Entrepreneurs

One Energy Startup's Tireless Quest For Capital

At current gasoline prices, replacing the family sedan with a hybrid vehicle doesn't make a lot of economic sense for most people. Assuming that the price per gallon hovers at $3, you would have to drive 148,000 miles to make up the $6,000 more you'll pay for a Toyota ( TM - news - people ) Prius getting 45mpg versus a Toyota Corolla at 28mpg. (See "Backseat Driver")

But what about cars that drive 100,000 miles a year and get 14mpg? There exists such a market: the taxis, limos, vans and shuttle buses of America. Fleet owners spend $62 billion a year on buying new vehicles, and a young company in Detroit, called Alte, wants a cut of it.
Alte doesn't aim to make whole vehicles. It wants to retrofit existing fleets with hybrid power trains. Most hybrids, like the Prius, have two drive trains--one turned by battery power, the other by a gasoline engine. Alte's design (similar to that of the anticipated Chevy Volt) involves a single shaft spun by a computer-controlled, battery-powered electric motor charged from a wall socket; a small gasoline engine powers a generator when needed. That approach saves parts, weight and fuel, though not enough to justify the cost unless you chew up the miles. Hence the fleet-market attack.

Chief Executive John Thomas, a 47-year-old mechanical engineer and former head of the Michigan sedan program at electric-car maker Tesla, is expansive about Alte's potential. Consider, he says, the 13,500 sedan cabs in New York City, plus another 30,000 livery vehicles, mostly Lincoln Town Cars. "We want to replace the drive trains of every one of them," he declares. Retrofitting just a tiny fraction of the entire U.S. fleet inventory--including shuttle buses, commercial vans, limousines, police cars and post office trucks--could generate $2 billion in annual revenue by 2013. Then there's the global market: Thomas has met with the Moroccan government about converting that country's 100,000 taxis. He's also salivating over a Spanish mandate to have 1 million of the country's cars running hybrid or electric-drive trains by 2014.

Initially Alte plans to sell the drive-train kits through 100 car dealerships that would pay a one-time $200,000 fee for licensed Alte territories. Dealers would shell out another $300,000 for specialized electrical testing equipment and other tools (sold by another manufacturer) to perform the conversions. Offsetting those outlays would be the $25,000 per conversion paid by fleet operators. At 900 conversions a year, each requiring about 13 hours of technician labor, Thomas reckons, a dealership with at least four service bays would bag $1,400 to $2,000 in pretax profit per vehicle.

Alte's leaders include cofounders W. Jeff DeFrank and Nam Thai-Tang. Both men came from the engineering ranks at Tesla and, before that, Ford Motor ( F - news - people ), where Thai-Tang logged 19 years. DeFrank also worked on nuclear reactors for the Navy. Chief Financial Officer Roy S. Clauss spent 30 years as an investment banker on Wall Street. Early this month ex-Chrysler chief executive Thomas LaSorda signed on as an investor and board member (he won't disclose the size of his stake). Says LaSorda: "I think the plan here will succeed because they're not going after markets that the big car companies target."
Just one problem: lack of startup juice. Thomas says he needs $130 million to get the manufacturing of kits started at a factory once used by Delphi (DPHI.PK - news - people ) in Auburn Hills, Mich. Alte can get there in nearly one fell swoop by bagging a $101 million federal loan, part of the of the Advanced Technology Vehicle Manufacturing Program sponsored by the Department of Energy, which so far has promised $5.9 billion to Ford to retool factories for fuel-efficient cars; $1.6 billion to Nissan ( NSANY - news - people ) to build electric cars in Tennessee; $465 million to Tesla to complete the factory for its $57,000 sedan; and $530 million for Fisker Automotive to build plug-in hybrids in Delaware. To even be considered for the loan, Thomas and company have to raise $30 million in equity. Since launching last December, Alte has managed to raise only $4 million from angels, with another $5 million on track from similar sources.

The hard quest for capital began with the compilation of a single-spaced 60-page loan application, which the government rejected in January, calling it "substantially incomplete." Little surprise given that Alte had little cash and no manufacturing capacity. Says Thomas: "The loan application process has been incredibly complicated, but we knew that from our experience at Tesla."

Thomas and Clauss then scrounged for dough at dozens of angel networks and investment conferences, paying up to $7,500 to offer a ten-minute presentation in front of venture capital and private equity firms. No luck there, either: Investors enamored of cloud computing and new consumer gadgets yawned at a car idea that on its face wasn't as sexy as Tesla's. In May Thomas came across a doe grant that promised to match the cost of capital outlays for new fuel-efficiency schemes. That proposal took another sleepless week. Again, the government refused. "You can't go after every shiny object you see," says Thomas.

