Bad Karma: How Fisker Failed

FISKER BIG DREAMS: Fisker’s goal was to build a beautiful, “green” car that could rival exclusive European brands like Maserati and Aston Martin. REUTERS/ALLISON JOYCE The company raised $1.4 billion in private and public funds since its founding in 2007, but most of the money is gone. Where did it go? Bad Karma: How Fisker failed BY Deepa SEETHaraMAN AND PAUL LIENert DETROIT, JUNE 17, 2013 anish designer Henrik Fisker knows how to style a sexy car. Among his works is the BMW Z8, driven by James Bond in “The World Is D Not Enough,” where the sleek roadster gets sliced in two by a heli- copter armed with giant saws. Fisker’s latest piece of rolling sculpture is the comely Fisker Karma hybrid sports sedan — and it may meet an equally ugly end. SPECIAL REPORT 1 FISKER A CAUTIONARY TALE ON THE OUTSIDE: Co- founder Henrik Fisker resigned from the company in mid-March in a dispute with some of the directors. REUTERS/PHIL MCCarteN The Dane’s startup, Fisker Automotive, into the company from May 2011 through executive who spoke on the condition of hasn’t built a car in nearly a year. It fired most August 2012, attracted by rosy sales forecasts anonymity said the company accurately pre- of its workforce, hired bankruptcy advisers and assurances the company valued itself at sented its finances to both investors and the and is seeking a buyer. Co-founder Henrik nearly $2 billion. government. The executive said Fisker dis- Fisker resigned in mid-March in a dispute “One characteristic of businesses that are in closed to investors in a December 2011 let- with some of the directors. And despite rais- trouble like this is, as the desperation increas- ter that it was unlikely to meet the financial ing $1.4 billion in private and public funds es, they tend to bend the story a little,” said covenants under the government loan. since its founding in 2007, the company is David Cole, a longtime auto consultant and “Whatever the Energy Department’s in- out of cash. For months, key investors have former head of the Center for Automotive ternal assessment or view might have been, been footing the car maker’s day-to-day ex- Research in Ann Arbor, Michigan. we certainly weren’t giving them different penses to keep it alive in diminished form. Fisker declined to comment. A Fisker information or different forecasts than we An examination of the company’s rise were providing to our own investors,” the and fall reveals Fisker’s finances started to executive told Reuters in late May. unravel as early as June 2011, when the U.S. Fisker’s undoing had numerous causes. Department of Energy cut off access to tax- $35,000 Fundamentally, say suppliers and some in- payer-funded loans — a fact that wasn’t pub- The amount that Fisker lost on siders, executives simply couldn’t orchestrate licly acknowledged by Fisker for nine months. each car it built the complex dance that leads from a design That and other troubling information sketch to the production and sale of a prof- remained unknown by many of Fisker’s pri- Source: Internal financial statements and itable car. Spending was lavish; engineer- vate-sector investors, who put $525 million interviews with former executives ing blunders rife. The company also faced SPECIAL REPORT 2 FISKER A CAUTIONARY TALE Fisker breaks down Over five years, Fisker Automotive EQUITY AND DEBT FINANCING $500 million raised more than $1.4 billion in equity and debt financing, from 400 13.9% DOE loans private investors and the 300 U.S. government. Total Venture capital $1.4 bln 200 Most of the money is gone. 100 86.1% 0 2007 '08 '09 '10 '11 '12 TIMELINE Sep 2007 Jul 2008 Oct 2009 Nov 2011 Jul 2012 Aug 2012 Jan 2013 Mar 2013 Fisker Contracts Karma Agrees to acquire Karma goes Valmet quits Posawatz replaces Fisker seeks Henrik Fisker founded assembly to Valmet GM plant in DE on sale building Karma LaSorda as CEO buyers in China resigns Dec 2007 Sep 2009 Dec 2009 May 2010 May 2011 Feb 2012 Dec 2012 Apr 2013 First $5 mln Energy Dept Initial target Draws first Draws final LaSorda replaces Hires investment Fisker fires in venture approves on-sale date DOE funds DOE funds Fisker as CEO bank Evercore 75% of capital funding $529 mln loan for Karma to find partners remaining staﬀ Sources: Fisker Automotive; U.S. Securities and Exchange Commission; U.S. Department of Energy S. Culp, 10/06/2013 pressure from both its investors and its chief condition of anonymity. Henrik Fisker, his senior partner at venture-capital firm Kleiner creditor, the Energy Department, to meet partner Barny Koehler and other executives Perkins Caufield & Byers, was developing ambitious goals set by Fisker executives. at Fisker declined to comment. a portfolio centered on clean technology. The findings raise questions about wheth- The Energy Department has repeatedly Lane, a onetime IBM executive, made his er the Energy Department provided