Preventing Fraud in the Battery World

This story is contributed by Nicholas Yiu, Crystal Jain, Melissa Zhang

• There is a clear pattern of fraud and scandals permeating the battery startup world, with key examples like Envia, Satki3, and most recently, Nikola Motors.
• The industry is naturally prone to misinformation and misrepresentation due to flaws in entrepreneur-investor relationships and policies governing battery testing and quality regulation.
• We recommend high-level strategies for mitigating this industry problem in order to successfully translate more technologies from the lab to deploy in commercial markets for greater societal impact.

Batteries are greatly hailed as the poster child for minimizing fossil fuel dependence and are undergoing a significant wave of technological development. But with great power comes great responsibility… and great scandals. What have we learned?

In 2009, Sujeet Kumar, a gifted electrochemist at Envia Systems, entered an ARPA-E competition to explore next-generation battery technologies. Kumar paired a nickel manganese cobalt (NMC) cathode with an experimental silicon anode from Argonne National Lab. The combination, he argued, could be groundbreaking: enough for a 300-mile range battery at half the cost of any battery on the market.

Many high-profile investors started to take notice, especially General Motors, who kicked off $17 million in fundraising. They signed a deal that would allow Envia to develop and provide the cathode for the next-generation Chevy Volt in 2015. However, GM eventually found that it couldn’t replicate this energy density. At around 400 charge / discharge cycles (roughly 2–3 years of an electric vehicle in the field), the performance had decreased by 50%.

The fallout was brutal. Further investigation uncovered that the ARPA-E cell used anode material purchased from a third-party Japanese supplier and passed off as Envia’s own. GM terminated the contract in 2013, citing Envia had misled investors and not moved the project forward. Kumar alleged that he never claimed the new technology could be used in working electric vehicles (EVs), and that GM’s timeframe was unrealistic.

At the root of Envia’s story was a disconnect between proof-of-concept and actual performance in the field. Kumar’s research, as presented to GM in 2009, was in its early stages. In hindsight, could GM have prevented this partnership based on limited lab data? Should they have?

The room for battery innovations is vast

The market for batteries has been rapidly expanding over the past decade with the increasing adoption of electric vehicles and renewable energy generation. Batteries can store relatively large amounts of energy in small package sizes and are becoming cheaper to manufacture every year, making them an attractive choice for everyday applications such as portable electronics and automobiles. It is predicted that demand will rise over hundreds of gigawatt-hours (GWh) per year in the next 5–10 years. With increased demand has come a growing number of startups dedicated to the pursuit of safer, lighter, and more energy-dense batteries. Universities and national labs have catalyzed many of these findings, such as Jeff Dahn’s group at Dalhousie University and Gleb Yushin’s group at Georgia Tech. In fact, the number of global battery-related patent applications jumped an annual rate of 14% between 2005 and 2018 and funding dollars in battery startups reaching >$1.5B in 2018.

Figure 1. Investments into battery startups from 2013–2018 (top) and global lithium ion battery demand growth 2015–2030 (bottom) (Bloomberg 2018)

Spinouts, Startups, & Fraud

Successes on lab benchtops ultimately need to be translated to products with commercial value. However, despite academic success of battery research, the commercial battery world has suffered from a reputation of fraud. Key examples include Envia in 2013, Satki3 in 2017, and Nikola Motors in 2020, ranging from misrepresentation to investors to various forms of sugarcoating promises of their new technologies. It seems to be becoming too commonplace to see once-celebrated startups succumbing to the fate of fraud and scandal.

Accusations of fraud do not solely fall upon technology creators; schemes can flow from inflated claims of investors to shortcuts taken by regulators. As the battery industry matures with more competitive players in the market, it is imperative to establish a standardized system of validation to ensure safety, manufacturability, and performance.

Types of Batteries

Batteries come in many different form factors (“shapes”). Form factors are complex at every level, varying in material to their packaging arrangement, both of which directly influence the cells’ performance and range. At the most preliminary level, battery research typically begins in the form of coin cells or pouch cells.

• Coin cells: when experimenting with new electrode or electrolyte materials, researchers typically make metallic coin cells the size of a coin in a laboratory glove box. While coin cells are convenient and have good cycling ability, they have low packaging density (or less efficient use of space).
• Pouch cells: these are larger than coin cells — roughly the size of your palm — and enable higher packaging density. Eliminating the metal enclosure of a coin cell reduces weight and cost, and allows the pouches to lay side-by-side. However, exposure to higher humidity and hotter temperatures can lead to swelling of the pouches due to gas generation during charge and discharge.