Meanwhile, Thai-Tang and DeFrank went to work on a prototype. In June, after spending three months and $125,000, Alte unveiled its first power train inside the shell of a yellow Ford Crown Victoria taxicab. A few angels bit, but Thomas still had a long way to go.

Back to the doe--this time, with 140 pages in hand, including a new lease on that Michigan factory and $1 million in angel funding. In August the doe declared Alte's submission "sufficient" for further consideration. Next step: an environmental review. No sweat, says Thomas. Alte estimates that a new hybrid car, from its manufacture to its death, creates 96 tons of carbon dioxide, while a plug-in power train conversion kicks off just a quarter of that over its lifetime. That's not exactly a comparison of apples to apples, but government bureaucrats might be wowed by it.

Alte's latest prototype--a $250,000 investment that helped lure LaSorda--is a rolling chassis that runs Alte's standard drive train, with all the working parts exposed. Eight engineers worked 16-hour days for two months to build it. The message here: Alte's system is totally flexible and can be installed in anything from a bmw 7-Series to a Chevy Caprice. In November Thomas sent the rolling chassis to a sustainable-energy conference in New York City, where it caught the eye of fleet operators at Frito-Lay and at the city's Police and Parks departments.

As Alte inches closer to capital, competitors are stirring. Azure Dynamics, a tiny company in Detroit, has sold some hybrid drives for medium-duty delivery vans. Raser Technologies in Provo, Utah has done a Hummer retrofit that, it claims, yields 100mpg. Eaton Corp. ( ETN - news - people ) has retrofitted 100 FedEx ( FDX - news - people ) trucks with fuel-friendly drive trains, though the conversion costs are still prohibitive.

Alte's angel funding should keep the lights on for the next year. As for the equity capital needed to land that big doe loan, Thomas is counting on LaSorda to pull his weight with dealers and convince them to put up the remaining $20 million. "We can't wait forever on our funding," he says.

Massive Market
Retrofitting even a tiny fraction of all fleet vehicles with hybrid power trains could generate billions in revenue.

Press Rekease 01/28/09
For Immediate Release
Startup Contactscale Unwraps Advanced Car Designs

Summary: Contactscale unveils prototype bodywork for alternative-fuel racecars; startup to kick-start Silicon Valley's automotive industry

Sunnyvale, CA - January 29, 2009: Silicon Valley startup Contactscale unveiled its first public project: advanced composite bodywork for the dp4, dp1 and dp1/e. The cars are ultra-lightweight sports racing prototypes being designed and built by Palatov Motorsport of Portland, OR.

The dp1/e is an electric variation of Palatov Motorsport's first racecar prototype and weighs around 1,000 lbs. Contactscale is fabricating the tooling and body, an all-composite affair that will reduce weight and improve track performance, where Palatov plans to use the dp1/e as a testbed for bleeding-edge automotive technology. And Palatov is only one of many automotive startups that are roving the valley, looking to innovate on more than software.

"You don't have to be GM anymore," said Contactscale founder Dan Bolfing. "Design that used to cost hundreds of thousands of dollars and take years can be done for tens of thousands in months or weeks." And that lower cost opens the door to new companies looking to bring new ideas to the road.

According to Dennis Palatov, the founder of Palatov Motorsport, “Designing a full-function electric car within the limitations of currently available energy storage solutions is akin to building a modern PC with only 10MB of memory – to make it useful off-the-shelf solutions simply won’t work and every possible avenue for improving efficiency must be explored, quickly and cost effectively. The Rapid Prototyping technologies and services from Contactscale allow us to do this much better, faster and cheaper than previously possible. This truly brings automotive design and development within the realm of the entrepreneur.”

Contactscale brings decades of experience in composites to the fledgling automotive industry in Northern California. The company is rooted in Bolfing's experience fabbing windsurfers, first out of fiberglass and then more advanced composites. Contactscale takes that technology and applies it to vehicles, where reduced weight means greater efficiency -- electric or otherwise -- and better performance.

That technology is eco-friendly, too. The carbon-fiber and polymer materials used by Contactscale can improve the efficiency and range of a car without sacrificing performance, according to Bolfing. "Making efficient cars isn't just about batteries and electric motors. Composites can lower the weight of a vehicle," he adds, "and you don't have to rely on unproven technology to make more efficient cars."

For additional information on Palatov Motorsport contact Dennis Palatov atdp@palatov.com.
For information about ContactScale in Sunnyvale, you can reach Dan Bolfing atDanB@contactscale.com.