Third time may be a charm

Undeterred by failures, A123 founder hits on a big idea

The third time that Ric Fulop asked Howard Anderson to invest in one of his start-ups, there was no good reason for Anderson to say yes. Fulop was forming a company that would reinvent the battery, but Anderson, founder of the Boston forecasting firm the Yankee Group, had already lost millions by investing in Fulop's previous ventures.

Fulop had come to the United States from Venezuela, where he'd started two companies while still in his teens, and then dropped out of Babson College to dive head-first into the entrepreneurial mosh pit of the late 1990s.

He started a company to stream software to PCs. He started a company to make equipment that would increase the bandwidth of high-speed Internet connections. A third start-up, Broadband2Wireless, aimed to use a network of antennas on rooftops to bring a zippier Internet access alternative to big cities.

The three companies, which together sucked up more than $100 million in funding, all failed. Broadband2Wireless, which filed for Chapter 11 protection about a year after its founding, acquired the nickname "Broadband2Cashless." Anderson, who was also one of the original partners at the Waltham venture capital firm Battery Ventures, had put money into two of Fulop's three companies, losing nearly $10 million.

For Fulop's fourth idea, he partnered with a materials science professor at the Massachusetts Institute of Technology, Yet-Ming Chiang, who had developed an approach for creating a high-capacity battery that would assemble itself: Just stir together some carefully engineered materials, and presto, you'd have a battery with incredibly low production costs.

The resulting company, A123 Systems Inc., was founded in 2001 and now is on the verge of filing for an initial public offering, according to several people with close ties to the company. They did not want to be named because they are not authorized to speak about the topic. A successful IPO would both redeem Fulop's reputation and make Massachusetts one of the leaders in the next-generation battery industry.

A123 expected to quickly adapt Chiang's laboratory insights to commercial production. But as the team hunted for the ideal materials to create an efficient self-assembling battery, they ran into problems. A Harvard Business School case study written about the company described the situation as "digging in, hitting rocks."

But a new breakthrough at Chiang's MIT lab seemed to have promise: the discovery that properly sized lithium-iron phosphate particles seemed to be a perfect replacement for the lithium-cobalt oxide traditionally used in lithium-ion batteries, which power devices like laptops and cellphones.

The nanoscale particles would enable batteries to deliver impressive bursts of power and charge more quickly - while being cheaper and safer than conventional batteries. (Puncture a standard lithium-ion battery with a nail, for instance, and it is likely to burst into flames; a video posted online shows one of A123's batteries surviving such a puncture test with no pyrotechnics.) The company decided to change directions and pursue the newer research.

In 2003, Fulop and A123 chief executive David Vieau met with executives at Black & Decker to talk about using their batteries for power tools. Two years later, the tools were in production. The company had great luck - and timing. It was to start developing a battery that would work with hybrid cars at a moment when the entire auto industry had gotten religion: Hybrids were the future.

Last August, General Motors Corp. disclosed that A123 would be one of two companies it would work with in developing the Chevrolet Volt, expected to go on sale in 2010. The Volt is designed to be plugged into an electrical an outlet overnight; running on charged-up batteries alone would give it a range of about 40 miles, and a small gasoline engine would be present only to keep the batteries charged for longer trips.

Also last year, A123 acquired a Canadian company called Hymotion Inc., which makes kits that can convert a standard hybrid car into a plug-in hybrid, allowing it to wring 100 miles of driving or more from a gallon of gas.

Environmentally conscious Google Inc. was among the first companies to start building a fleet of hybrids converted with the Hymotion technology, and A123 recently decided to start selling the kits to consumers who own Toyota Priuses. The cost to have a Prius upgraded with one of the kits is $10,000, and installations are expected to begin this July.

Unfortunately, none of the executives at A123 would speak with me for this column -- even though they haven't yet filed their S-1 document with the Securities and Exchange Commission, a milestone generally regarded as the start of the mandated "quiet period."

One person close to the company said they were worried about the so-called Playboy problem: When Google was in its quiet period in 2004, Playboy magazine ran an interview that the founders had given earlier. The SEC threatened to delay the IPO, since executives are barred from promoting their company prior to a public offering.

But the company has already benefited from some very high-profile publicity, as when CEO David Vieau visited the White House last year to show off a plug-in Prius hybrid to President Bush.

And Fulop isn't above a little digital hucksterism on behalf of his latest company. On Amazon.com, he has posted five product reviews -- all for Black & Decker tools from the VPX line that rely on batteries from A123.

"This was the first VPX tool I got and I have to say that after getting this I had to go and get the rest of the set!" Fulop wrote about an air pump. "I love it!" He didn't mention his connection with the product.

A successful A123 IPO would produce big returns for North Bridge Venture Partners of Waltham and Desh Deshpande, chairman of Chelmsford-based Sycamore Networks, both big believers in the company. Silicon Valley venture firm Sequoia Capital and General Electric are also investors. A123 has raised $148 million in total funding so far.

Amazingly, Howard Anderson also decided to ante up with Fulop again. At the time, Anderson was running the Cambridge venture capital firm YankeeTek Ventures. (YankeeTek has since folded; having invested in Chinook Communications and Broadband2Wireless, two of Fulop's earlier companies, didn't help matters.)

Anderson's decision was based on his belief that not every successful entrepreneur succeeds his first, second, or even third time out of the gate.

"I was worried this one would hit, and I'd be the dummy who passed on it," Anderson told me once.

Scott Kirsner can be reached at kirsner@pobox.com.