Go on, take the money and run.

GigaOm’s article on green energy snake oil highlights the challenges faced by investors in any industrial technology.  We’re not investors, but over the past six years of applying our process and equipment in this industrial technology space, we have certainly seen many unusual opportunities.  A fair number of them don’t make any sense.  Some turned out to be fraudulent.

What leads to fraud in industrial technologies?

Lots of money, much of which was grant money.  With the federal initiatives through the Department of Energy and many state-based initiatives, there was a lot of money moving around.  Money always attracts individuals looking to make a quick buck, or who might not know the fundamentals of the technology they are selling.  With ‘Cleantech’ being a hot space in the late 2000’s and with a glut of government money (which is not usually overseen by professional investors), hucksters entered at a faster rate than normal.

They didn’t know it was a fraud.  We’ve worked with several academic groups who, when it came time for scale up, were unable to repeat their earlier work.  Several commercial partners have had market assumptions about either the ASP or performance targets of their benchmark that were wildly off.  Under a harsh lens these mistakes nad misinterpretations could have been called fraud, when they were in fact errors.

The science is complex. Energy technologies will often combine cutting edge work in chemistry, electricity and other fields. Our process requires expertise in mechanical, chemical and electrical engineering as well as deep domain expertise in our target application areas.  Translating the science from stage to stage isn’t easy.  Small errors can compound.  This makes diligence for investors very tough – especially if they are conducting commercial and technical diligence simultaneously.

Materials science can take a long time. Ponzi schemes end when they have consumed all the capital that they can. They move fast, like a fire. Materials science innovation is slow – it can take a long time. That provides a benefit to the huckster, who can use that time to their advantage, staying a few steps ahead of their current and future investors.  Envia (below) used that time to try and cut licensing deals, which they didn’t disclose, and to push technology improvements, which didn’t happen.

Supply chain complexity can mask bad business models.  Better Place was going to fix the entire automotive supply chain at once – with fast change battery swap stations and revolutionary vehicles.  It never worked.  When pitching his vision to Toyota, the car maker was immediately suspicious as they knew how long it had taken their market-leading Prius to achieve the numbers that the upstart was promising.  The long and complex supply chain masked numbers that didn’t make any sense.

There are many other reasons that fraud could occur in industrial technology.  List below are several examples of known fraudulent behavior:

• Better Place failure.
• Calera from GigaOm.
• Cool Planet – Article by TheVerge on Founder Mike Cheiky.
• Envia from IEEE
• Kior – post IPO move into bankruptcy.
• Mantria – Biochar ponzi scheme (from GigaOm).
• Matinee Energy – a solar firm (from GigaOm)
• RocketJet by Bloomberg.

Lastly – I haven’t seen any data that says that fraud is more prominent in this area as opposed to other areas of investment.  Maybe the fraud rates are actually better, but it certainly is disappointing to see it occur so often.