Figure 3. Example of coin cell (left) and pouch cell (right)

Outside of the labs on the road, electric vehicle batteries are typically an array — up to thousands — of pouch cells, cylindrical cells, and prismatic cells. These industrial components are economical to manufacture, but are heavy and not necessarily representative of coin cell performance from the lab bench.

Making innovations marketable is extremely challenging

Innovations in battery technologies require meticulous validation and reliability testing before scaling and market entry. Thorough testing is crucial, because the consequences of underperforming or unsafe batteries are lethal: consider Tesla’s battery explosions and Samsung’s Galaxy Note 7 expedited launch. Even the most minor of changes must be validated through full cycling tests, charge-discharge cycles, assessment of efficiency, and pass regulatory and environmental checks. Combined, these efforts are both cost and time-intensive; in fact, standard battery cycle life tests can take years to complete.

Due to demanding time and cost barriers of testing, many battery startups burn through their funding before placing a viable product on the market. Series funding and valuations are therefore based on a startup’s “potential future value.” Equipped with only benchtop characterization data of a coin cell or a few pouch cells — which are significantly different from a working battery — and without proof of full scale-up, how can we — and importantly, early stage investors — accurately evaluate a battery’s merits?

The majority of early stage battery startups spotlight coin and pouch-cell performance to formulate their pitch decks. Startup CEOs are used to giving “optimistic projections” on the technology and how it will scale in five to ten years time. These forecasts may be commonplace and even reliable in the other industries such as software where scaling costs are minimal to zero (e.g. growing Instagram from 1 million to 100 million users is not as labor or capital-intensive).

Unfortunately, scaling in the battery world relies heavily on capital, requiring pilot plants, manufacturing plants, and ongoing technology maintenance and upgrades. Early stage investors who are not familiar with this development process therefore risk being misled by coin cell and pouch cell performance projections which exclude proof of scalability. Inadequate diligence on battery risks and development timelines lead to suboptimal investments, disappointment, and potential for fraud.

Additionally, traditional early stage venture funds expect investment returns within 5–7 years, which usually does not fit in with battery startup development cycles which exceed a decade. This mismatch of timeline unfortunately incentivizes entrepreneurs to potentially over-promise on their technology in order to secure funding.

Parallel Scandals in Biotech & Batteries: A Case Study of Theranos & Nikola

Battery failure implicates life and death, not unlike that of pharmaceuticals. Like batteries, vaccines cannot directly be tested on end users without established proof of concept. And similar to battery commercialization, pharmaceutical development is also a time and capital intensive endeavor. To that end, the pharmaceuticals industry blueprint provides a model for how drug development research can be regulated on its road to commercialization.

In drug development, the FDA defines industry-level certifications as phases 1, 2, and 3, which standardize stage-specific tests that drugs have to pass before “qualifying” for the next stage of trials. There are currently no equivalent standards in the battery world. As a result, batteries which pass the equivalent of Phase I drug development (i.e. on the merits of coin cell and pouch cell data alone), are viewed as attractive bets despite extremely early stage test results devoid of third party or industry validation. Capital is essentially invested in products at least 2 FDA trials away from being ready for commercial use.

Figure 4. Pharmaceutical vs battery commercialization model (Hanson et al., 2017)

EV truck startup Nikola has been compared to blood test company Theranos: both were hailed as industry breakthroughs until analysts and regulators unmasked each company’s product as unfit for commercial use. In Theranos’s case, the diagnostic product never gained FDA approval before deployment in retail stores; in Nikola’s case, management misrepresented the electric truck’s motion capabilities in a marketing video and brought little to its high-profile partnership with GM except concept designs and unrealized claims of battery innovation.

In the case of Theranos, the company managed to bypass a “Laboratory Developed Test” (LDT) loophole which several diagnostics companies (Pathway Genomics, Admera Health, Strand Life Sciences) have similarly exploited. Under the LDT loophole, Theranos never published test results in peer-reviewed journals and avoided responding to test accuracy questions on claims of protecting intellectual property. As a result, it managed to ink a significant partnership with Safeway, Cleveland Clinic, and retailer giant Walgreens in 2013, including deploying the test in over 40 Arizona stores, two years before Theranos received its first FDA approval in July 2015. Eventually, Theranos whistleblowers began to file multiple complaints with the FDA over alleged faulty test results “tainted by breaches in research protocol.” The FDA retracted its approval merely a few months after its issuance in 2015.

