineer to create a hybrid with a flywheel for acceleration and a turbo-generator for cruising. The vehicle was a play against battery powered vehicles of the time, which were clunky and inefficient. But after $24 million of capital invested, mostly by Rosen, the brothers shuttered the 70-person company in 1997.

Automobiles aren’t the only failures. The Indian Motorcycle Co., makers of fat-fender cruisers, went through a $45 million buyout in August 1999 by Katama Cycle, McKinley Cycles and J.L. Albright Venture Fund. The company sucked up another $48 million from J.L. Albright in 2001 before going under again in 2003. Stellican Ltd. bought the trademarks associated with the company in 2004 and plans yet another re-launch. The company raised $30 million in September 2006 from an undisclosed investor.

Then there’s Segway. The personal transporter has taken on something of a punch line status. Since 2000, it has pulled in approximately $126 million in funding from a bevy of VCs, including Kleiner Perkins Caufield & Byers. The company recalled 23,500 of the two-wheeled electric vehicles in 2006 due to a software glitch that can cause them to suddenly back up.

As VCJ went to press, Segway was still working on raising yet another round, this one for $20 million, and chatting up a four-wheeled, battery-powered transporter that it says is safer than an ATV. Before they plunk down more money, VCs would be wise to take a look in the rearview mirror. —Alexander Haislip