What Went Wrong at Faraday Grid?

Faraday Grid’s mystery technology could be poised for a comeback — thanks to the man who led the company into insolvency in the first place.

Andrew Scobie, Faraday Grid’s ex-CEO, has acquired his former company’s intellectual property assets after registering a new company, Third Equation, on September 4, according to a source familiar with the acquisition.

Faraday Grid’s novel grid technology, called the Faraday Exchanger, promised to replace traditional power transformers, potentially cornering a massive market as the world builds out and updates its electricity infrastructure.

But the company was placed under the control of insolvency administrators in August, less than seven months after securing a £25 million ($32.5 million) investment from WeWork co-founder Adam Neumann.

The incorporation of Edinburgh-based Third Equation suggests that the eyebrow-raising saga of the Faraday Exchanger is not over yet.

"Revolutionary design"

To hear the company itself tell it, Faraday Grid's Exchangers were on a path to replacing power transformers around the world, helping grid operators rebalance power flows automatically amid the rapid rise of variable wind and solar generation.

In practice, these impressive benefits were all linked to a device that to this day largely remains a mystery. 

Faraday Grid guarded its intellectual property carefully. Still, what little is known of the device suggests the company may have been onto something.

Amp Energy, a Canada-based clean energy infrastructure developer, was one of the company's earliest investors. In May 2018, the Power Networks Demonstration Centre (PNDC), a Scottish research center linked to the University of Strathclyde, carried out more than a dozen tests on a prototype Exchanger and found it outperformed a traditional transformer on all measures. 

Perhaps more significantly, in October last year the British network operator U.K. Power Networks was intrigued enough by the Exchanger technology to agree to a test program this year.

“The Faraday Grid is indeed a revolutionary design,” Alex Davenport, U.K. Power Networks' innovation project manager, told GTM at the time. 

It's not clear, however, that the testing program with U.K. Power Networks ever went ahead. Siobhán Meehan, communications officer at the network operator, said “no customer money was invested into any projects with Faraday Grid.”

Instead, an ambitious expansion plan at Faraday Grid came to a halt when directors “were unable to secure the necessary level of investment,” according to a press statement from Grant Thornton, the firm handling the company’s administration, which is akin to Chapter 11 bankruptcy in the U.S.

Sources with knowledge of Faraday Grid, speaking under condition of anonymity, said the technology wasn’t to blame. The company’s flow control concept may well have been able to live up to its early promise.

Instead, they said, the company simply tried to go too far, too fast under Scobie, its live-wire former CEO.

Scobie did not respond to several requests for comment about his new venture or his tenure at Faraday Grid. The insolvency administrators also declined to comment beyond what was contained in their press release.

Scobie, a straight-talking Australian, passionately defended his grand vision for Faraday Grid during a late-2017 interview with GTM, shortly before he was scheduled to hold the first live public demonstration of a prototype Exchanger.

Believer: Former Faraday Grid CEO Andrew Scobie

Scobie claimed a Faraday Grid using Exchangers instead of transformers would allow electricity networks to absorb massive amounts of renewable energy and deliver it to distributed demand centers, from electric vehicles to residential batteries, without an increase in costs.

With little or no access to Faraday Grid’s Exchanger technology, potential investors and customers had to take Scobie at his word. And the CEO was a compelling storyteller.

Throughout 2018, the tests by the PNDC and growing interest from U.K. Power Networks helped increase expectations around Faraday Grid’s enigmatic offering.

Then, in January 2019, came an event that insiders said changed everything.

The WeWork connection

At the time, Faraday Grid was short of funds, according to a highly placed source. Amp, which had become a strategic investor in Faraday Grid in August 2017, had not followed up its initial investment with a further cash injection.

Talks with other potential investors had also failed to drum up support. Sensing that his company’s investment in Faraday Grid was in danger, Amp’s executive chairman, Paul Ezekiel, set about introducing Scobie to other potential backers.

One of these was Adam Neumann, the billionaire founder of coworking giant WeWork. Scobie met Neumann in New York, and the two visionary entrepreneurs hit it off over the course of an afternoon.

By the end of the session, the source told GTM, Neumann had agreed to put $32.5 million into Faraday Grid. The investment was significant on several levels.

First, it would help Faraday Grid to commercialize what was still essentially a precommercial technology. Second, Neumann’s money came with a promise of much more to follow. This could potentially allow Faraday Grid to scale up production to commercial levels.

But perhaps the most important feature of Neumann’s $32.5 million investment was that it valued Faraday Grid at £2.75 billion ($3.4 billion).

This was a huge valuation for a business that had yet to publicly sell a single product. It also represented a potential stumbling block for further fundraising, making it awkward for Faraday to bring in additional money at a lower valuation. 

