Ask Coral; What can we learn from Northvolt?
It was a tale full of sound and fury, signifying nothing
We received the following question from one of our esteemed readers; “I see a lot of think pieces here in the UK about the fall of Northvolt, and how it’s doom for the European EV scene. How bad is it really, and how worried should we be about the viability of building companies here?”
What a great question. $15bn down the drain is quite a headline. But our take? Not that bad, and not particularly worried.
Let’s start with a more-complex-than-it-should-be question. What actually is Northvolt? The simple answer is that it’s a battery company, founded in 2015 by ex-Tesla executives, with a stated mission of creating a European alternative to the Chinese dominance in EV batteries. This is true, but too simplistic and doesn’t reflect the true scope of the enterprise. Take a scroll through their Wikipedia. An R&D office, no fewer than 6 announced GigaFactories, including one that makes equipment for excavating and mining, and an advanced sciences division in California following an acquisition of a local tech company. Northvolt isn’t a company so much as an attempt to spin up a full-stack industrial conglomerate to make batteries.
One which, it’s worth noting, is still losing over a billion dollars a year, against revenues of $128m or so, with outstanding debt of around $5bn, and only $30m (!) of cash on hand. Oh.
We applaud Northvolt’s mission and vision. Alternatives to Chinese control of the EV battery chain are undoubtedly a good thing. But, looking at their balance sheet… What the fuck?
From loosely pattern matching the sites of the giga-factories to the headquarters of Northvolt’s largest backers, among them the Canadian & Quebecois governments and various large auto companies, this appears to be a simple quid pro quo. Northvolt’s backers coughed up vast sums of money, on the condition that Northvolt onshore a battery industry local to them. This led to the company getting way, way ahead of itself in investing in the future, without bothering to make money in the present.
Could it have worked? Perhaps, in perfect macroeconomic conditions, although we think even that’s dicey. While it’s true that there have been ripples in worldwide EV adoption, the overall chart is up and to the right. Northvolt simply didn’t execute. We’ll spare you the recitation of failures; Frequent safety violations, multiple worker deaths, poor HR practices leading to language barriers among the workforce, etc etc etc. They bid on a lot of huge contracts and lost, including losing a transformational order from their backers at the BMW group. Yes, their own investors didn’t buy from them.
Perhaps the most professionally offensive failure was the touted promotion in July of this year of Northvolt’s former CFO into the role of Chief Transformation Officer, tasked with overseeing a strategic review of the business and right-sizing of finances. Yes, the CFO who oversaw the aforementioned 500/1 debt-to-earnings ratio. Organizational arrogance is a hell of a drug.
We love the European climate ecosystem, and have been wildly impressed by the quality of the builders, and the rigor and discipline of the companies. This one is out of character; bloated, aimless, and uninspired.
We suggest that climate builders not overthink this one, but a few lessons we think are worth highlighting.
Consultant-created powerpoint decks full of buzzwords about “cross-border stakeholder synergies” are not a business model
Neither is raising money
The best funding rounds are large orders from customers
We love working with early-stage founders because they bring strong points of view to the business-as-contact-sport of building climate companies. A company that attempts to serve everyone, for example by standing up large factories next to their investors, serves nobody. Founders need to maintain control.
You’ll never outbuild a bad corporate culture. Things like language barriers and lack of top-down rigor around safety are existential issues and should be treated as such.
There are times when a small and executable vision is a great starting point. Instead of creating a continental industry, maybe just build a great battery company.
The. best. funding. rounds. are. large. orders. from. customers.
Debt to earnings is not a metric so much as a law of physics. Act accordingly. This is the reason we generally recommend that hardtech businesses slowly expand manufacturing capacity in response to long-lead-time customer POs. Get people to pay for the expansion, don’t do it on spec. Yes, this takes longer and is more complex to execute. Deal with it.
We’d love to see a much more prudent, rigorous, carefully scaled version of this company tried again. Norway, where 95% of new car sales are EVs and the sovereign wealth fund could back such a company with the national equivalent of couch-cushion money, strikes us as not a bad spot. Just build one company, in one place, off a single funding round of perhaps $100m, and fund the rest through revenues. Let’s make it happen.
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