McCain to charge battery innovation

Cleantech VCs are nonplussed by Sen. John McCain’s proposal to award a $300 million federally funded prize to develop an improved battery for electric cars and plug-in hybrids.

Investors and many others say that expected rewards in the marketplace are already pushing their creation and that they don’t need a federal incentive to invest in better batteries. In fact, VCs have ploughed more than $550 million into more than 25 battery startups in recent years.

Jim Greenberger, vice president of the venture network for the Association for Corporate Growth Chicago, says that the concern he has with the McCain proposal is that it may prove long on show and short on substance. Greenberger instead advocates federal loan guarantees.

“At the ACG Chicago Advanced Automobile Battery Investment Summit last month, one speaker estimated that simply building the manufacturing capacity capable of producing advanced lithium batteries in mass quantities would cost in excess of $1 billion,” Greenberger says. “The McCain prize would not scratch the surface of such a project and a company interested in building such capacity might not even be eligible for the prize.”

Many startups are already taking advantage of new technologies to build more efficient, smaller batteries with longer life times and fewer environmentally harmful chemicals.

Cleantech investments are already among the fastest growing sector of the venture capital industry, with investments in new energy technologies leading the way. Analysts at Frost & Sullivan put the revenue from sales of lithium ion cells at $5.9 billion in 2007 and the market research firm predicts that manufacturers will sell more than twice as many units by 2013.

VC-backed A123Systems, for example, is making progress hawking lithium ion batteries juiced up with “nanoscale electrode” technology that was developed at the Massachusetts Institute of Technology. The company has raised nearly $132 million in financing from Sequoia Capital, Motorola Ventures, North Bridge Venture Partners, the hedge fund AllianceBernstein and corporate backers, such as General Electric.

The East Watertown, Mass.-based company won an early, important customer in toolmaker Black and Decker, which was impressed with how fast A123Systems batteries could recharge.

The real coup, however, could come from a contract with General Motors. The carmaker has committed to produce an all-electric production automobile and has put A123Systems on a short list to supply batteries for the car. GM hopes to have the Chevrolet Volt on the market by 2010.

Signing a deal with GM might help the company win the proposed McCain prize, which focuses on battery technologies for automobiles.

Meanwhile, the company is reportedly looking to launch an IPO to raise more financing to support the opportunities it sees. It could float the issue before the end of the year, according to some reports.

Other startups are banking on laptop batteries, a market that’s hungry for innovation after several high-profile laptop fires and battery recalls during 2006.

Boston-Power may be the best-capitalized of these companies. The company raised $45 million from investors in January to bring its total capital raised to $70 million. Investors include Venrock, Oak Investment Partners and GGV Capital, among others.

New technologies might help further these green goals and improve consumer electronics. Venture capitalists have invested more than $81 million into at least four startups working on completely different battery technologies than the traditional lithium-ion combinations. Startups are focusing on nickel-zinc, carbon-fluorine, zinc-air and alkaline-zinc as possible alternatives.

It’s difficult to know how these nascent technologies will work out, or even which ones will be better for the environment. It is clear, though, that both consumers and producers are already chomping at the bit for something better than the status quo.

Alastair Goldfisher contributed to this report.