Venture Capital Has an EV Battery Blind Spot
Venture Capital Has an EV Battery Blind Spot
One of the world’s biggest battery companies is mulling a reversal on a $1.3 billion project to churn out electric vehicle powerpacks in Arizona. South Korea’s LG Energy Solution Ltd. cited surging costs and slowing demand as it now rethinks the investment announced in April.
That’s a blow to EVs and batteries, and to the US as it tries to build out its supply chain. It is however, a much-needed opening for funding for under-the-radar technology breakthroughs.
So far, the energy storage industry has been dominated by giants like China’s Contemporary Amperex Technology Co. Ltd, BYD Co., Samsung SDI Co. Ltd and LG Energy Solutions Ltd. Their existing scale has allowed them to gain market share and supply existing demand. By making incremental improvements to their batteries’ energy density and fast charging, it’s been enough to keep investors satiated. That’s largely shut out big-ticket funding for smaller, more promising technology upstarts. What’s more, investors prefer to focus on the electric car makers more than they do on batteries that power them.
Now, as costs for everything from labor to raw materials rise, splashing out to make multi-billion dollar, headline-grabbing investments isn’t as easy. Large players – like LG — are being forced to reconsider their overall strategy to meet forecasts.
As the South Korean firm contemplates cutting back in Arizona, it separately struck a non-binding deal with a Kansas-based miner, Compass Minerals, to supply lithium carbonate and hydroxide to secure raw materials and beef up its supply chain. In June, the firm broke ground on a nickel processing plant in Indonesia. Without raw material access, there will be no power packs to make.
Regardless of the potential impact of LG’s move, the recalibration is an opportunity to get investors focused on technologies that actually stand to move the needle. Nomura analysts estimate over 40% of its battery production capacity will be in the US by 2025.
Several startups are researching options for better and cheaper batteries for electric vehicles and grid use, along with EV charging and the infrastructure needed around it. Across the energy storage supply chain, small firms are looking for lower cost options by using more abundantly available materials like sodium, sulfur, manganese and in some cases, no metals at all. With progress on the cathode-side of the battery topping, firms are now focused on other parts like the anode, separator and electrolyte. Others are looking for manufacturing processes that will help store more energy.
Yet, they consistently run into funding issues given the scientific and hard-to-understand nature of their product. On the face of it, the numbers don’t look too bad: $3.3 billion of investments have been disclosed by around 34 battery-related startups since 2017, according to BloombergNEF analysts. Considering the global green goals that need to be met, it’s a paltry sum. Juxtaposed with the fast funding for jazzy electric car startups that haven’t quite delivered on their promises, it’s even smaller and the $210 billion invested in fintech last year — led by crypto and blockchain interest — it’s miniscule. Let’s be honest, as millions of people sit through power outages across the globe, there is no doubt the energy crisis needs solutions.
It isn’t surprising, then, that we are so far behind on EV and energy transition. Venture capitalists shy away from such complex, difficult innovation that isn’t a cloud-based or digital platform. Electrochemistry hasn’t exactly been a hot investment space, either. Investors can’t quite assess the efficacy and incremental nature or risk the way scientists can, some small firms say. Nor are they willing to put their conviction and money behind technologies that are focused on high-tech manufacturing.
Even the likes of Tiger Global are writing relatively small checks. Late last month, Chase Coleman’s firm led a $25 million Series A round for India’s Battery Smart, a battery-swapping provider, along with a couple existing investors. Compare that to the $650 million Series E round in a rocket builder (arguably far less useful in the near future than powering our homes and businesses) last year.
The prospective vacuum created by LG (and potentially its peers in the near term) will open the battery investment landscape, but the barriers to entry remain far too high because of the large incumbents. Focused venture capital and private equity firms — those that are led and run by scientists and engineers, not just financiers — should open their eyes a bit wider and come to terms with reality: There will be no big breakthrough anytime soon.
Instead, several battery chemistries are likely to co-exist. The choice of range and safety will be left to consumers. It’ll go beyond the two choices drivers currently have: nickel, cobalt, manganese packs that will take cars further and perhaps less stable and more expensive or lithium iron phosphate. The latter represent the tried, tested, safer version that won’t take you as far, but do the job for now. Silicon anodes, sulfur-based cathodes, cheaper lithium anodes and cell architecture where companies like the Warren Buffett-backed BYD have had success are where high-profile investors need to start putting their money and lead the way. If even Charles Koch’s energy empire that has long been against climate regulation is now betting hundreds of millions on batteries than surely this is the only way forward.
Startups take over three years to run positive cash flow. Meanwhile, “scaling up new technologies from the lab to mass production can take as long as 10 years,” according to BloombergNEF analysts. Without money, that will take far longer and EV mass adoption will be even further out.