Never Mind That Bailout: Venture Funding for Auto Innovation Accelerates As Startups Race to Leave Detroit in its Own Dust
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.
Companies 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 called the Roadster—with a base price of $109,000.
Rather than investing in “one-off cars that cost $100,000 apiece,” Zuberi says many VCs are looking for automotive innovations that make conventional vehicles more energy-efficient or significantly reduce pollutants, especially carbon dioxide and other greenhouse gases.
He cited as examples:
— San Diego-based Achates Power, which has been developing “a radically different” high-efficiency two-stroke diesel engine conceived by founder James Lemke of UC San Diego. The startup, which is in stealth mode, has received undisclosed venture funding from Sequoia Capital, RockPort Capital Partners, Interwest Partners, and Madrone Capital Partners.
— A123 Systems of Watertown, MA, which has developed innovative lithium-ion batteries for use in motor vehicles, portable power markets, and electric power grids. The startup founded in 2001 raised at least $102 million this year alone from more than a dozen corporate and venture investors, including North Bridge Venture Partners, General Electric and Qualcomm Ventures.
— ISE Corp. of Poway, CA, about 25 miles north of San Diego, which is making hybrid-electric drive trains for heavy-duty vehicles such as buses, garbage trucks, cargo “yard hustlers,” airport ground vehicles, and military vehicles. “You can think of it as a very large version of the Toyota Prius,” says co-founder David Mazaika, who recently raised $17.5 million in a fourth venture round led by Siemens Venture Capital, Macquarie Clean Technology Fund, and DTE Energy Ventures. Gaining a major industrial partner like Siemens was key to increasing production at ISE, which did about $28 million in sales this year.
— Geo2 Technologies of Woburn, MA, which is developing high-temperature ceramic air filters with the ability to remove up to 99 percent of particulates, or soot, from diesel engine exhaust, without affecting engine power or efficiency. The company, where Zuberi worked before joining General Catalyst Partners, has raised about $25 million from Firelake Capital Management and a number of wealthy individual investors, including Gary Jacobs, eldest son of Qualcomm founder Irwin Jacobs and Gary Weiss. Both Jacobs and Weiss also are investors in San Diego’s Fallbrook Technologies.
Of the automobile startups, Tesla Motors probably ranks as the largest and best-funded company. The five-year-old startup has raised about $145 million from venture investors, including $55 million from PayPal founder Elon Musk, who is the chairman and current CEO, and Google co-founders Sergey Brin and Larry Page. The company recently secured another $40 million in convertible debt financing, but is facing fresh challenges in its plans to build a $250 million manufacturing plant in San Jose, CA.
Fisker Automotive of Irvine, CA, also has been developing a sleek, hybrid sports car for the high-end market. The company recently raised $65 million in venture funding from Kleiner Perkins Caufield & Byers, Palo Alto Investors, and others.
Aptera Motors of Carlsbad, CA, about 26 miles north of San Diego, is taking a more practical approach by developing a futuristic, two-person electric car for suburban commuters. The startup, which has raised $24 million from Idealab, Google, and others, has had no trouble attracting additional funding despite the economic downturn, CEO Paul Wilbur says.
“We are talking to a number of VCs right at this second about getting our company into high-volume production,” Wilbur says. The CEO, who joined Aptera in September after spending most of his career working for the auto industry in Detroit, says most of the U.S. automotive startups are based in California.
“The clustering is clearly in California, the trendsetters are in California,” Wilbur says. But let’s not be too narrow on this one, because it is not just in the U.S. It’s a global trend. There are automotive startups in Korea, China, Israel, Europe, all over the world.”
Venture Capital Investments in Motor Vehicles and Auto Parts
|Year||No. of Deals||Total Invested (in millions)|
Biggest VC Deals in Autos, Parts, in 2008 (Jan. 1-Sept. 30)
|Startup||No. of Deals||Total Invested (in millions)|
|A123 Systems (Advanced batteries)||1||$102|
|Fisker Automotive (Hybrid-electric car)||2||$85|
|Vehicle Production Group (Taxicab maker)||1||$40|
|Dash Navigation (Web-enabled GPS)||1||$30.2|
|Segway (Personal transport)||3||$15.5|
|Miles Electric Vehicles (All-electric cars)||1||$15|
|Transonic Combustion (Advanced engines)||1||$14|
|ISE Corp. (Hybrid-electric buses and trucks)||1||$17.5|
|Brammo (Electric motorcycle)||1||$10|
|PAX Streamline (Energy-efficient designs)||1||$6|
|EcoMotors (Advanced diesel engine)||2||$5.24|
Source: The MoneyTree Report by the National Venture Capital Association, Pricewaterhouse Coopers, based on data from Thomson Reuters.
*A123 Systems was added by the editors of Xconomy. The MoneyTree Report did not include it as a startup in either motor vehicle or parts category. MoneyTree counted Segway Systems, however, as a deal in the motor vehicles category.