How Will Better Place's Business Model Hold Up in the Downturn?

Better Place Founder and CEO Shai Agassi’s vision of building out charging infrastructure and battery-swapping stations for electric vehicles was never going to be easy to implement. But turmoil in the world’s financial markets and mounting deficits in government budgets have raised new hurdles for the Palo Alto, Calif.-based startup. While Better Place has packed its project pipeline at a brisk pace (networks or pilot projects are now being considered in Denmark, Israel, Australia, Japan, Ontario, Hawaii and the San Francisco Bay Area), they won’t get off the ground without financing — a whole lot of it.


Better Place’s new Chief Financial Officer, Charles Stonehill, took some time out of his second day on the job to speak with me this morning about some of the company’s challenges — and why he thinks the current business model will carry Better Place through the downturn.

Stonehill insists that being at a relatively early stage of development — a couple years away from having any swap stations or charge points in full swing — means Better Place faces less trouble in this kind of economy than it might in later stages. He says the company, which has already raised more than $200 million, does not need immediate access to credit and can lay groundwork for infrastructure deployment until markets stabilize — building relationships with battery and automakers, and wooing investors for capital and policymakers for tax credits and other incentives to push electric vehicles mainstream.

When it’s time to start shoveling dirt and building the physical infrastructure, Better Place is banking on private equity markets, which are not as “dysfunctional” as credit markets, according to Stonehill. By the time Better Place might need credit to run the day-to-day business — stocking up on batteries, for example — he expects credit to be flowing again. That’s at least two years out: Israel and Denmark’s networks, at the front of the line, aren’t slated to launch until 2011.

Stonehill explained that the first phase for each network is the buildout. This includes investment in things like charge points, switch stations, and a visitor center for dealing with potential customers, and it’s the part that Better Place wants to finance with private equity. In Australia, for example, the company enlisted Macquarie Capital Group last fall to raise AUD$1 billion (about $642 million) for this phase.

Phase two is the rollout — everything from acquiring contracts with customers to purchasing batteries and installing them in cars. For this, Better Place plans to hand the reins to operating companies, which will raise funds in local markets. By keeping it local, Stonehill said, “it will not reduce our ability to raise financing in another market, and it may help.”

Problem is, all of this seems to leave the company having to raise hundreds of millions of dollars for just about every new project for at least the next several years. Here’s the best-case scenario: lithium-ion battery and electric vehicle supplies neatly align with consumer demand for a subscription battery exchange service (a huge gamble), and Better Place starts generating revenue so it doesn’t have to keep raising all that capital. (Stonehill said the company can work on at least two networks and probably several more at any given time.) But for the startup to rake in enough to build a few billion-dollar networks each year? Might be a stretch.

Those markets that Better Place expects to have its back through the downturn aren’t exactly in ship shape. As the WSJ’s Deal Journal blog put it earlier this week, “the private equity business had a bit of its old swagger as late as early 2008” — but “that strut now looks more like a limp.”