“I’m sorry, John. The cleantech thesis has not panned out for us and we’re under pressure to limit our exposure in this space. We cannot continue supporting Fast Ion.”

John Davidson (HBS ‘05), a partner at Ware Street Capital (WSC) and a board member at Fast Ion Battery, had just received a phone call from Donna Lerner (HBS ’05), a partner at Bluelock Ventures. Bluelock had participated alongside WSC and Franconia Ventures in Fast Ion’s $10 million Series A financing in mid- 2008, at a time when every venture capital firm wanted exposure to the burgeoning cleantech sector. Three and a half years later, in December 2011, the venture capital landscape looked very different. Although the pace of investment by VCs had recovered from a sharp dip during the worst financial crisis in seventy-five years, cleantech companies funded in the prior decade had failed to deliver on their promise. Only a few companies that had managed to go public or get acquired had generated large returns. In addition, high profile bankruptcies, such as that of solar cell manufacturer called Solyndra, had tainted the sector, leading most VCs to shift their focus away from funding clean energy ventures.

Lerner’s call could not have come at a worse time. Fast Ion was running out of cash and needed another round of financing urgently to continue developing its revolutionary battery. Davidson contemplated whether his firm should make an investment to keep Fast Ion going, and if they did, how he would cover Bluelock’s pro-rata share.

Fast Ion’s Promise

The technology underlying Fast Ion was developed by a post-doctoral student at MIT, to address the need for radical innovations in the energy storage landscape. In a landmark TED talk entitled “Innovating to Zero”, Bill Gates had put this challenge in perspective by noting that “all the batteries on Earth could currently store less than 10 minutes of the world’s electricity needs”. In order to really exploit advances in intermittent renewable energies such as solar and wind, therefore, there was a need for big breakthroughs in energy storage technologies that could be deployed at scale. In addition, there was a tremendous need for improvements in battery technologies as electric vehicles became more mainstream.

Professor Ramana Nanda, Senior Lecturer Robert White, and Research Associate Stephanie Puzio prepared this case with the assistance of Research Associate Sid Misra. This case is not based on a single individual or company but is a composite based on the author’s general knowledge and experience. Funding for the development of this case was provided by Harvard Business School. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2014, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

This document is authorized for use only by ilker akdemir (iakdemir@bryant.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies.

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REV: MARCH 10, 2015

815-025 Fast Ion Battery

Although the market for such a technology, if successful, was massive, the initial proof had only been documented in a laboratory setting. However, realizing its potential when he saw it presented at MIT’s business plan competition, Davidson decided to help finance its commercialization. Fast Ion Battery was formally incorporated in May 2008. WSC and Bluelock funded a $10 million Series A investment, together with Franconia ventures. Davidson, representing the Series A investors, took a seat on the board (see Exhibit 1 for excerpts of the Series A term sheet and Exhibit 2 for the Davidson’s projected cap table in his initial investment memo for Fast Ion).

Given the early stage of the technology, Davidson and his fellow-investors had decided to tranche the Series A round, such that the first tranche of $4 million was disbursed in May 2008 at a $ 5 million pre money valuation, with the goal of demonstrating the capabilities of the technology, establishing an IP portfolio, and determining the customer segments and their willingness to pay. The second tranche of $6 million at a 1.5X step-up would be disbursed conditional on meeting the milestones outlined in the financing agreement. The team had made slow but steady progress towards achieving the milestones by December 2009. Although not all the milestones had been met, they had secured a prestigious ARPA-E grant worth $2 million that provided both certification and non-dilutive capital to the company. The Series A investors therefore decided to follow through with the second tranche of $6 million. Looking back to that point, Davidson reflected, “As with many of these tranched investments, the startup met some but not all its milestones. It was not quite right and not quite wrong either. The technology continued to have a lot of promise and the team had begun to develop a strong IP portfolio. Although they had not come close to defining a business model, we were heartened by the validation the competitive ARPA-E grant would provide to future investors and therefore decided it was worth paying to see the next card.”

Investor Backgrounds

Davidson and Lerner had known each other for years. They first met in college through a shared group of mutual friends, but remained nothing more than occasional acquaintances. Years later, their paths crossed again when they took their seats in Section B at HBS as part of the Class of 2005. Over the next two years they became really good friends even climbing Mount Kilimanjaro together. They also had similar career interests in entrepreneurship and Venture Capital (VC). At the end their second year at HBS, both Davidson and Lerner graduated with great jobs lined up at boutique VC funds, WSC and Bluelock, respectively.

They stayed in touch over the years and when the opportunity to invest in Fast Ion presented itself, Davidson decided to reach out to Lerner at Bluelock to complete the syndicate alongside Franconia Ventures. Since Lerner knew that, like all other VCs at the time, Bluelock wanted exposure to cleantech, she decided to take it to her investment committee. They supported the investment and Fast Ion received its Series A funding.

WSC and Bluelock were at two very different points in the life of their funds when they made the initial investment in Fast Ion. WSC had just launched a brand new $100 million fund, had made only one other investment as a syndicate in a consumer technology business (and had an estimated net IRR of less than 5%). Bluelock, on the other hand, was five years into a $500 million dollar fund that had already returned over $1 billion. Additionally, the funds had very different investment philosophies: WSC liked to limit the total amount invested per deal to $10-12 million, whereas Bluelock had more flexibility given their larger fund and was able to investment up to $25 million per deal.