Art of the Unicorn | “Deep tech startups need investment, government support for R&D”

At a very granular level, what does Log9 Materials do?

The primary business is to basically bring a differentiation when it comes to batteries in India. The fundamental challenge is that the battery technologies that have been created globally were never created keeping in mind India’s operating conditions or type of vehicles specifically. Our average temperatures are significantly higher, which can have a considerable impact on battery life, performance, charging time and more.

From that perspective, some factors are unique to our geography, leading to a different level of stress on the battery itself. That creates its own challenges when it comes to designing battery packs for EVs. The driving patterns or road conditions are also stressful and it becomes very important to manage the lifecycle of the battery accordingly. We have to collect data, analyse energy patterns, look at efficiency, and driving behaviour and manage the life of these assets.

So, we are coming up with solutions to create better battery solutions. Starting from the cell chemistry itself, we focus on better battery cells, creating the right kind of battery packs, managing and monitoring these battery packs as they go out in the field, as well as connecting them to manufacturing and looking at the performance of the cells.

When it comes to the manufacturing process, there will not be exact replicas. It will be close to a standard, but there will be deviations. If one doesn’t exactly know what the level of deviation is in a battery pack that’s going into the field, they will not be able to monitor and manage, as there would be harsh conditions and different cells would start to degrade differently. All of that is something which we’re able to manage. That’s the innovation that we’re doing at the battery pack level.

Commercial vehicles are the ones which spend most of their time on the road. So, that’s where there is an expectation of performance and the heavy-duty rugged use case is significantly higher than the personal use case. As we have all this capability from a product manufacturing perspective, from a technology perspective and from a management perspective, we are best suited to enable the electrification of commercial fleets in a far better and more data-driven manner than anybody else in the market.

We not only provide batteries, but we are also able to provide management servicing on the assets, because of the data that we have in the batteries. That’s how all the activities of Log9 come together. By leveraging that battery technology, we are able to bring together the ecosystem of commercial fleets.

Many people want to use EVs because they want to curb emissions. However, manufacturing of EVs leads to far more emissions than a fuel-based vehicle, whereas running an EV leads to lesser emissions, as compared to a fuel vehicle.

I get your business model. But if commercial vehicle energy efficiency was such a big problem, why are the big car companies of the world not able to solve it?

Well, because commercial vehicle energy efficiency requires a technical solution, not an operational one. The big car companies may not be technology houses; they are product and manufacturing houses. This requires a fresh look at technology in terms of the conditions and the requirements of our local environment. We’re the only company that deals with things at the cell level and we’re the first ones to have established lithium-ion battery cell manufacturing in the country.

Cell manufacturing is a long-term play which requires process maturity over multiple years. It will enable backward integration for our currently commercial and rapidly scaling battery pack business.

Okay, so, how did you identify this problem? When approaching a product-market fit, how did you ascertain that this was a very big market opportunity?

For us, right from the beginning, commercial electric vehicles are what made sense to us, from an economic and climate perspective. It was very clear from the get-go that if we have to build solutions, we have to build for the commercial space. We don’t want to sell a battery or an EV just for the sake of it. And when we went to see what was happening in the commercial EV space, we realised that everyone was struggling.

Take a fleet operator, for instance. Say they bought an EV, took financing for it and were promised that the vehicle would last for five years. And let’s say there’s a warranty for three years. Yet, the battery would end up lasting for only two years and there were defaults in how the operator fulfills EMI obligations. Then, the financier is offering higher interest rates and lower tenures. This was killing the market for EVs, because no one was willing to take responsibility for the lifetime and reliability of the battery itself. So, we began to explore why batteries are failing faster than they were supposed to.

Was there ever a temptation or desire to go into the retailer space or a flashier segment?

For us, the primary objective is not to create a brand. Our focus has been on what my team and I bring to the table: The technology prowess, not the brand prowess. And the technology will help us create a brand in the long term.

The commercial EV market has a natural sense to it. Consumers are able to see the cost-benefit and efficiency benefits from Day 1. But, at the same time, from the government’s point of view, why could it be pushing for EVs? It may be due to better sustainability and helping meet net-zero goals. India would also get more supply chain control in that regard. From those perspectives, the most amount of fuel is used by commercial makers. So, minimising fuel imports is viable for commercial usage. And because it’s the commercial vehicles that lead to a net-positive climate impact, it serves a net-zero goal as well.

