Never Mind That Bailout: Venture Funding for Auto Innovation Accelerates As Startups Race to Leave Detroit in its Own Dust

12/1/08Follow @bvbigelow

Tomorrow, Detroit’s automakers are expected to give Congress a detailed plan that explains exactly how they intend to use $25 billion in taxpayer funding to engineer a turnaround—no doubt refueling the nationwide debate over the auto industry bailout.

Meanwhile, venture capital funding for innovative automotive technologies has accelerated dramatically over the past five years. Investment data reviewed by Xconomy shows venture deals in automotive startups have increased by more than 2,979 percent—from a near-standing start of $8.1 million put into five deals in 2003 to more than $250 million and two dozen deals in just the first nine months of 2008 (see charts at the end of this article).

Bill Klehm, CEO of Fallbrook Technologies, a San Diego startup which itself has raised some $25 million to help it develop a gearless transmission, says he laughs when he hears Detroit auto executives fret about competing against China’s low-cost manufacturing. “Nobody should be worried that the Chinese are coming,” Klehm says. “But the U.S. automakers should be concerned that the U.S. entrepreneurs are coming.”

While total VC funding for automotive startups is relatively small—venture firms put more than $1.35 billion into U.S. biotech companies in just three months that ended in September—the explosive growth in automotive deals reflects a phase change among VC firms nationwide. (The total also is clearly an underestimate, since it does not include startups such as battery developer A123 Systems of Watertown, MA, which counts major carmakers in the United States and Europe as its largest target market.)

“They are realizing that there is a big gap between consumer demand and the supply of the kinds of vehicles that the country is going to need,” says Bilal Zuberi, who specializes in energy and cleantech deals at General Catalyst Partners, a $1.7 billion venture firm in Cambridge, MA. “It’s a difficult industry, but there are opportunities. It is a $100 billion industry in which innovations are really needed, really fast.”

Any automotive technologies that can help the big three U.S. automakers meet tougher fuel economy standards and other “pain points” could be helpful, says Boston lawyer Tom Burton, who heads the energy and cleantech practice of the Mintz Levin law firm.

“In the last year and a half, we’ve really seen an uptick in the VC flow into these companies,” says Burton, who has been involved in the financing of several deals. “The downturn in the economy and the fact that Detroit is battered is what creates an opportunity for many of these guys.”

Fallbrook Technologies CEO Klehm contends the opportunity is big enough to drive a truck through.

Tesla Motors\' All-Electric Sports CarCompanies and small businesses that operate delivery fleets are searching for ways they can retrofit their trucks and vans to reduce fuel costs, which were acutely painful when gasoline was more than $4 a gallon, Klehm says. At Wal-Mart, for example, Klehm says a 1 percent improvement in fuel economy is worth $52 million. “Ford is talking about improving the fuel economy of next year’s lineup,” he says. “Fleet operators need solutions today. They don’t need promises for the next year.”

As a result, the surge in VC funding is spreading well beyond high-profile startups like Silicon Valley’s Tesla Motors, which has developed a high-performance, all-electric sports car … Next Page »

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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  • http://www.teslamotors.com Rachel

    To answer the fundamental question that this article poses: Yes, absolutely, the federal government should provide low-interest loans to R&D-focused automakers that have already demonstrated a commitment to building fuel-efficient vehicles. This will encourage and hasten the time to market of a sophisticated all-electric, zero-emission powertrain for affordable, family cars. If this isn’t in the public interest, what is?

    Just to set the record straight among the good folks in the blogosphere:

    Tesla is not applying for a loan from the Department of Energy to fund anything having to do with the $109,000 Roadster sports car pictured here but rather future generations of more affordable sedans and a powertrain facility to make battery packs and other components for other automakers, which could also use them for affordable sedans and subcompacts.

    To be sure, the Roadster is an important, paradigm-shifting product. Tesla has delivered nearly 100 to customers already and is increasing production starts to 30 per week in 2009. The all-electric, zero-emission Roadster is a viable production vehicle that also serves as an innovative precursor to other, less expensive products in Tesla’s pipeline. Ask the Xconomy guys if they enjoyed their test drive in September in Seattle — it’s a real car with amazing fit and finish, performance and handling to rival much more expensive cars.

    On that note, it’s obvious but critical to emphasize that R&D and early-adopter technology is relatively expensive. Whether it’s the iPhone or photovoltaic panels, the first owners pay the most. But the technology inevitably becomes affordable within several product cycles, whether on the timeframe of Moore’s law or (in the case of battery capacity) at the fair clip of 8 percent per year. Given the Tesla Model S five-passenger sedan (base price expected at $57,500) and the Bluestar project (all-electric, zero-emission subcompact for $30,000), a government loan to Tesla would inevitably help speed delivery of more affordable vehicles that eliminate dependence on foreign oil and reduce drivers’ carbon footprint.

    Finally, let’s discuss the difference between the Detroit Three’s “bailout” and what was originally a progressive and well intentioned program to encourage fuel-efficient vehicles. The loan wouldn’t be used for the Roadster or Tesla’s ongoing operations — and it would go to the company that has arguably done the most to rattle the Detroit status quo when it comes to developing vehicles with far greater well-to-wheel efficiency than a Prius.

    Tesla’s blog clarifying the distinction:
    http://www.teslamotors.com/blog2/?p=66

    FWIW, I’m all for spirited debate about public policy, but it should be based on facts. Blog on!

    Rachel Konrad
    Senior Communications Manager
    Tesla Motors, Inc.

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  • http://www.auto-facts.org/automotive-blog.html Auto mechanic mark

    No bailout needed but venture capital welcomed. My Ideas are not government approved but here they are any way. We will have to save America ourselves. The power of people. Rock stars and celebrities for buying American cars. Angelina and Brad love to help so lets get them to lead with a trade of some venture capital going to their favorite causes. We the people can bailout the big three with a focused effort. If the state and local governments want to help the effort they can reduce the sales tax for each sale in 2009. And how about 0 percent financing backed by the government. If the banks will not help the automotive credit market with the money they where given take some back and start a federal financing program to approved buyers. Stimulate and escalate sales saves the industry without additional tax payer money. But yes we will still need that bridge loan to get there!