June 14, 2013 by startupengineering .
Since the bankruptcy last month, it’s easy to second-guess Shai Agassi about Better Place– the Webvan-sized fiasco of the electric car world. A total of $850 million was invested in the company since it was founded in 2007, most of which is now going down the drain. How could this have happened? The problem Better Place addressed was (and still is) widely believed to be real. The solution was brilliant and compelling.
Problem: People don’t want electric cars because they’re more expensive and less convenient than gas-powered cars. (Note: Both issues stem from the battery; batteries cost a lot, don’t provide enough range, and take too long to recharge.)
Solution: Separate the battery from the car, both physically and as an asset. Physically, make the battery generic and swappable, like propane tanks for gas grills. Drivers can pull into a station, swap out their depleted battery for a fully charged one, and be one their way; which makes driving the cars convenient. Financially, sell people the cars, but retain the batteries as an asset of the company, leased to drivers. This makes the cars affordable. Eventually, Agassi hoped to give the cars away, and sell miles driven instead of cars. It’s the razor-and-razor blade, phone-and-minutes, printer-and-ink cartridge business model, poised to transform the auto industry.
So what went wrong? A survey of post-mortems highlights five possible answers:
The business model was too high-risk because costs were front-loaded. Better Place had to build dozens of $500,000 robotic battery switching stations before they could start selling to customers.
Rather than ameliorating this problem, management compounded it by scaling too early. For example, documents revealed this week by the bankruptcy court show that Better Place bought software licenses to cover one million customers, anticipating, and paying for, an avalanche of demand that never arrived.
Government didn’t help. The tax treatment of car purchases in Israel undermined the attempt to drive prices down – buyers effectively had to pay tax on the whole car-and-battery package, despite the fact they were just leasing the battery. Further, local authorities put up unexpected roadblocks to building the switching stations, driving costs up and convenience down.
Not enough buyers bought in. Only one car company (Renault) bought into the concept and produced an electric car with a swappable battery; only 750 people in Israel, and a few elsewhere, actually bought the cars.
Asking people to accept a whole new business model was too great a leap. Customers didn’t trust a change-the-world approach that asked them to buy a car but lease a battery, and depend on electricity instead of gas, and look for a battery swap stations instead of gas stations, and trust a startup, even one of history’s most well-funded startups, to keep it all together.
Honestly though, explanations #1-3 are useless. Most companies try to come up with a minimum viable product – they just have trouble figuring out what “viable” means, and end up building whatever they wanted to build in the first place. Every company makes scaling choices that try to balance a bulk purchase that lowers cost of goods sold against uncertainties about demand. Every company runs into unexpected difficulties with regulation or government or something — smooth sailing is an exceedingly rare event. So in fact, evidence for each of these three explanations can be adduced for nearly any company – both the ones that fail and the ones that succeed – so what do they explain?
And how about explanation #4 – that they didn’t get enough customers? This explains even less. Failures result from too few customers in the same sense that they result from the money running out. Sure, these or proximate causes, but they aren’t root causes; they don’t explain why.
So then, why? Don’t ask.
If the customers aren’t buying, or the partners aren’t partnering, don’t ask “what’s stopping them?” Every non-action has a million parents. People lead busy, full lives doing whatever they’re doing already. If you’re running a startup with a new idea, then you’re asking potential customers to make a series of displacements. They’ve got to displace their attention, their previous decisions, their loyalty, and their current allocation or resources, and to replace all that behavior with new stuff built around what works for you.
Trying to get people to do all this is risky business. You might know everything about your half of the equation – what you’re trying to get customers to shift to. But what about the other half? What do you know about where they’re shifting from? Are you trying to shift them from a commitment to a price? From a level of comfort with a technology? From a color? A set of features? A personal history? A set of peer expectations? Once you know your customers commitments, you can understand their problems. Before that, you’re just guessing. Explanation #5 gets at this, though only obliquely. A complicated, innovative new business model isn’t necessarily bad news. But if it requires changes in a lot of different behaviors, then it multiplies risks.
Better Place started with a problem: “People don’t want electric cars because they’re more expensive and less convenient than gas-powered cars.” Ok, that is a problem, but is it the actual customer’s problem? There are good reasons to think not. On the expense front, people already buy cars at different price points that range over more than an order of magnitude. They don’t decide whether to buy a Ferrari or a Kia based on a Consumer Reports-inspired price/value comparison of the two cars. Why expect them to buy your electric car rather than some other car (which one?) that way? On the convenience front, no one every heard the phrase “range anxiety” until traditional car makers started worrying about electric cars and marketing the phrase. The fact is, lots of car buyers drive less than 30 miles or so per day, sleep at night, and have access to electricity. Electric cars aren’t objectively inconvenient for those customers, so they don’t necessarily need a network of convenient battery-swap stations.
Shai Agassi started with a problem. That problem led to an ingenious solution, one that led, unfortunately for him, his investors, and his employees, to a very challenging business model. He was right to build his solution around a problem. But he was wrong to start with a problem. Real understanding of a customer’s problem is the goal, the endpoint, of a search. It’s easy to state a compelling, plausible problem without that search. But it’s not likely to be the problem that ends up driving customers to your door.