Automotive start-ups are entering a financial crunch period that could send once-lauded companies to the wall amid a dramatic slowdown in investment.
The collapse of share prices, a rise in interest rates and uncertainty over the ability of new companies to deliver on promises has already contributed to the demise within the last month of the US van start-up Electric Last Mile Solutions and the UK’s online used-car retailer Carzam, with others predicted to follow.
“It’s a very capital-intensive industry, and for the past 10 years, capital has been pretty much for free. That’s changing right now,” Arndt Ellinghorst, former automotive analyst and now a director at data analyst Quantco, told the audience at the Move 22 future mobility event in London last week.
The easy access to investment led to automotive start-ups, many promising innovative new electric vehicles, being valued at levels far beyond those of established companies as particularly institutional investors chased the next Tesla.
“We had 10 years of growth companies being given extreme valuations,” Ellinghorst told Autocar. “We’re now going through a period of normalisation. Some will survive, some will fall and even some good ones will struggle.”
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The onrush of cash from institutional investors culminated in many companies listing on the US stock market by merging with so-called blank-cheque companies, or spacs (special purpose acquisition companies) through the pandemic years of 2020 and 2021.
Little scrutiny was needed – far less than required by a traditional initial public offering (IPO) – and so-called retail investors, aka the general public, joined the big funds in betting that companies' grand promises would one day come to fruition.
But despite the millions that subsequently flowed into company coffers, many companies had yet to get to the point where they were creating decent revenue, let alone profit. That means they still need investment money to survive.
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