Scobie was now the CEO of a business valued in the billions of dollars. Soon afterward, he told GTM to watch out for big-ticket investments on the path to a stock market flotation within three years.

By April, Scobie made good on his investment pledge with the acquisition of production facilities in the Czech Republic, an unusual step for a company seemingly not yet ready to scale up its products. GTM understands Faraday Grid may have committed as much as £10 million ($12 million) to the Czech purchase, although it remains unclear if the seller, Foxconn, was ever paid in full.

Around the same time, Faraday Grid was opening innovation centers around the world and adding highly paid executives to its senior team. Scobie moved Faraday Grid’s domicile from the U.K. to Switzerland, ostensibly to avoid the threat of a change of government in Britain.

Faraday Grid’s board, which included Amp executives Paul Ezekiel and Dave Rogers, seemed happy to let Scobie do much as he pleased.

In the end, it took an outsider to lift the lid on what was going on inside the company.

Questions raised

In July of this year, 166 2^nd Financial Services, Adam Neumann's family investment office, hired Ilan Stern, formerly of venture capital funds General Catalyst and Soros Fund Management, to manage the WeWork co-founder’s personal investments.

Stern encountered a tangled web of business interests. Neumann reportedly pumped money into ventures ranging from a wave pool manufacturer to a medical marijuana provider. And then there was Faraday Grid, touting a mysterious product with no sales, opaque finances and a worrisome burn rate.  

A source close to Faraday Grid claimed that only a small fraction of the money the company was going through each month was being spent on research and development. The situation prompted Neumann's investment shop to start asking questions that Faraday Grid wasn't able to answer satisfactorily.

Suddenly galvanized into action, Faraday Grid’s board commissioned legal advice that concluded Scobie could be fired for irregularities associated with misuse of company funds, misalignment of business strategy, and behavior toward coworkers, multiple sources said.

Scobie was dismissed from Faraday Grid’s board and Paul Ezekiel assumed control of the company.

Even then, it looked as though Faraday Grid might pull through. After all, Neumann’s follow-up investment was still on the table and U.K. Power Networks remained committed to its test program, with a proposed start date of August 2019. The Italian power giant Enel had expressed an interest in the Exchanger technology, too.

Ezekiel set about righting the company, a source said, firing many of the firm’s more expensive executive hires and closing Faraday Grid’s Swiss and U.S. offices.

Ezekiel also entered talks with 166 2^nd Financial Services on the terms for a cash injection that would take Faraday Grid through the next 12 to 18 months.

Unfortunately for the Faraday Grid team, things were beginning to unravel at WeWork as it prepared to launch an initial public offering and concerns were raised over Neumann’s stewardship of the business.  

What happened next is still business-page fodder today: Evidence of mounting losses at WeWork forced the company to call off its IPO. Neumann was unceremoniously ousted from the business.

And Faraday Grid ended up as one of the first victims in the disaster.

In the lead-up to WeWork’s proposed IPO, Neumann's family office called off its second investment in Faraday Grid. By this time, it was too late for Faraday Grid to find alternative sources of finance, a source said.

On August 15, the day WeWork filed to go public, Faraday Grid collapsed.

Another go?

Even under different management, the company's plan to change the face of the world's electric grid faced an uphill battle.

An analysis by Ben Kellison, grid edge director at Wood Mackenzie, shows it would have been difficult for Faraday Grid to raise more than $100 million in the summer of 2019, as Scobie had said he would do that January.

“There have been only 12 funding rounds that exceeded $100 million in the market since 2010, and seven of them went to either Better Place, the failed battery swapping firm, or Bloom Energy, which 17 years after its founding went public in 2018,” Kellison said.

Two other claims, that Faraday Grid would be able to ship hundreds of Exchangers this year and proceed to a market flotation in three years, also appear unrealistic, said Kellison.

“Shipping 100 units would require a tremendously wide sales net to sell a handful of devices to a large number of utilities or a herculean effort to demonstrate the device’s value proposition and reliability to a single utility to garner a significant order."

Of the 12 grid edge IPOs since 2010, none of the firms were utility equipment manufacturers, Kellison noted. “Grid equipment vendors almost never IPO in a traditional sense."

“Typically, startup equipment providers seek a larger strategic acquirer to gain access to wider sales channels, marketing and a balance sheet that resolves utilities’ concerns about long-term warranty and servicing support.”

Alongside Scobie, Third Equation is listed as having one other director: Scobie’s romantic partner Jacqui Porch, who was chief marketing officer at Faraday Grid.

James Brooks, the chief strategy officer at solar developer Lightsource BP, was listed as a director of Third Equation on September 4 but resigned seven days later, company records show.

Grid watchers are left with a perplexing question. For all the Exchanger's promise of transforming the grid, will Scobie be able to overcome investor concerns and bring the technology to market on a second try?