Venture capitalists know that new technologies are risky. They know things can go wrong. They sort of expect it.
Public investors don't understand this. We expect that if we're to put our hard-earned dollars and dimes into an investment, things will work out.
So we come to A123 (AONE), a classic case of a company that went public too soon. The producer of car-sized lithium-ion batteries, based in Massachusetts, went public near the end of 2009 amid great fanfare. Since then it has lost over 90% of its value.
Why? Because the manufacturing techniques on its Nanophosphate lithium-ion batteries were imperfect. Enough prismatic cells were coming up bad at its Livonia, Mich., factory that just about any battery it was shipping was subject to early failure.
The batteries are used in the Fisker electric car, and caused one used by Consumer Reports to go bad after a relatively short drive. Fisker says the image of satisfied customer Leonardo DiCaprio driving off in one of its $107,000 beauties will fix the image problem, but in his best-known movie role, the boat sank and (spoiler alert) Leo's character died.
Management is putting the best face it can on this and there are customers whose cylindrical cells are working well, but given the company's participation in Department of Energy loan programs, its future has become embroiled in presidential politics, with Mitt Romney calling the whole program "crony capitalism."
Silicon Valley is pushing back against the political charges, with Hewlett-Packard (HPQ) Chairman Ray Lane, a lifelong Republican, leading the way. But other venture capitalists aren't so sanguine about A123. Vinod Khosla, for instance, at a recent Energy Storage Association meeting called the industry's best products "toys" and predicted A123 will be a failure.
Khosla believes better power electronics are the answer to the intermittency of solar and wind, rather than storage. Solid state devices creating a grid "uncoupled" from short-term supply and demand is the answer, and he may well be right. Efficiency is the best investment you can make in the renewable business right now, he says.
This doesn't make A123 a scam. It may make A123 a failure. But smart venture capitalists, like Khosla, accept failure as the price of progress. Real success always comes at the risk of failure, and true success comes only after it.
But try telling that to a public investor. Or a taxpayer, for that matter.
My own view is that AONE is fairly priced right now. It may fail, or it may succeed, on a limited basis in the luxury car space after tweaking its manufacturing processes. But even its failure isn't bad for the industry. It is, in fact, a sign of progress, just another dry hole on the way to the unlimited gusher of renewable energy.