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In any new industry, investors know that they must take big risks in unproven markets to capture potentially outsized rewards. But the recent troubles of a pioneer in the electric vehicle (EV) industry have provided a stark reminder of some enduring lessons about funding innovation.

For several months, the bad news hasn't stopped flowing from Better Place. The Israel-based company grabbed the media spotlight with its idea of building an EV infrastructure based on car batteries that could be swapped in five minutes at specially designed stations. When it was founded in 2007, it seemed like a creative solution to "range anxiety", the fear of running out of power on the road, as well as the limited capacity of batteries and long charging times.

Today, Better Place is falling apart. Cumulative losses reached nearly $500 million late last year. Founder Shai Agassi stepped down as CEO in October, and less than four months later, his successor Evan Thornley resigned over a rift with the board regarding the company's strategy. Layoffs and delays were followed by a shutdown of operations in the US and Australia. Hundreds of unsold, specialized cars are languishing in Israel's ports, as the company struggles to find buyers.

Investors have started to defect. Dong Energy, a Danish strategic partner with a 17% stake, pulled out in January, having poured $160 million into the company. Investors were still pumping money into the company in 2012 as it hemorrhaged cash. Better Place has received about $850 million in investments, from a list of distinguished international institutional and corporate investors led by the Israel Corp, a leading Israeli holding company.

Why didn't they see it coming? It's true that Better Place's solutions to the EV industry conundrum seemed utterly simple-swap batteries quickly instead of recharging them. However, in hindsight, it appears that investors failed to anticipate a string of strategic blunders that undermined the entire venture.

First, battery swapping stations were expensive. Early in the project, Agassi himself said it would cost about $500,000 to build a station. Some industry insiders estimated it would cost twice as much. That's a lot to spend on infrastructure costs without a critical mass of drivers to support it with revenue. It also did not help that their battery swapping stations were only designed to swap batteries from their own cars and not of other manufacturers.

Second, the company's forecasts for getting drivers on the road proved wildly inflated. By late 2012, there were only about 500 Better Place cars on the road in Israel-the company's showcase market. Agassi had expected 4,000 cars in 2012, rising to more than 60,000 in 2015. Even an increased pace of sales in January 2013 leaves the company well behind these targets.

Third, the cost of the Better Place customized car was prohibitive, and it was offered in only one model, a Renault Fluence. Even drivers who reported a relatively positive experience conceded that this was probably a big barrier to penetration.

As the saga unfolds, Better Place is increasingly looking like a textbook example of a wildly ambitious business venture that spun out of control. Investors keen to get into the EV infrastructure space might want to look out for opportunities in companies that offer more viable alternatives.

These include Car Charging Group Inc. (OTCQB:CCGI), a Miami-based company, which has a business model that focuses on providing public charging stations in partnerships with real estate groups, retailers and parking providers. Installations of charging equipment are relatively inexpensive, and can be scaled up-so a site can start with a few charging points and add more as demand increases. This means it won't be saddled with heavy infrastructure costs too early in the EV adoption cycle. Shares of CCGI are traded over the counter, making it a risky investment, but it's one of a few EV charging companies that is publicly traded.

Another publicly traded EV Charging company is ECOtality Inc., (ECTY), which operates the BLINK network. Investors might be attracted to its strong partnerships with companies like ABB, the Swiss industrial giant, and with the US Department of Energy's EV project. Access to public funds is an important antidote for challenges in the early stages of market development, such as those that plagued Better Place.

DBT and Chargepoint are also considered industry leaders. According to Pike Research, the companies have "feature-rich" products combined with strong market share, geographic reach, and a "vision for competing successfully" as the market evolves. However, both companies are not publicly traded, so the opportunity is limited to private investors.

Companies and investors can learn important lessons from the Better Place debacle. Here are a few points to ponder:

  • Beware of heavy infrastructure investment-the projected costs of Better Place's battery switching stations should have raised red flags early on. Look for companies with business models that don't require huge capital expenses, and can therefore withstand a longer period of sluggish demand until more cars are on the road.
  • Be sober about EV forecasts-nobody really knows when the inflection point will come for EVs. When scrutinizing a business model, take a conservative approach to EV fleet forecasts. Better to benefit on the upside if the pace of adoption accelerates than to get stuck in a cash trap when revenue falls short.
  • Think ahead about technological progress- the simplicity of Better Place's battery changing concept missed an important point. It failed to consider that advances in EV battery and charging technology might solve the problem faster than expected. Indeed, DC fast charging technology promises to cut recharge times to about 15 minutes. And battery technology is moving ahead fast, and could make EVs competitive within a few years, according to a recent report by McKinsey.
  • Target markets can make or break an initiative-at first glance; Israel seemed like an ideal market for Better Place. It's a small country so relatively few battery stations are needed, and Israelis are generally keen on innovation. But Better Place depended on a big uptake from corporate lease arrangements, which dominate the Israeli market for personal vehicles. When that didn't happen, the broader market was simply too small to fill the gap.
Source: Better Place Failure Teaches Lessons To EV Investors