I think you’re definitely solving a much larger and much deeper-rooted problem. And you’re very clear that the go-to-market has to be the commercial segment. So, why is there a need for capital for your company? Because, unlike a consumer-facing company, you don’t have huge cash burns to build a brand, right?

Well, technology is not cheap, it’s significantly expensive. Running a facility every month costs a million dollars, plus you have to keep in mind the kind of people that you have to hire, the people who understand the technology and who have the right credentials, who conduct R&D and constantly improve the technology and more. It’s a costly affair. That’s where the investment goes.

And if you look at our monthly burn, 70% of it is directly attributable to technology and further advancement. So, it’s a way of creating strength and building for the future. You can leverage that for future growth of the business and the company itself. This is a costly industry in that regard and is very similar to the kind of cost structure seen in the semiconductor industry. Think about it: Why don’t we have enough semiconductor research and manufacturing happening in India? Maybe, because research and production, even at a pilot level, require a lot of money.

And in terms of margins, are you making money or is there no intent to do so right now?

There are a couple of aspects to this. One is the cell, another is the battery pack, and the third is management and data analysis. The cell level is at the pilot scale, where we have created the technology. The battery pack level is already at a commercial scale. We earned a revenue of $10 million last year and we’ll be doing a revenue of more than $15 million in FY24.

We are consistently improving our margin profile by optimising supply chains, improving product designs and automating our manufacturing processes. This is being done with a target to become cash flow positive in the next 18 months.

Who are the buyers of the battery packs?

We have about 10 different Original Equipment Manufacturers (OEMs) across the two-wheeler, three-wheeler and four-wheeler categories to which we provide these batteries. When the vehicles are made and have to be deployed with commercial fleets, we, again come in because we understand what is happening with the battery, what battery was manufactured, what was the condition of that battery and more. We collect dynamic and real-time data with about 30 variable data points for every second for every battery deployed in the field.

So, imagine the intensity of the data that we’re getting every second from across 25 cities where our products are running today from across the country. All the data helps us manage the entire ecosystem. Using the data, we’re able to bring together charge point operators, because we know how many vehicles would need charging and where.

And financiers have a better view of how the asset is being used, how long it will run and how long is the life cycle: So, they are reassured. And if all the data is there, we can do predictive maintenance. We know if there’s some issue that is coming up in the vehicle because we’re monitoring the efficiency of the vehicle; if it is underperforming, then, probably, there’s some issue coming up and we could intervene.

What do you think is stopping a SoftBank-esque firm from funding millions of dollars to another company to do this? So, basically, what is stopping another big competitor from doing a gigafactory, as opposed to your small factory?

A gigafactory would come up and our technology would also flow into the gigafactory. But, setting up a gigafactory has multiple challenges and it’s not a technology issue for us, because we’ve created the technology and we’ve tested and validated it. The issue, in terms of a gigafactory risk, is the Chinese scale, which is constantly growing. About 85% of all manufacturing in the world takes place in China. We also have to think about whether policies would be aligned to be competitive with this Chinese scale. And even with high capex and high risk, in this case, the margins are razor thin.

How do you plan to make it really big? Maybe right now the margins are razor thin, but that is what scale is like. If you scale it up at that level, it won’t really matter, right?

Well, at a large scale, the risk becomes higher. But I have to take a ₹2000 crore bet today. If I am taking that kind of financial risk, the reward has to be significantly high. And I need to have more visibility. I cannot just take an uninformed bet or an experimental bet at that kind of scale. That is why the entire industry is treading cautiously on this front, even people who have all the money in the world. Even if the capital is available, you have to be smart about it.

What is your clear ask from the government?

Well, there has to be absolute clarity, in terms of how policy will shape up and how it will be in support of local manufacturing to happen. If there’s an expectation that the industry should take a punt and move forward without clarity from the government, that’s not going to work. And we keep on talking about having a technological edge and being self-reliant, but where is the investment and support in terms of R&D?

