Startup Northvolt's failure after $15bn fund raise shows where founders really need to focus

Northvolt was supposed to be a battery pioneer, a symbol of European competitiveness in a global market. It was Europe’s best funded startup, raising $15bn from investors including Goldman Sachs and BlackRock. It was Sweden’s most exciting company in decades. Who cared about IKEA, Spotify or Klarna when you could work for a climate tech company like Northvolt?

Northvolt raised $1bn in June 2019, then the largest funding round in European tech history. Over the next two years, before they had manufactured a single cell, $50bn customer contracts were signed. Co-founders Peter Carlsson and Paolo Cerruti had worked closely with Elon Musk at Tesla. But on November 21 it filed for bankruptcy and Carlsson resigned.

The writing has been on the wall. In 2022, it announced production issues and that capacity targets wouldn’t be reached until 2024, a year late. This marked the beginning of a series of delays. During the first nine months of 2023, it delivered just 0.5% of the planned annual battery cell capacity. They were also burning cash: in the first nine months of 2023, losses increased from €113m to €950m.

Northvolt tried and failed to raise $1.2bn in the first half of 2024. BMW cancelled a $2bn order in June. They undertook a strategic review, the outcome of which led to the closure of several plants and 1,500 job losses, a quarter of its global workforce. Within months, Northvolt had gone from a much-heralded well-funded unicorn tech startup to a company struggling to stay afloat.

It went bust, joining other similar hype-funded startups like Jawbone, Quibi, Theranos and WeWork. The resonance with WeWork is stark. In a matter of weeks in 2019, WeWork, an emblem of venture-backed unicorns, became a casualty of consensual hallucination between startup founders and investors who seemingly shopped at the tailor who makes emperor’s new clothes.

Founder Adam Neumann declared that WeWork’s valuation and size are much more based on our energy and spirituality than on a multiple of revenue. He said he’d met with Elon Musk and offered the company’s services supporting Musk’s future Mars missions:  WeWork Mars is in our pipeline, Neumann declared. He forgot to add that Musk wasn’t interested.

In frothy capital markets romantic delusions of growth are possible, where the charisma and audacity of founders is more alluring than spreadsheets, and investors jostle with each other to write cheques of $100m. However, for me the fundamental flaw here is that raising capital isn’t a strategy – which has been the Northvolt operating model.

Investors acted like the 1850s Californian gold rush where the hubris of megalomaniac founders seduces investors with their ambitions as to be wannabe unicorns. SoftBank told WeWork founder Adam Neumann to make WeWork ten times bigger than your original plan and to recognise that being crazy is better than being smart. Neumann didn’t hold back. Neither did Northvolt: instead of a 16GWh factory production capacity was increased to 40GWh. Yet in reality, fund raising is not a destination. It’s when the true journey begins. Stats estimate that only 65% of Series A startups reach Series B - a third fail at this hurdle. Equally a relentless blitzscaling strategy of constant pursuit of growth funded by repeated new

Northvolt struggled to get anywhere. Owing to incompetence, bad luck or strategy? Its main battery factory operated at a small fraction of its capacity incurring huge losses. Were its managers too eager to expand that they neglected the basics? Was it a flawed business plan, is there just not a market for a European battery project like it?  No one has proven it is possible to conduct commercial and profitable production of lithium-ion battery cells outside of Asia.

Northvolt’s failure holds lessons. Here are ten takeaways which clearly shows fund raising isn’t the panacea for startups and can in fact drive the wrong strategy and behaviours.

1. Perils of overhyping and under delivering Northvolt’s inability to deliver on hype and high expectations serves as a cautionary tale. The company burst onto the scene promising cutting-edge technology. Overhyping a product that isn't ready for the market can erode trust, the net effect for them was failure to bring in a rescue round. investors had lost faith and patience.

Takeaway: The hype superseded numbers. It was accounting jujitsu. At some point, startup gestalt of overpromise and underdelivering pushes founders into a shadowy corner. Simply, set and hit your metrics to model a pathway to breakeven, then profitability.

2. Too much focus on investment Ventures that create hyperbole and receive funding tend to shift their strategic focus towards ‘blitzscaling’, seeking repeated funding rounds to fuel growth. Yet despite being well-backed, they burn through money quickly and run out of runway well before becoming profitable. There's an over-reliance on investor funding instead of focusing on achieving and sustaining a minimum viable business. Blitzscaling means you need investors with very deep pockets. And you usually need more money than you thought, because you’ll need further funding to recover from the mistakes you’re likely to make along the way.

