LION Smart: Taking the Lion’s Share of the Market Niche
Sound success: With services covering electromobility and battery technology, the Munich startup LION Smart has developed from a TUM spin-off in 2008 into a successful market player. Last year, the company holding LION E-Mobility generated a surplus of just under 500,000 euros. How did it all happen? An exemplary lesson in five acts.
I. It began with a market niche
Tobias Mayer, co-founder of LION Smart, was still a student when the company was launched. He commented in retrospect:
“Test facilities were in high demand in 2008. We learned that first hand during an earlier project in college. As a consequence, the margins were also very good. We thought: someone needs to seize this opportunity. Let’s create our own lab using the knowledge we already have!”
Together with Daniel Quinger and Michael Geppert, fellow students at the Technical University of Munich, Mayer decided to launch a startup. Even more knowledge was brought on board with an additional fellow student and two economists. Using their own capital, the young founders were able to bring together 100,000 euros to establish LION Smart GmbH. Three investors contributed a total of 200,000 euros as well.
II. Move right into the profit zone
The team was immediately able to land their first orders and grew organically with the profits from operational business. It is all about the market niche. One factor of success in the very beginning for Mayer was the relatively high level of startup capital that they invested themselves:
“A common mistake made by founders is to only invest the minimum amount. As soon as a business is run by people or hardware, more money is necessary. It might be different in software applications where the founders work on programming without earning anything. With our test lab, we said from the start: We will not achieve anything if we found the company just by meeting the minimum requirements.”
III. Growing with the market
The next milestone in the company’s history occurred when TÜV SÜD AG caught wind of the LION Smart test lab. The large Munich company wanted to develop its own lab for testing batteries, but had been unable to find the right staff. A special line of training did not exist, and the market was new. TÜV SÜD wanted to buy the young company and hire the founders as their own employees. The founders were not easy to win over, however, since they had just started their entrepreneurial careers. They agreed to develop a joint venture: 70% share for senior partners, 30% for the startup.
LION Smart sold the existing test facilities to the newly developed TÜV SÜD Battery Testing GmbH. At this point, their own funds were no longer sufficient for further expansion.
“We saw that the market was growing so quickly, and we needed to invest.”
For the first time, the company needed outside capital. Yet in the middle of the Lehman Brothers crisis, venture capital was hard to come by, and bank loans were not an option:
“The banks did not understand our business model back then. Despite significant interest from board members, it was still difficult for the banks to gauge the market segment, so they held back at that point.”
The economists in the founding team recommended going public. This was something they already had experience in. The company owners transferred their shares of LION Smart GmbH to the newly founded LION E-Mobility AG. The sold shares were floated on the stock exchange and are now owned by diverse shareholders. The shareholders had the proceeds from their sold shares paid out, which they then invested as a loan in both companies – LION Smart and TÜV SÜD Battery Testing.
IV. Momentous decisions
At the prompting of the economists involved, Switzerland was chosen as the location for the holding for financial reasons. Both economists have since sold all of their own shares and have completely withdrawn from involvement with the business, which led Tobias Mayer to the insight:
“In retrospect, I would not have gone public so early on. In the beginning, a Swiss holding was quite cost effective. However, the rules increase from year to year. There is almost no difference compared to a German stock corporation. It was difficult to predict these kinds of developments. You’re always smarter after the fact.”
In general, deciding to become a stock corporation should be well thought over:
“You have to be able to manage the corporate beast properly to use it reasonably. Otherwise, it just costs an enormous amount of money for things like audited accounts and bookkeeping. Our revision also has to be completed by a state-supervised Swiss company. That makes it even more complex, and that kind of statement costs a lot of money.”
In hindsight, Mayer still does see significant advantages in having become a corporation when compared to companies run according to private law:
“We were able to refinance under good conditions without needing banks. We use option programs so our employees are also able to share the success of the company. This also engages them for long-term commitment.”
V. Off to new frontiers
Spinning off battery testing into a joint venture meant that the original LION Smart business plan was also a thing of the past. The team has since been working on monetizing their collaborative expertise and own reputation. Three lines of business have resulted.
First: consulting. Companies, government agencies and ministries depend on specialized e-mobility knowledge. LION Smart offers the preparation of expert reports.
The second line of business: When building prototypes, even large-scale car manufacturers count on specialized external service providers. Their own departments often lack the innovation that young, small companies have to offer. LION Smart supports car manufacturers in development, prototyping and the path to series production.
Mayer sees particular promise in the third line – their own battery management system (BMS). In this case, it is a circuit board with matching software. It can be thought of as a brain that tells the vehicle how to make the most of its battery. Fundamentally, every manufacturer has its own BMS. What makes LION Smart special is that they offer the entire software package free of charge as open source. This makes the system much more flexible. The company earns money with its BMS through a freemium model. While the software is free, adaptation, warranty and support must be purchased. The company also sells fully equipped circuit boards:
“This is where the largest economies of scale can be achieved. Hardware only has to be developed once. Delivering more circuit boards is not a problem for us. Costs also drop as the amount produced increases.”
Speaking of scaling: At the end of December last year, LION Smart moved to more modern, spacious facilities. New business fields are also in sight for the future. The German Renewable Energy Act is about to end, which means that people who installed solar cells on their rooftops will not necessarily be able to continue to feed the generated electricity into the grid. Intermediate storage in large batteries just might be the future.
It seems the company’s plans for taking the lion’s share in many possible market niches will continue.