Maker of high-capacity batteries raises $40M

A123 Systems Inc., a Watertown, Mass.-based maker of lithium-ion batteries, last week announced that it raised $40 million in Series D funding.

The deal makes it the sector’s best-capitalized company, with A123 Systems having raised about $102 million since it was founded in 2001.

At least 10 lithium-ion battery companies have raised VC funding in the past two years, according to Thomson Financial (publisher of PE Week). The second-largest fund-raiser after A123 is Golden, Colo.-based Infinite Power Corp., which received about $35 million in a Series A funding in August from such firms as Applied Ventures, Core Capital Partners, D.E. Shaw, Polaris Venture Partners, In-Q-Tel and Springworks.

Next up is Boston-Power, which has raised nearly $25 million since 2005 (including a $15 million infusion in December at a $60 million post-money valuation) from Gabriel Venture Partners, Granite Global Ventures and Venrock Associates.

However, more battery-related deals are likely forthcoming in light of the State of the Union address last week by President Bush, who called for the expanded use of ethanol and other alternative energy sources, including electric hybrid automobiles.

A123 Systems makes lithium-ion batteries, which have become the industry-standard power source for tech devices, such as laptops and cell phones.

One big downside to date has been that most lithium batteries use combustible oxide-active materials, which are thought to help foster fires when batteries overheat. But A123 products are non-combustible and do not release oxygen if exposed to high temperature or in the event of battery failure or mechanical abuse.

A123 Systems’ initial contract was for a line of Black & Decker power tools, but more recently it signed a deal to help develop battery packs for General Motors’ upcoming line of plug-in hybrid vehicles known as the Volt E-Flex. Most current hybrids use nickel-metal hydride.

General Electric Commercial Finance led the latest round, with other return backers including Sequoia Capital, North Bridge Venture Partners, Motorola Ventures, the Massachusetts Institute of Technology, Qualcomm Ventures, OnPoint Technologies, GE Equity, FA Technology Ventures, Boston University, Alliance Capital Partners and individual investor Desh Deshpande, who’s chairman of A123 Systems and co-founder of Sycamore Networks.

The only new investor was Procter & Gamble (maker of the Duracell brand of batteries).

The company’s previous round was a $30 million Series C deal in January 2006 that had been marketed with a pre-money valuation of between $90 million and $100 million. —Dan Primack