A123–The Real Financiers May Be Standing Up

A123  just filed to go public,  http://sec.gov/Archives/edgar/data/1167178/000104746909008218/a2193887zs-1a.htm. The underwriting group is being led by Goldman Sachs and Morgan Stanley.  A123 makes energy storage systems (batteries) using nanotechnology, interesting manufacturing techniques and some proprietary chemical formulations.  By using microparticles to coat the anode and cathode of its lithium-ion batteries, A123 appears to be able to reduce the form factor (size) and weight, increase efficiency, extend battery life and enhance safety. This can have application in many markets, but electric or hybrid vehicles, electronic devices and intermittent energy storage are certainly big potential markets. This is a company I first got to know in its infancy, although I was not able to make an investment.  The existing investors didn’t need anybody else, then.  I guess I will now have a chance to do so in the public equity market, if I so chose, at a  higher valuation than most of the early private rounds. I could go on about the company, but the company, itself, is not the subject of this posting. I would urge everyone who is interested in clean technology–particularly batteries–, the history of a venture-backed technology company and the equity markets to read this prospectus in its entirety.  Pages 10-45 must be read to get a full understanding of the risk factors associated with such a company, and pages 72-79 give one a good education of the various battery technologies and the markets they can serve. This posting in no way represents an offering to sell this security or a recommendation to buy it.

What this posting attempts to do is point out what may be a phenomenon of our time regarding the source of financing for innovation in this country, particularly in the clean-tech space. July 26th, I wrote a post in this blog titled “Where’s the Money–Will the Real Financiers Please Stand Up.” It was basically a rant that much of the venture capital industry, which has been an incredible strength of the US industrial system, is in retreat. This generation of  vc’s appears not to have the patience, maybe not the capital nor the foresight to invest strategically in new big ideas. Having grown up in the heady days of the dot-com era, many seem to have a sense of entitlement and an expectation that returns need to be forthcoming in very short time periods. Longer—what I would call normal—investment cycles and the illiquidity produced by the current economic malaise seem to have produced paralysis.  

Well, maybe we are starting to find the real financiers.  Under normal circumstances A123 would not be attempting to go public at this stage. Its current backers—experienced vcs, successful entrepreneurs and GE–, would be putting up more funds and finding other sources of private capital to take this company closer to a less risky future.  Instead, the next risk capital is expected to come from two other sources—the federal government and the public equity market.  Through the ARRA (American Recovery and Reinvestment Act) and the ATVM (the DOE’s Advanced Technology Vehicles Manufacturing Loan Program), A123 can get its hands on about $484 million to fund construction of a plant in Livonia, Michigan. The State of Michigan has also made a small ($10mm) grant in support of this facility. A123 has to put up some of its own money (dollar-for-dollar for about half and one-for-four for the other) and meet some other requirements, but this dwarfs the capital committed by the vc investors to date. A123 hopes to net about $200 million from the public offering, which I believe also exceeds the capital put at risk by the vc’s.

So the new investors are the government and, more importantly, public–as opposed to private– equity investors. In spite of the risks associated with a company at this stage in its development, the addition of liquidity and the chance to be an investor at an earlier stage in a venture may be enough to justify buying in at almost a $900 million valuation for a company with $43 million in sales and $40 million in losses for the first 6 months of this year.  As I said, read the prospectus, the registration statement and anything else you can get your hands on.

I do hope this offering succeeds.  If it does, it may signify the opening of a capital window that is critical at this time to continue the innovation efforts of many companies in clean tech and other technologies and services.  The timing may be right, or even essential, since China is creating a Growth Board within the Shenzhen Stock Exchange to make it easier for small companies there to go public. Under their current proposals, A123 wouldn’t qualify, but I wouldn’t be surprised to see those qualifications change. I can think of several companies in this country (and China and India)  that have metrics similar to or better than A123 who need capital and are well-positioned in markets of a size similar to the one A123 is going after.  Some of these companies may not even require 35 pages of risk factors to file for an offering.  Even if they do, it may be time to test the public’s appetite for the degree of risk and reward associated with this generation of new companies. In many instances the funds required to get to lower risk may be more than even the experienced venture capitalists can put up. The government and the public may have to be the sources.  One way or another, we must get capital behind these companies if the US is going to play a significant role in this global marketplace.

This entry was posted in Venture Capital by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

6 thoughts on “A123–The Real Financiers May Be Standing Up

  1. Hey Jack, interesting observation. The pattern of government-public investing in A123 is somewhat akin to PPIP (public-private investment program) in the fixed income realm; the public invests 25% through 9 PPIP managers, the govt matches 25% and lends 50% on good terms. Can you think of other examples?

    All the best,
    Charlie

    • I have never met him, but anyone involved in Climate Change knows who he is. I worry that the cap-and-trade system the US develops wont have some of the simplicity and elegance of what he originally designed and will be gamed by many of the participants, including AEP of which he is on the board.

  2. Jack,

    As always, you take us behind the curtain of the green economy to give us perspective we rarely get elsewhere. Yours is the kind of thoughtful analysis that can take the debate and our understanding to another level entirely. On behalf of the laymen out there who need that perspective, keep these posts coming.

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