In the case of public company Nikola, its source of fraud is similar to that of Envia, whereby management misled partners into signing agreements by overpromising on “revolutionary” proprietary technology, though at a larger scale. Nikola’s management envisioned building a vertically integrated green trucking business which leased trucks powered by 700 hydrogen charging stations. Leading up to the revealing Hindenburg report, Nikola inked multiple high-visibility partnerships with General Motors, Bosch, NEL Energy and even brewer Anheuser-Busch, projecting massive “pre-order” reservations despite pushing production back by two years to 2023. The Hindenburg report revealed that Nikola made false claims about virtually its entire business: it partnered with GM in order to use GM’s battery technology, lied about truck production, owning solar assets, and its ability to produce hydrogen, let alone reduce costs by 81%. Without checks and balances in place, Nikola made dominos of “revolutionary” claims until the first domino fell.

How can we learn from these mistakes to build a healthier battery innovation ecosystem? Improved due diligence and caution must be exercised by founders, investors, and policymakers in tandem to strike a balance between incentivizing lab-driven innovation and validating new ideas through rigorous testing.

Our recommendations for industry

As the world gears towards carbon-neutrality, it is evident that the role of the energy storage industry is increasingly essential. To avoid many of the disconnects and failures in the industry, there needs to be a healthy battery ecosystem from the perspective of entrepreneurs, investors, and policymakers.

Innovation and competition in battery development, while critical, must comprehensively consider R&D, scalability, and manufacturing. In Figure 5 below, we evaluate cost-to -performance against scale by investment size and time. Many battery startups (green, pink and light blue crosses) from the lab bench reach early stage proof of concept, and even proof of system, but struggle to reach scalability pilot or supply chain development phases. Investors need to recognize sufficient proof of scalability before funding pure proofs of concept based on coin cell level findings.

Figure 5: Stanford University lecture (Source: Cheuh, Cui, Benson, 2020)

Founders, investors and government policymakers must understand the full research to market process and be cognizant of information integrity and relevance when conducting due diligence to fund each stage of innovation.

Recommendations for:

1. Founders: be transparent about the product development stage, scale, and needs in order to avoid misrepresentation. Provide clear to-do lists and funding requirements to achieve the next scalability step of development.
2. Investors: understand the high risk levels and long time scales with battery startups. Look beyond the coin/pouch cell level testing, and adopt much longer timescales for funding returns so as to not pressure entrepreneurs into over-promising and under-delivering.
3. Policymakers and government: the pharma commercialization model with the FDA can be used as a successful example of how to regularly test and approve drug development at each stage of the process in order to mitigate risk to end users. To define a clear line between a sales pitch and projecting data, the government can impose regulation on entrepreneurs on ethics and data reporting.

Ultimately all stakeholders need to work hand-in-hand to more successfully deploy battery technologies from the laboratory to market.

Authors

This article is a collaboration between peers passionate about the battery industry and sustainable energy. We hope our findings will drive more success for battery startups and a greener future. The opinions expressed in this article are those of the authors. They do not purport to reflect the opinions or views of the author’s affiliated organizations.

Nicholas Yiu is a Business Manager with UCL Business based in London, UK working on technology commercialization and venture capital in connection with the University College London. He is passionate about early stage startups and serves as a venture fellow at Berkeley SkyDeck and as a mentor at the UCL Hatchery startup incubator. Formerly, Nicholas held engineering roles in clean tech start-ups working on electrochromic smart windows at Heliotrope Technologies in San Francisco and lithium ion batteries at Addionics in London. On the side, Nicholas is an editor for Intercalation Station writing about energy storage. Nicholas received his MS in Nanotechnology from the University of Pennsylvania and BS in Chemical Engineering from UC Berkeley.

Crystal Jain is an MS candidate of Materials Science at the Georgia Institute of Technology. Her research, advised by Dr. Gleb Yushin, focuses on next-generation lithium-ion battery materials. Passionate about the intersection of sustainability innovation, energy policy, and product development, she interned as a Process Engineer at Tesla in the Cell Manufacturing team. Prior to graduate school, Crystal was an Engineering Program Manager at Apple for 4 years, overseeing product development of the Apple Watch Series 2, 4, and iPhone 12 OLED Displays. Crystal received her BS in Chemical Engineering from UC Berkeley.

Melissa Zhang is an MBA and MS Energy Candidate at the Stanford Graduate School of Business (GSB) based in Palo Alto, California. Passionate about climate change, Melissa is a venture investor on the GSB Impact Fund and leads weekly climate tech meetups on campus. Prior to Stanford, Melissa consulted for venture-backed ESG data startup MioTech and published policy recommendations for the Clean Energy for Biden Campaign. Before that, Melissa was a portfolio manager and product strategist at BlackRock for five years, overseeing the firm’s systematic hedge funds and Low Carbon Transition Readiness equity strategy in San Francisco. Melissa received her BS in Environmental Economics and BS in Business from UC Berkeley.

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