By Vitaly M. Golomb, Partner, Drake Star
Vitaly M. Golomb, Partner, Drake Star
For mobility startups, the last few years have been a roller coaster ride. In 2020 and 2021, after years of difficulty raising capital, largely driven by the dynamics of stay-at-home investing during the pandemic, a long list of EV and autonomy companies raised billions of dollars through SPAC combination transactions. Then came a knee jerk reaction to depressed growth prospects thanks to the struggles of the global supply chain and over-optimistic promises.
Now, with a global downturn looming and interest rates rising, things are looking ever more uncertain. Mobility startups spoiled with the feast of easy capital in the past several years, will be upset to learn that everything – from seed checks to M&A activity – is currently retracting to an old “normal.” According to PitchBook, as of Q3 2022, the Mobility VC deal count is down 43% and total deal volume is down 74.3% from one year ago. Without a pragmatic plan for revenue many companies will run out of gas.
Blank Checks Gave Black Eyes
Even a few months ago, the market looked different. To be clear, our thesis remains that that mobility startups will explode in terms of growth in the next decade. In fact, the global mobility industry is expected to reach $823.75 billion by 2030, growing at a CAGR of 18.2% between 2021 and 2030. Unfortunately, right now all startups, including those working on EV and autonomous driving, are caught up in the same downturn as the entire tech market. Of the mobility companies that went public this year through a SPAC merger, 68% are now trading at half their opening price of $10, four have seen their shares fall 90% while only four have seen growth in their share price. About 15 mobility companies including Bird, Embark and British EV maker Arrival had their shares decline more than 90% in 11 months.
At the same time, as of September 2022, VC funding for mobility tech has also receded, with current volumes at close to half of what they were in 2021. In 2022, US IPOs are still struggling to shake off the slump from the global pandemic. As the year draws to a close, what does Q4 hold for the mobility tech sector, how can these young and innovative companies successfully grow their product and market share, and what can this tell us about the market as a whole?
The problem, quite simply, is that many mobility companies aren’t booking revenue yet. You can have the best ideas in the world, the best team and talent, and 15 PhDs and patents on the wall but that won’t get you far in this new climate.
Market excitement goes up and down. Your goal as a startup founder in any environment is to ship product. Unfortunately, the last few years have allowed companies to coast and that has reset the expectations of what’s “normal.” If you are planning to raise money this year under the same terms as you did last year, you’re in for a rude awakening. The market has quickly receded to the old normal. Blitzscaling in mobility now means putting hardware and software on the road or in the air. It doesn’t mean fiddling with a non-commercial idea until, like the proverbial goose, out comes a product and customers.
Why is this happening? Quite simply because interest rates are up, the cost of capital is much higher than we’ve been lulled into for the past several years. This means investors and corporate M&A teams will be biased towards revenue and profitability and away from the high-risk potential sometime over the horizon.
Let’s Book Revenue
A company I recently spoke with has progressively raised several hundred million dollars through multiple rounds with step-ups in valuation that made it a unicorn by sheer inertia. They have a large team, an interesting idea, and a few prototypes. And they also don’t have a customer and a clear timeline towards real scalable revenue. In the automotive world, it takes four to five years to get an innovative new component into cars coming off the assembly line. This company, with its bloated valuation, recently went back to raise. The result? A substantial down round and plenty of internal handwringing.
Hardware in general is hard. Getting products on the road is not fast. This mix makes it wildly difficult to even consider investing in a hardware startup at the idea stage let alone one whose customer lead times measure in the decades. The lesson? Don’t wait to start customer discussions until you have what you think is a perfect product. It takes years on both sides.
Driving Into the Future
Since we haven’t had one in a while, it is worth repeating: with every downturn comes tremendous opportunity. Every tech company seeking investment knows they must excite investors with their ‘secret sauce:’ their unique value proposition, their engaged market, and their growth projections, but with rising interest rates, pressures on domestic spending, and whispers of recession there has to be a laser-focus on costs, high efficiency and planning for a long drought in funding. Every investor will be focused on cash burn and how quickly recurring revenues can be built. The days of unprofitable growth at any cost are probably over for now. And don’t forget, this environment was normal for decades before the euphoria of the last decade.
If we stick to our automotive market example, there are lots of tailwinds. As fuel costs continue to grow so does the interest in electric vehicles; the focus on clean air and reduced carbon emissions is another driver that is expected to bring the global market value of the industry to over $489 million by 2025. A Drake Star survey showed that 59% of our professional network already owns an EV or plans to buy it as their next car. On the flip side, rising interest rates are likely to dampen consumer sentiment and big-ticket sales may be harder to achieve. Dozens of new EV models are expected to debut in North America and Europe by 2024, and a flood of new supply makes for a competitive environment. Industry commentators believe many new entrants will struggle with liquidity and fail to achieve success. Against this background, how do tech companies from Seed to Series B position their fundraising search for the best success?
For all stages of a company, the new normal will all be about the evidence – how can you show that your company is positioned to succeed and thrive as a revenue-generating business where others might fail? For start-ups at the seed stage, this means demonstrating a genuine differentiator, whether that’s tech, a unique business model, or a stellar team, which will solve a palpable problem in a way no other company can. The solution must be rooted in deep knowledge of the market and the target customer. Any new tech must have a working demonstrator, or as close to one as possible, to remove some execution risk for investors. In the current capital climate, founders also need to demonstrate that the risk-adjusted valuation they are seeking is a good deal and a risk worth taking.
For companies in Series A, the track record to date and business strategy going forward will be heavily scrutinized. Key milestones in the product roadmap must be hit, the cash burn has to be reasonable for the company stage and customers must be buying into the product. In the current climate, consistent revenue growth and modest spending to get there are essential. Investors will look for management teams that can be agile, respond quickly to market, tech or personnel changes and new opportunities as well as prepare for potential disruption. The future roadmap to Series B and beyond should be clear and credible and should include opportunistic M&A strategies – many companies with valuable component technologies will be unable to raise more capital and will be forced to sell themselves at fire sale prices.
At Series B stage, the focus is on scale. Investors will be looking for a solid path to long-term profit. In tough economic times, investors often switch behavior to early in and early out, rather than staying for the long haul. This means some of your investors may be looking for the exits while founders will have to double down on their commitment to the mission.
To end where we started, the overall transportation and mobility industry is going through the biggest transformation in a century. Passenger car sales increased by 186% in 2020 and EVs enjoyed a record year in 2021 against a transport market that was 28.7% below pre-pandemic levels. According to Cox Automotive, EV sales accounted for 5.6% of the total market in Q2 2022, an increase from 5.3% in Q1 and a record high. One year ago, in Q2 2021 EV share was only 2.7%. Surpassing the 5% threshold is seen by many analysts as a catalyst for the start of mass EV adoption.
One of the major sources of continued growth is likely to be in charging infrastructure and grid management. To accelerate the market consumers and commercial users will need confidence that they can charge their vehicles when and where they need to. It’s an exciting time for mobility tech; everyone can see the potential. Finding the companies that will weather the economic downturn and become the household name of tomorrow is an investor’s holy grail. But for now, across all tech sectors, a heads-down approach will be the one that wins.
Jesse Pitts has been with the Global Banking & Finance Review since 2016, serving in various capacities, including Graphic Designer, Content Publisher, and Editorial Assistant. As the sole graphic designer for the company, Jesse plays a crucial role in shaping the visual identity of Global Banking & Finance Review. Additionally, Jesse manages the publishing of content across multiple platforms, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.