New age auto startups now at risk
WHAT could the automotive sector learn from the recent fiasco around rental-office company Wework? A lot, according to some Sanford C. Bernstein analysts.
The collapse of Wework’s attempted IPO is not only a warning sign for technology startups with inflated valuations – funded by investors pouring money into unprofitable companies in search of the next Amazon or Netflix – but, strangely, augers ill for many new companies in the auto industry.
They too have benefited from venture capital money that swarmed into ride-hailing, autonomous driving and electric vehicle technologies, a team of Bernstein analysts including Max Warburton and Robin Zhu wrote in a note to clients.
“It’s hard to think of an industry that’s been the target of as much venture capital spending as automotive,” the analysts wrote, noting that Softbank has been the single biggest investor in “disruptive” automotive-related technology. The Japanese backer has big holdings in Uber, Ola, Grab, Cruise and other autonomous startups, which have all attracted billions more from other investors.
“The investment going into these firms has created huge concern and crushed the valuations” of traditional carmakers, the analysts said.
As the Bernstein analysts noted, many ride-hailing, mobility and autonomous driving startups don’t look to have a viable, profit-generating model – which is an obstacle when they want to go public.
“If their backers can’t exit, then at some point, the supply of cheap capital will dry up,” the analysts said. Recent months have seen many electric vehicle startups challenged, with NIO close to failure, Byton possibly being absorbed into FAW and Dyson cancelling its electric car project, the analysts said. Faraday and Lucid may never even get started.
“Most of these startups will likely fold,” they said, adding that only Rivian, which is backed by Amazon, may prove an exception.
“The truth is barriers to entry in auto remain high. Making cars is hard,” the analysts said, noting that the move to electric cars will be expensive, and will probably be led by traditional auto companies, with far less disruption than feared.