Automotive technology ventures – identifying opportunities in a challenging arena

06 Jul 2015 | Ali Naini

Backing automotive technologies is undoubtedly risky but has huge potential upside given the very large volumes involved.

Investors looking at making venture capital investments in this sector will quickly find themselves faced with a choice between 3 types of innovation which can be simplified as:

(1) the “evolutionary” process of making the internal combustion engine (ICE) more fuel efficient and less polluting

(2) the “revolutionary” process of replacing the ICE with electric equivalents powered by batteries or hydrogen fuel cells and redesigning other vehicle systems accordingly

(3) using the power of mobile internet to make the way we use cars more efficient.

The media and political establishment seem fixated by the second type of innovation, and the car companies have been happy to oblige. Announcements of new electric and hybrid cars, openings of charging stations, and targets for more in the future have all captured the limelight. However, for the time being these technologies are still far too expensive for the volume car market, which is why sales have being growing too slowly to make any significant impact.

In the meantime, all of the very impressive efficiency increases and emission reductions of recent years have been due to the first type of innovation aimed at making today’s cars continuously better. Moreover, this will continue to be responsible for most of the improvements that we will need to achieve for at least the next 15 years.  By which time, provided the investors in second type of innovation don’t lose their nerve and the regulatory pressure for ever cleaner cars continue, electric and fuel cell cars should have become affordable enough for the volume market, our electricity and hydrogen supply networks should have expanded to be able to power all the new cars that will be reliant on them, and our method of generating the required electricity and hydrogen may have become non-polluting enough to generate a positive overall environmental result.

In parallel, we will be finding out more about the impact of the third type of innovation. Will they lead to more or less car use? Can smart route finders really avoid traffic congestion if everyone is using the same algorithms? Will a self-drive car ever be considered safe enough? Will such technologies make enough money to justify the price tags that Google, Apple, et al seem willing to pay for them at the moment?

So, which type of innovation should a venture investor focus on? Since the three are interlinked, investors will need to keep an eye on all of them to make sense of what is going on and remain open to investing in any of them.

That said, as always, investors would do well to bias their investment decisions to take account of the constraints within which they have to work regarding, for example:

  • Location: Europe has strong expertise in all things electro-mechanical, whereas connected car innovations are still mostly coming out of Silicon Valley,
  • Availability of Funds: automotive standards are very high and new developments need proper funding and time, so access to a pool of like-minded patient co-investors is important,
  • Risk Appetite: evolution is typically less risky than revolution.

The automotive sector is undergoing significant change, which is creating opportunities for informed investors.

Ali Naini

Managing Director