If you look at any battery company in China or the US, the first $10 million to $20 million is money that comes directly from the government. And that creates a launchpad for investing in technology and building it further. We don’t have that here.

Suppose the government does not help you with capital. Can it help you with tax sops? Will that be helpful?

That may help, but is it coming out? Because it has not happened so far. However, increased customs duties on Chinese imports are highly anticipated to support local manufacturing.

I think it’s a fair series of asks of a startup founder from the government. So, the way I see your business, I think you’re being smart enough to have two nodes to your business, besides R&D. What’s the investors’ point of view? Give me some sense of the board.

So, scaling a company in India purely based on technology is something which has not happened and which is not easy to do. Startups in India are not funded on a disproportionate outcome with a willingness to take failure as it comes. Our system is not designed for high-risk high-reward situations. Everybody wants to play it safe. From that perspective, there’s an expectation to get to market within a year or a couple of years, start churning revenue and build on that. And that’s the reality of our ecosystem. Hence, building nodes which are revenue-churning and commercial became very evident to us.

So, what’s ahead for Log9? What are the discussions at the Board meetings? I’m sure there is some bit of scepticism on the R&D level and some questions on the battery manufacturing side, maybe…

Well, that’s the unfortunate part of the Indian ecosystem. When you’re at a board level or investor level, the thinking is x revenue tomorrow and y profitability tomorrow. But, we have to live in the ecosystem that we’re born with. We can be a bit cynical, critical or upset about it. But, we’ve decided, as a team, to be based in India.

Okay and is the next round of fundraise imminent now for Log9?

So, we’re talking to many financial investors and we have strategies in place. But the investor lens can change. An investor who invests $10 million in a battery R&D or deep tech company in the US would come to India and be enamoured by downstream deployment deals, rather than fundamental R&D deals. I’ve seen this time and again talking to global investors.

So, I would like to caution you that when talking to investors, please be cognizant of their intent. Because investors have the capability and propensity to put you on a treadmill and pointedly ask, “When can you become the next big thing?”, “When can you go consumer-facing?” or “When can this become a brand?”. But, you have to be very clear in terms of your vision that this is an R&D play. And you’re at a very critical juncture, where you have to decide when to say “no” to that kind of money.

True. And we’ve chosen our investors very cautiously in that manner in terms of how they’re aligned with our business and our technology roadmap. Current schemes are not enough to compete with Chinese prices in the long run. Also, the current subsidies have been long delayed and erratic.

Well, hopefully, you will continue to stick to that thinking. Because, usually, when entrepreneurs see a lot of capital coming their way, it’s very difficult to say no and very soon, they realise the reins of their company are controlled by somebody else. Coming to you, in your journey, going from a very tech-focused person to wearing the hat of an entrepreneur, what are the things you’ve had to unlearn?

Among other things, being closer to the customer or the market is something I had to do. It’s a very big comfort zone sitting in a lab and doing your own thing, where what you’re making is the best. But, when you go out there in the market, you understand walking the tightrope to balance technology and its price viability. That’s where the rubber hits the road in that regard.

And what is the culture of innovation in your organization? There’s a thought process that customers won’t tell you what they need. It’s basically your responsibility to excite them and give them excellence. And your DNA is so R&D-focused. So, is there a constant process of listening?

The way it works in any innovation space, you try 10 different things. And as per the nature of innovation, 8 won’t work out. Instead of getting disheartened by 8 negative outcomes, you have to remember that 2 will work and make up for the failure of 8. For us, from the very beginning, we stuck to the “why” and we tried a lot of things to get to the “how”.

I think you’ve, sort of, hit the nail on the head that innovation is a constant process of trial and error. But, worst case scenario: let’s say things don’t work out in the future. Is there a Plan B?

Well, there’s always a Plan B for us. We’ll keep on trying 10 different things. We’re staying true to our “why”, which is using technology to solve climate change. What we’re doing to create that impact is dependent on a lot of market dynamics, as well as in terms of what is working and what is not working, what changed and more. So, you have to keep up with micro-trends, but stay core to your “why”.

Shrija Agrawal is a business journalist who has covered startups and private capital markets before it was considered cool in India.

The views expressed are personal