The Long Tailpipe - Shai Agassi's Blog

Synthesizing Transformation

On January 21st 2008 we set the first step towards getting an entire country off its addiction to gasoline. Why is the Israeli announcement so meaningful? Almost a year in the making, and three years in thinking, the transformative power of yesterday’s announcement is not immediately obvious to people. Sure, most people feel in their gut that something big happened but very few could put their finger on the real transformative news of the day. So let’s run a Monday morning quarterback session (for those who are not into football, the reference is to the analysis run by commentator the morning after a football game is over…for those of you from the UK, football is a game played using a strangely shaped ball, using your hands, covered in protection, with lots of TV oriented stoppage time).

We had a country, Israel, announcing its intent and actions towards a strategic shift from oil as the main source of transportation energy towards clean electricity (mostly solar) as the source of energy powering cars. The announcement was made at the visionary leadership level – by President Shimon Peres – who has been one of the driving forces behind Project Better Place for the last year. The Prime Minister, Ehud Olmert – who promised and delivered relentless backing across all government branches, and executive power through his own PM office General Manager, Ra’anan Dinur, drove the vision into policy.  The Ministry of Finance, converted the policy into green taxation law, in the making for more than 2 years, by a team in the finance ministry, which made sure there is a great starting run for zero-emission vehicles, but more importantly – long term visibility for the law. It will now convert into working regulatory bodies headed by ministry of energy and infrastructure, with minister Ben-Eliezer present and speaking yesterday; other efforts led by ministry of transportation and of course ministry of environment are all working through a coordinated effort across the entire government. Finally, to convert this transformation into an economic growth The ministry of Trace, headed by minister Eli Ishai, commerce and labor which owns the chief scientist of Israel will start creating economic growth packages, R&D programs and trade incentives that will attract the emerging EV supply chain into Israel. This was demonstrated by a signing ceremony of the first umbrella agreement between Renault and the Chief Scientist of Israel at the President’s house.  That is the kind of comprehensive plan that is required for a country to convert itself off fossil fuels – strong coordinated force that can provide enough momentum to turn away 100+ years of inertia in this industry.

We had a car-maker, the forth largest one in the world, that committed to Pure Electric Vehicles (EV) as a mass-market product. Not only are they committed, they have allocated the funds required to develop such vehicle, for the needs of the country where we will start. In their alliance with Nissan, they are developing the next generation of batteries that can drive the vehicle, and provide significant economics advantage for EV over gasoline, diesel or hybrids. Carlos Ghosn, the legendary CEO, who runs two car companies headquartered in two different continents (who is the only man I personally know that flies more miles than I do), is known for being conservative and always delivers more than he promises. He promised us a great car, a fun car to drive, a good performance full three-box sedan, a better car TCO than internal combustion engine, and he promised it will be delivered in volume within approximately three years. Ghosn, Patrick Pelata and Renault-Nissan alliance do not promise lightly, and when he looked me in the eye, I knew he will deliver.

The third ingredient we had yesterday was funding, as we had some of our investment group present in person - Idan Ofer braved the day with high fever and I was really glad to have his father Sami share the event with us; we also had Mike Granoff, representing our angels (some of them like Sass Somekh were there in person), while others like Alan and Bill and the rest of the VantagePoint team and Morgan Stanley were with us through the webcast. For the first time, a company raises the money required not to make the sexy electric car – for that we have Renault-Nissan committing more Development resources than any startup could in the EV industry. This capital is the money that will be leverage to build the infrastructure so much missing from all the previous attempts at this EV market - $200M in equity, goes a very long way when matched with project financing for long term infrastructure investment. I am glad to share with you that we not only signed the funding agreement, we also passed all due diligence on our plans and closed our financing by all parties (which proves to some people that we did have financial plans after all…not a pipe dream).

As the integrators, Project Better Place were the fourth ingredient. Our job starts now (although I must admit we did play some part in bringing all the other parties together to see this tremendous opportunity). We are building the infrastructure framework; we are sourcing the grid elements; we work with the electric company to connect a virtual grid across the country (think of VPN for electrons, instead of bits); we are securing the installation across the country’s parking lots, homes and curbside parking in every major and minor city in Israel; we are educating the drivers and fleet managers as to how EVs work and feel; we design and redesign the EV experience – in our definition of what a car means to us;  we work with the car makers to define the car requirements and how they work with the grid; we integrate and build the software that manages everything for charging the cars to charging the credit cards; in short – we put it all together – and we turn this concept into a replicable business for Israel and other countries.

What happened yesterday was much like photosynthesis – one of the most intriguing processes in nature, where four electrons make it to the same spot in the leaf at the same time, and convert energy from photons to molecules bonded by chemical bonds. Before photosynthesis happens, all you have is energy. After photosynthesis happens what you get is a physical molecule which can be stored for ever. By putting all four elements together in PBP, we will convert vision (neurons firing in one crazy brain) into reality - physical manifestation of the energy of the entire Project Better Place team manifesting itself forever hopefully.

