Economy chills investments in EVs and mobility

Once flush with easy money, investors have soured on investing in electric vehicles and other mobility startups amid uncertain economic conditions. The total amount invested in the moblity tech sector dropped by 79 percent year-over-year in the third quarter of 2022, according to the latest figures from financial services firm PitchBook.

Going forward, investors expect investment in transportation tech to continue, albeit at a more deliberate pace and with startups facing more scrutiny from prospective backers.

Global economic headwinds, rising borrowing rates and the recent struggles of startups that went public via special-purpose acquisition companies have brought a heightened sense of cautiousness among venture capital firms, experts told Automotive News.

“The funding spigot is almost turned off,” said Quin Garcia, co-founder and managing director of Bay Area venture-capital firm Autotech Ventures. “But VCs have a ton of dry powder, so they’re going to be a lot more selective with their investments.”

Garcia, an early investor in ride-hailing company Lyft, said startups that last raised funds before the Federal Reserve started hiking interest rates in March 2022 will likely need to show investors clear plans onhow they will eventually make money to receive additional investment.

“Many startups are going to have to show how they’ll turn a profit,” he said. “There will also be mergers, some will be acquired, and some will just die.”

Rising interest rates are dampening investors’ appetite for risk, said Olaf Sakkers, a partner at RedBlue Capital, which has a stake in Zoomo, an Australian e-bike startup that’s become one of the fastest-growing e-bike companies in the world. RedBlue invested $28 million in EVage, an Indian electric light-truck company, in January.

“There’s not much capital going into startups right now,” Sakkers said at the CoMotion LA 22 mobility tech conference in November. “The reason for that is when the cost of capital goes up with inflation, the amount of capital going to risky things goes down, and startups are about as risky as it gets.”

In the third quarter of 2022, venture capital sunk $5.5 billion in mobility-related deals, a 79 percent year-over-year decline, according to data compiled by PitchBook.

Separately, funding for supply chain tech companies totaled $8.6 billion, down 40 percent compared with the third quarter of 2021, the financial data firm said.

Startups accessing venture capital funding in 2023 should find money will come with more strings attached, compared with the cheap money they were able to access in 2020 and 2021, said Jonathan Geurkink, senior analyst on PitchBook’s emerging technology research team.

Case in point: Swedish autonomous trucking company Einride’s recent $500 million raise included borrowing $300 million from Barclays Europe, and handing over stakes in the company to Swedish pension fund AMF, EQT Ventures, Northzone, Polar Structure, Norrsken VC, Temasek and other investors for the remaining $200 million.

Mergers are another likely outcome of tighter access to capital.

The merger of Lidar companies Velodyne and Ouster, and the possible merger of automotive data companies Otonomo and Wejo, is probably where the sector is headed in 2023, Geurkink said.

The four companies all went public via SPACs, and are now trading substantially lower than initial stock prices. They’re looking to slow their cash burn, make layoffs and cut other costs, Geurkink said.

On the corporate front, the venture capital arms of some big auto-related players are sticking to their investment strategies despite the rising cost of capital.

Abhijit Ganguly, managing director of Goodyear Ventures, Goodyear Tire & Rubber Co.’s investment arm, said the backing of a corporate parent means the firm can have more patience with its startup investments.

Goodyear, which plans to invest $100 million over the next 10 years, is not trying to time the market, he said, though the company will still be judicious with its investments in the coming months.

Investors will pay a lot more attention to “unit economics,” which refers to a startup’s revenues and costs related to the production of an individual product or service compared to just pure growth, Ganguly said.

“Financing rounds will be taking longer, how long? Who knows?” Ganguly said.

“But entrepreneurs are going to have to conserve and extend their runway, and show a trend towards profitability.”

Venture capital will seek green tech investments because of favorable provisions in the Inflation Reduction Act. The law, enacted earlier this year, has a mix of tax credits, rebates and incentives to bring EV product manufacturing to the U.S. and funding for consumer and commercial electric charging infrastructure.

“Our portfolio companies are hearing that the electrification aspects of the IRA are good,” Ganguly said.

Goodyear Ventures’ investments in the EV infrastructure space include stakes in AmpUp, an EV charging operating system that allows businesses and property owners to manage multiple charge stations and locations on one technology platform, and Revel, which offers EV fast-charging stations.

Autotech Ventures is particularly interested in companies using incentives to bring EV manufacturing back to the U.S., Garcia said, especially in Michigan and states near Mexico and Canada, and those receiving EV charging corridor funding.

In the early 2000s, venture capitalists had scant interest in EV and moblity startups. That was followed by a decade of access to cheap money.

Today, venture financing is entering uncharted and uncertain waters, Kevin Tynan, a senior automotive analyst at Bloomberg Intelligence, said.

“You’ve also seen a major pullback in this space over the past year since a bunch of companies went public through SPACs,” he said. “It’s been difficult to justify some of these public listings,”especially as many companies need further capital infusion to reach production.

Others are grappling with high lithium prices, continued supply chain issues and infrastructure issues. Should they navigate those challenges, they still need to produce and sell vehicles at scale. Tynan is not convinced all will reach that milepost.

“When analysts do a deep-dive on them and the justification for their stock prices, they’re seeing problems,” he said.

There are also lingering doubts in the industry that fully autonomous vehicles, the apogee of automated-driving technology, will be achieved in the near future, Tynan said.

“There’s going to be a mix of mergers, acquisitions and shutdowns like Argo in AV,” he said. “And there could be similar falling out in EV.”