Takeaway: Northvolt had a hard landing - with no recognisable route to profitability it’s harder to get cash. The taps have been tightened. Blitzscaling may become a dirty word. It’s a do-or-die approach. Cash-burning firms may find themselves stranded. For your startup, don’t fall for the hype. 

3. Speed of product development For startups, it is not only the idea that matters, but also the speed of execution. When startups have access to a large amount of capital, they tend to develop products at a slower pace because they are distracted and not as hungry.

Takeaway: Mistakes in execution have severe repercussions. Peloton, once a darling of the home fitness sector, suffered a precipitous fall after having to recall their Tread+ exercise machine due to product safety concerns, which delayed their product roadmap execution.

4. Ignoring the competition China dominates battery cell production and the supply chain, giving its companies the ability to undercut on cost. Northvolt spent lavishly on lab-level breakthroughs and next-gen tech, but never worked out how to commercialise them and never came close to matching the world’s best battery-makers in terms of unit economics. The trouble is, if they are too far behind, they may never catch up with their rivals, and buckets of cash may simply allow them to grow flabby.

Takeaway: Scale unit economics. A startup is a bet on a business model attaining the scale/critical mass beyond which the unit economics starts making sense.  Focus on determining the economic drivers of success, not throwing out outrageous revenue projections, and build a growth story around this. Northvolt failed to demonstrate any operating economies of scale.

5. Scaling risks Northvolt needed the scale to make its battery price competitive, and hired 100+ people a month. Scaling requires an operational infrastructure and team way ahead of anything they had in the past. Effective leadership and management of scaling are cornerstones of startup success.

Takeaway: Think of scaling as building the base of a pyramid, the foundation upon which everything else is built, and you know that it will hold. Focus on building your organisation capability to grow to realise your potential, without over taxing your cash or endangering your roadmap.

6. Product-Market Fit The best founders undertake research to find a pain point for their target market, then develop their MVP. However, if they receive significant funding early they tend to stop focusing on  product-market fit and continue research and product development in isolation. Where technology is rapidly evolving, it is likely to rapidly consume several electric lorryloads of cash.

Takeaway: Many founders lose product focus and step back into indulgent research as their cash pile gives them misplaced comfort of having time. They neglect the product which is the very reason for their existence. Ironically, funding can be a detriment as founders lose their hunger and edge.

7. Poor timing EV sales in Europe dropped by 5% in the first ten months of 2024 compared with 2023; in Germany they fell by 27%. EVs’ share of total car sales in Europe slipped from 14% to 13%. LG Energy Solution, a South Korean manufacturer running Europe’s biggest battery facility in Poland, which accounts for half of Europe’s capacity, paused their expansion plans.

Takeaway: The startup world is filled with the idolatry of winners, dulling our sense of reality. Failure arises from not watching the trends and movements in their target market and becoming myopic to their own product, continuing to burn cash without considering the market timing. I’ve always preferred opportunities where time is an ally, not an enemy.

8. The dilemma of unproven business models Startups that receive funding at an early stage often become complacent when it comes to developing a well-defined business model. Many startups attract investor interest due to a promising idea. However, if there is no clear-cut plan to execute a viable business generating revenue from the resultant product, survival becomes uncertain.

Takeaway: Northvolt repeatedly rebuilt the plane mid-flight. The multi-faceted, interlinked levelling up that’s needed across the entire business is then a huge challenge.

Summary

The salutary lesson from the trauma of Northvolt is that common sense has prevailed, and the free rocket fuel stoking the tech startup mania is rationed after all, rewarding firms that generate cash or profit. This will cause a shift away from the quest for growth at all costs towards more responsible stewardship of startup capital to get better at runway growth. It’s about building a minimum viable business, not just the latest tech innovation.

The goal for startups should be to make their ventures sustainable, not just explosive. After years in which startup investors have cast themselves as infallible Merlins, we need a back-to-basics approach, shouting when a venture cannot demonstrate a route to profitability in a way that’s not obvious to the naked eye avoiding the Emperor’s new clothes allegory.

These patterns of failure hold crucial lessons. No amount of funding can compensate for a lack of a clear business model, overhyping and competitive market pressures. Premature scaling or an excessive belief in your own product can be just as dangerous as they are tempting.

Implementing a high-growth innovation requires maintaining a razor-sharp focus on customer demands, keeping execution errors in check, and strong operational management. By understanding the business fundamentals, startups can improve their chances of sustainable success and growth.