Failed MIT spinout and consumer fuel cell startup Lilliputian Systems faces the sell-off of its assets and IP after more than twelve years of development and hype, $150 million in VC investment and dozens of press releases attesting to the strength of its portable charging technology.
This fuel cell development effort says a bit about fuel cells and startups, but personally it tells me a little bit about venture capitalists and due diligence.
About ten years ago, before Greentech Media was even a gleam in its founders' eyes, I was contracted by a reputable Silicon Valley VC investor to participate in the due-diligence process of a potential fuel cell investment. This particular VC investor had been invited to join a syndicate of VCs, but it was clear to me that the firm was less than enthusiastic about making the investment.
I spoke to the investment team about fuel cell history, the technology, and this specific consumer charging application and the competition in the field. The partners asked me if I would make this investment.
I have enough of an engineering background to be dangerous and had been investigating fuel cell technology and markets for a few years when I received this call. The VC wasn't looking for technical due diligence on the physics of the device, but rather a market assessment, a competitive analysis and a verdict on Lilliputian.
Leading fuel cell technologies include proton exchange membrane (PEM), solid oxide (SOFC), and molten carbonate (MCFC). There are a number of other technologies, all equally adept at oxidizing investor capital. Fuel cells employ an assortment of membranes, catalysts and temperatures, but in almost all cases, the membranes are difficult and expensive to fabricate, the catalysts are rare and expensive (typically platinum or palladium), and the temperatures required in the processes are relatively high. Fuels range from natural gas to methanol to butane to hydrogen. There are ongoing efforts to reduce the need for expensive metals and to improve the reliability and lifetime of the fuel cell stack.
As a reminder, here's an updated list of the top three profitable publicly held fuel cell firms. The list was exactly the same back when the investors asked for my opinion.
I produced a brief report for the investors, pointing out the deep technological and market risk for this company, and was paid for my time. The partners seemed genuinely relieved to have an outside party confirm their reservations about the investment, and they thank me to this day for saving them a few million dollars, and, more importantly, the time spent keeping a bad investment alive. The best outcome of the due-diligence process for this VC was to have my report confirm their hunch.
Wilmington, Mass.-based Lilliputian Systems aspired to commercialize a butane cartridge-powered fuel cell charger for consumer devices. The firm was spun out of MIT in 2002 and raised more than $150 million from Kleiner Perkins, Atlas Venture, Fairhaven Capital, Rockport Capital, Stata Venture Partners, Intel Capital and Altira Group. Lilliputian's pitch was that it combined silicon economics and fuel cells. The startup's most recent investment was $25 million from Rusnano in 2012.
Lilliputian claimed that its silicon "chip-based" power generator and recyclable fuel cartridges could back up or replace batteries in smartphones, tablets, and cameras, but the company could never make it to market. Michael Kanellos wrote about this daunting market in Forbes.
Here's the punchline: A few years ago, I was asked by another investor to perform a market due-diligence assessment of Lilliputian. This investor was obviously eager and enthusiastic about making this investment. I disclosed that I had looked at the company years ago and had already formed an opinion. The investor was unperturbed and asked that I speak with him and a colleague about scaling fuel-cell technology and the road to market. As the conversation went on and I repeatedly told them "no" and "nyet," the investors were red-faced and upset that I was not conforming to the decision they had already made. The firm ended up making a considerable investment in Lilliputian, despite my (in this case) free advice.
The lesson here is that VCs, like other humans, are not always looking for clearheaded analysis that goes against their worldview. They are usually paying someone to agree with their preconceived notions. It's not the case with every investor, but I've seen it occur a number of times across disparate investment sectors.
Scott Kirsner describes the final acts of Lilliputian and the sell-off of its IP in this article from the Boston Globe. Most of the employees left in 2013. "Lilliputian had announced launch dates for Nectar in 2012 and 2013, and missed both." Customers who pre-ordered the charger on Brookstone’s website dubbed it “vaporware," according to Kirsner.