Currently reading: Automotive start-ups under threat from spooked investors

As the cost-of-living crisis bites, so disruptors in the car industry are also finding cash hard to come by

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.

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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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A good example is the UK online vehicle retailer Cazoo, which spent big to fulfil its plans to one day capture a 5% share of the fragmented used-car market.

That drive for growth ended abruptly earlier this month when Cazoo announced that it would pause investment, cut 750 jobs and end its subscriptions.

“We’ve seen a significant deterioration in the financing climate for businesses like ours,” CEO Alex Chesterman said on a call to investors. “We’re going to assume none of this is going to get better.”

Carzam founder Peter Waddell told The Times newspaper that he directly blamed Cazoo’s falling share price for scaring off investors from putting more money into his company.

Meanwhile, EV start-up Arrival – like Cazoo, a UK company that listed on the US stock market via the spac method – has to find new funds or it will run out of money next year, bank Berenberg warned in May. Arrival has seen the value of its company fall 93% since it listed by spac last May.

“Given the current state of capital markets, we believe additional cash would likely come from a strategic partner such as UPS, Hyundai or a new entity,” Berenberg analyst Michael Filatov said.

Arrival said its business model operating flexible ‘microfactories’ meant it could survive a period of lower investment if needed.

The lack of new funds available to start-ups is inevitably going to act as a drag on progress in the automotive industry, which has typically been forced to change through a reaction to disruptors, rather than moving forward from within.

“It will slow down the path of innovation I think quite dramatically,” Ellinghorst said. “Innovation rarely comes from the OEM; it almost always comes from smaller companies.”

It's still possible to find investor money for a new disruptive EV company, you just need to be canny about it, argued Stefan Krause, a former BMW head of sales who previously led EV start-ups Faraday Future and electric MPV creator Canoo (both of which are currently experiencing their own financial difficulties).

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Krause is now heading new electric van company B-On, an example of what he calls a 5P firm.

The desire to find the next Tesla promoted the 3P firms, which raised money on the basis of “powerpoint, prototype and promise”, Krause said at the Move 22 event. What investors didn’t wait to find out was whether the company could execute the next two Ps: product and production.

“It was like Tinder for money, but those times have passed. Completely passed,” Krause said. “Regretfully, we all have to go back to classical private funding rounds A, B, C etc.”

If you want money from investors now, you have to follow the path of every successful Dragons’ Den contestant and show that you have a product already in production, adding the crucial two elements to financial viability.

“Right now, if you're a 3P company, you don't get money. If you’re a 5P company, you get money,” Krause told Autocar.

B-On has bought the Streetscooter electric van company set-up by DHL in Germany, a strategy that Krause says works in the new investor era because they can see that it already has a proven business case. There's still money available for good companies, Krause says.

And car buyers are still demanding innovation, Alain Visser, head of Geely-owned brand Lynk&Co, told the Move 22 conference audience.

“There’s a contrast between the complication of the capital markets and the massively growing new trends and the desire of customers for new things,” he said. That isn’t being fed by the traditional car companies, he added. “This is an industry that still bulldozes through the same business model.”

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