suffi- defended its handling of the Fisker loan. reputation as president of software giant cient oversight and whether Fisker’s board of Nicholas Whitcombe, who previously led the Oracle. Kleiner Perkins had bankrolled the directors, comprised mainly of large investors, DOE loan program, told lawmakers in April likes of Google and Amazon. Their backing afforded proper corporate governance. that the DOE “acted decisively to protect the was a coup for any startup. A detailed portrait of Fisker Automotive taxpayers’ interest since it became evident that Lane threw his support behind Henrik and its finances emerges from interviews Fisker faced financial difficulties.” Fisker in early 2008, joined Fisker’s board with more than 30 people close to the of directors and ultimately went on to serve FISKER’S ORIGINS company, as well as a review of five years of as the startup’s lead investor, board chair- confidential investor presentations seen by Fisker Automotive was founded in August man and chief cheerleader. Two people close Reuters, and internal Energy Department 2007 with the goal of building a beautiful, to Lane said he was impressed by Henrik emails and briefings released during a con- “green” car that could rival exclusive European Fisker’s design chops. gressional hearing in late April. brands like Maserati and Aston Martin. Fisker landed an even bigger backer Most of those interviewed spoke on the Around the same time, Ray Lane, then a the next year. In September 2009, Fisker SPECIAL REPORT 3 FISKER A CAUTIONARY TALE won a $529 million loan from the Energy Department to develop the Karma and build a second model in the United States. The financing came as part of a broader Obama administration effort to shore up employ- ment in the recession-ravaged auto industry and improve the fuel efficiency of the U.S. auto fleet by extending government loans to so-called green-energy initiatives. A month later, Fisker agreed to buy an idle General Motors factory in Delaware for about $20 million. The government loan ap- proval was a welcome relief for Fisker, which was hurting for cash by late that summer and eager to raise more money from investors, according to an email from Koehler. “We are oversubscribed in this equity round with the Energy Department sup- MASS PRODUCTION: There were repeated delays in the start of Karma production and a drastic port — and nowhere without it,” Koehler curtailment in volume meant that Fisker was paying higher-than-budgeted prices for many said in an August 2009 email to Energy components. REUTERS/ALLISON JOYCE Department officials. The announcement triggered a flood of investor interest in Fisker. The company raised it originally planned to sell 15,000 Karmas a design, even when flaws emerged that un- some $600 million before it ever sold a car. year, starting in late 2009. dercut the Karma’s performance and poten- Some of the production delays were tial fixes would add millions in cost. PRODUCTION PROBLEMS caused by last-minute design changes and In mid-2011, engineers found that Despite this influx of cash, Fisker never engineering fixes, insiders said, resulting in Fisker’s unusual front-end exhaust design was turned a profit. From 2008 to 2012, the additional cost overruns and late shipments of too noisy and hurt the Karma’s horsepower. carmaker lost an estimated $1 billion, ac- critical components. Fisker also over-ordered This could have been headed off years earlier cording to internal financial statements and and stockpiled other parts. There was no sales by putting the exhaust pipe in the back, as is confidential presentations made to pro- revenue to help offset some of those costs un- standard, but the idea was struck down. spective investors. til late 2011. A person close to the company’s What emerged was a solution dubbed Fisker built an estimated 2,450 Karmas finances estimated that last-minute tweaks the “pizza box” that kept the exhaust sys- from 2011 to 2012, but lost at least $35,000 rendered between $50 million and $100 mil- tem in front, but encased it in a very thin on each car, according to internal finan- lion of Fisker’s parts inventory obsolete. steel box. The idea emerged after engineers cial statements and interviews with former Another hitch: Pressure on engineers ordered pizza for lunch one afternoon. The Fisker executives. One former executive said to stay faithful to Henrik Fisker’s original solution addressed some concerns about the the Karma “cost far more to produce than sound of the vehicle, as well as CEO Fisker’s we could ever charge for it.” aesthetic sensibility — but at an extra cost Repeated delays in the start of Karma Beneath the world-class of millions of dollars, according to two engi- production and a drastic curtailment in vol- skin was a rudimentary machine neers who worked on the redesign program.

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