By: Prof. Shlomo Maital

Why did Better Place, Israeli entrepreneur Shai Agassi’s ambitious attempt to rid the world of its addiction to oil, become Bitter Place, filing for bankruptcy in a Tel Aviv court on May 25 after burning over $800 million in investors’ cash? Over 900 Israelis bought Better Place Renault Fluence ZE all-electric cars. Nearly all of them said they were highly pleased with their cars; now, they’re simply out of luck.

The saga of Better Place began in 2005 in Davos, Switzerland, at a Young Leaders Forum. Shimon Peres invited Agassi to the meeting, noting his meteoric rise to global prominence. A child prodigy in computers, son of entrepreneur Reuven Agassi, Shai Agassi graduated from the Technion at age 17 ½, sold his start-up TopTier when he was 24 for $400 m. to global giant SAP (business management software), and was on his way, at age 37, to becoming SAP CEO.

At Davos, the young leaders were challenged to find ways to make the world a better place. Oil was and is a major issue. The number of cars on the world’s roads now surpasses one billion and will reach 2.5 billion by 2050.  Fully half the world’s daily oil production, 85 million barrels, is used to make gasoline. As a result, OPEC rules, and CO₂ ruins, our planet. Agassi asked a hutzpah-laden question: How can we run all the cars in the world on electricity,  instead of oil? Partly at Peres’ suggestion, he left SAP and founded Better Place in 2007.

What was the breakthrough innovation of Better Place? What persuaded tough, savvy investors like General Electric, HSBC, Lazard, Morgan Stanley and Israel Corp. to plough $850 million into the venture? (The major loser is Israel Corp., the shipping and chemicals conglomerate owned by tycoon Idan Ofer, which owns about a third of Better Place shares).

I interviewed Shai Agassi late in 2011, when the future still looked rosy. He was supremely lucid and compellingly persuasive. Despite my long years as a management educator, I was dazzled by him and completely missed the gaping holes in his business model. I test-drove a Better Place car;  it was quiet, zippy, and in general seductive.

Agassi explained then that electric cars have a basic problem. Lithium-ion batteries can go for only about 140 kilometers (84 miles)  before they need recharging. And recharging takes several hours. That is why most electric cars today are hybrids that combine battery power with conventional gasoline engines. But Agassi wanted to run all the world’s cars without any gasoline. How?

Why not, he reasoned, create stations where depleted batteries could be swapped for charged ones, in less than one minute, using robots, less time than it takes to fill up a tank of gas? If you dotted Israel with such stations, then you could drive a Better Place car anywhere, everywhere, forever. Then, suppose you recharged the depleted batteries at night, when there is surplus electric generating capacity. You could run all of Israel’s cars, conceivably, without oil and without building one new power plant. Is this a “wow” or what? True, Israel uses oil to make electricity (now being replaced with cleaner natural gas). So Agassi tried to persuade the government to give him Negev land, huge swathes of it, for solar cells, “virtual oil wells” he called them. He was turned down.

Agassi cut a deal with Renault; they built the electric cars, while Better Place provided the recharging stations. Better Place’s business model was essentially that of power companies or cell phone companies ‒ selling ‘minutes,’ only battery-charging minutes.

So – what went wrong?

Our son Ronen, an industrial designer, considered buying a Better Place Renault but chose not to. Here is his reasoning. “For starters,” he told me, “my gut feeling was that it won’t fly, it won’t work in Israel, for many reasons; for example, we Israelis live spontaneous lives, there is no such thing as planning a play date for your child a month in the future; driving a car with limited charging stations demands planning and living a very organized life style like the Germans and Swiss. [Better Place set up only 30 charging stations throughout Israel, far too few than would reassure drivers they would not be stranded]. Second, we are still far from being environmentally-conscious enough to care to invest in electrical cars. Yes, there is a trend toward caring about the environment, not among the clients who drive cars, but mostly those who live in the North on a moshav or zip around Tel Aviv on bicycles.”