January 21st changes the balance in this industry – if we are right about the business model of PBP, and given the cars will be insanely great (as Renault promised us), there is a possibility of market tipping first in the test markets but very rapidly in the entire car industry worldwide. The industry, and other countries can no longer sit on the fence and wait to see what happens – the first mover advantage here is just too big to overcome – see what happened to Toyota with the Prius. Countries that depend on oil today are hurting at $100/bbl (and $88/bbl is not helping much…but let’s hope the price stays lower as long as possible). Waiting for the economy to break before investing in an alternative is like running a “Thelma and Louise” on your economy – you all know the scene, where you see a canyon approaching and you don’t stop, just pres the gas peddle harder and fly off the cliff. While a memorable ending to a movie, it is an unpleasant jump when 6 billion people are in the car with you.

Let me make a bold prediction – Israel will not be alone on the road to electric transportation. By the end of this year there will be at least 5 countries supporting the same policies and on the same framework. As to the car industry – In the words of Lee Iaccoca - It is time to lead, follow or get out of the way.

Driving Economies - IVA Continued

In continuation to the discussion about growth through innovation, I took a look at the economic drivers that drive the baseline of an economy. Normal growth curves can take small states, like Israel, into pretty much cruise mode – GDP will sustain as long as three cost ratios remain stable:

• Demographics, as represented by health care costs and social security ratios, both manifesting the retired population to working generation size ratios
• Education, as measured through the ratio between what an 18 year old knows when they come out of school with compared to their parents at 18.
• Security costs, counting military spending and internal crime rates.

Interestingly the US is reversing ratios on all these indicators in recent years. The demographics in the US, as result of significant improvements in medicine grows a much larger aging population than native working population. We have seen a significant slide back in the knowledge ratio (son/father knowledge ratio has been declining since the late 80s) – which is amazing given all the technology we are able to use for educating kids these days. Finally, we have had significant decline in normal internal security costs (with a very interesting explanation as to the reasons you can read in Freakonomics), but a six-year very significant spike in (what we hope are temporary) costs of wars on Terror at home and abroad.

What I believe is holding the US is a combination of talent import process, caused by the great H1-B visa policy that allowed more than a million talented scientists and engineers to immigrate into the US if they can show knowledge – not money – as the ticket to the promised land of silicon valley. That wealth of knowledge met wealth of capital (the funny part is this wealth comes from global capital coming to invest back in their own exported talents) – with the meeting place set for Sand Hill Rd, Menlo Park, CA. The creativity of these young engineers brought us the web, eCommerce, the gadgets (no, I didn’t get an iPhone yet – but I sure want one…), the ever present connected world, advertising based media, the social virtual community of web 2.0 – wave after wave of [Knowledge -> Technology -> IP -> wealth -> Venture Capital] circles. All the while, the economy is growing, taxes are flowing, and everyone enjoys the party (especially the tax man).

The comment on my previous post regarding Singapore’s leadership success, one that comes from treating the island state as a large company by its founder-leader is right on. To a certain (much larger) degree, China applied the same model to create modern china over the last few years. Where most countries need one good idea every 5-10 years and can ride the wave of that idea for a generation, China needs to create one of those big ideas pretty much every 5-10 months at their scale. So what is the next big idea – because if you are a small country, like Israel or Singapore, you just can’t wait for the wave to hit the shore, you have to start paddling before the wave comes.

I contend that it is time to get Israel out of cruise mode – not by slowing down the great circular VC model – rather by accelerating and focusing part of it. It is also time to turn Israel’s global brand around – the world mostly sees Israel as exporting a problem by the friction it creates through its (legitimate!!) presence in the middle-east. I believe it is time for Israel to start solving some big problems that worry us on a global scale and export the solutions. Personally, I would like to see Israel start exporting solutions to the true fundamentals again – Water, Food, Energy, Emissions, Genetics – the founding blocks of humanity.

The theory I have is that Israel should focus on one or two of these every five years, in overlaping waves. The focus is not a government program – quite the contrary, it needs to be a commercial focus, galvanized through a challenge of huge scale. The challenge needs to be one that can unite the common people, the entrepreneurs, the wealth – so much so that no one will want to be left “outside” the solution. Think of it as an Apollo mission, getting humanity to the moon and back, only targeted at one or more of these fundamental problems. Make the challenge look so big it becomes truly emotional, the best brains can see their life’s mission in it – after which they simply can’t back away from that mission, day and night.

In the next posts I will try to illustrate how big the problems are, but also how small the solutions can be. All of these fundamental solutions are tightly interlinked, and the key is that solving one will help solve the rest of them in a cascade of solutions.