“But,” Ronen continued, “the main reason I figured it was not worthwhile was the technical aspect ‒ you buy a state-of-the-art innovative new car for nearly the price of a standard gas-driven car ‒ sounds promising right? Well, it’s not! Because this technology is so new and is advancing so rapidly, what will the car be worth in a year or two when a totally new,  four times more efficient electrical motor and battery have been invented. So, bottom line,  it was obvious to me that in two years the car would drop in value by nearly 50- 70% and that is basically throwing money away in a car that is high risk as it is.”

Listening to Ronen, I recalled something management guru Jim Collins (author of Good to Best) wrote: “Nothing destroys an organization faster than a charismatic leader.” Shai Agassi was spellbinding in his passionate pitch for Better Place. He got global media attention. But in a way, the story of Better Place became himself, rather than the client and the product. Had Agassi listened to enough potential clients like Ronen, the ones who didn’t buy his cars, he might have been able to fix the basic flaws in Better Place’s business.

The most glaring flaw was one I myself failed to spot. Half of Israeli cars on the road are leased, mostly by companies providing them as perks to their employees. The tax benefits, for both company and employee, are very big. Better Place should have cut a deal with the leasing companies, or even bought one, to put a major fleet of thousands of Better Place cars on the road, creating a critical mass of visibility and buzz. In the end, Agassi is a software genius. The Better Place software that shows how many kilometers you can drive on the remaining battery power is superb. But neither Agassi nor his senior managers truly understood the car business.

This is in sharp contrast to Tesla Motors, the successful American electric-car start-up launched by entrepreneurial genius Elon Musk. Musk bought a car plant (the California NUMMI plant built as a joint Toyota-GM venture) and learned how to make his all-electric cars from scratch. He and Tesla were sufficiently clever to impress one-time General Motors VP Robert Lutz, who is said to have launched the successful plug-in Chevrolet Volt project because of Tesla. And unlike Better Place, whose recharging stations each cost a high $500,000 to build, Tesla’s cars can go for 245 miles on one charge; Tesla invested only $25 million to build a nation-wide network of charging stations, installed only where Tesla cars are bought and driven. At each station, a 30-minute charge adds another 150 miles of range. Tesla (after 10 years) is now profitable. Many Tesla cars are sold in California, which unlike Israel is ‘green’ through and through.

Musk once posted on his blog, that “new technology in any field takes a few versions to optimize before reaching the mass market and in this case (cars) it is competing with 150 years and trillions of dollars spent on gasoline cars.” Musk made a fortune from his startup PayPal; he kept Tesla alive until it made money, with $70 million of his own money. Agassi burned through Better Place’s cash long before it reached break-even. This violates the First Law of Start-ups: Thou shalt respect and conserve every single shekel, or dollar.

Better Place offered clients to replace batteries for 20,000 kilometers (12,000 miles) of driving for NIS 13,000 ($3,500)  a year. But according to Better Place’s own website, the cost of gasoline for driving the same distance is almost the same, NIS 14,700. Why charge $3,500 a year, when Better Place itself was paying next to nothing for night-rate electricity? I believe Better Place had to charge high fees in order to try to make a profit on its huge initial investment. But the high fees deterred mass market buying. The same vicious circle has killed many businesses: High prices, low demand, high costs, even higher prices…and ultimately, demise.

Former Teva CEO Israel Makov once defined in nine words how to launch a successful business. First to imagine. First to move. First to scale. Agassi and Better Place were first to imagine (“not a drop of oil”). They were first to move (replaceable batteries using robots). But they bungled the ‘first to scale.’ And without mass-market scale, there is no sustainable business. Two out of three doesn’t count.

I strongly agree with Haaretz journalist Avi Bar-Eli, who covers the energy beat. “When money is cheap and readily accessible,” he wrote, “it is better to burn it on trailblazing initiatives that leave behind valuable know-how, experience and intellectual property….always a better alternative than burying it in the pit of a Les Vegas hotel as did IDB’s Nochi Dankner.” Better Place holds numerous patents and some may be very valuable. Problem is, they are mostly held by the company’s Swiss affiliate, beyond the reach of the Israeli liquidators seeking to recover some of the investors’ (and customers’) losses.

There is little doubt that we will all drive electric cars one day. It is a great pity that they won’t be Better Place cars. Nice try, Shai. If only we had helped you figure things out a little more carefully.

This article was originally published in the Jerusalem Post Marketplace on June 2, 2013.