The transportation and automotive industry represents more than 10% of U.S. GDP, making it one of the largest industries with more than $1.5 trillion dollar in annual spend. Entrepreneurs are taking notice and both corporate and financial investors are supporting them in creating the next generation transportation and automotive solutions.
Volvo Ventures ambition is to be a leading corporate investor in sustainable transport solutions. During the past two years we have analyzed investment trends in the U.S. transportation sector. Analysis like this is challenging due to the fact that defining and tagging companies is not an exact science. However, the goal is not to be completely correct but to describe the overall trends.
In the time period of 2012 to Aug 2014, we’ve identified a total of 294 transportation VC deals1 at a total value of 4.5 billion dollar.
Figure 1: Number of VC deals and amount of investments made in Transportation companies between 2012 and Aug 2014.
The amount of investment was stable between 2012 and 2013 but has increased significantly during 2014 as a result of large rounds raised by Uber and Lyft..
Comparing transportation VC to total deals and dollars invested, we see that the deal share has been pretty stable around 2%, whereas the amount invested has increased significantly, as seen in figure 2.
Figure 2: Uber and Lyft have increased the share of VC dollars that goes to transportation deals.
Out of approximately 100 transportation deals per year, top 20 deals represent the majority of money invested (2012 – 83%, 2013 – 74% and YTD 2014 – 85%).
Since the top 20 companies each year roughly represents 80% of the funding, we looked more closely at those companies. We classified them into seven categories based on business model and segment, as seen in figure 3.
Figure 3: Classification of the transportation companies that have done the 20 largest funding rounds during 2012 to end of August 2014. The Full stack Start-up concept is described in Chris Dixon’s blog, http://cdixon.org/2014/03/15/full-stack-startups/
We have divided the companies into Full stack vs. companies selling products/services into the transportation value chain. As seen in figure 4, the majority of investments have gone to start-ups taking on the Full stack and going all the way to control the customer experience.
We believe this makes a lot of sense. The transportation value chain is known for its rigidity protected by legislation, long-term relationships, and challenges to work with small innovative companies which translates into high barriers to enter the value chain. Full stack start-ups are changing the game, Uber/Lyft being the two most obvious examples. They are simultaneously attacking product experience, legislative challenges and are changing consumers’ expectations and behavior in the taxi/ridesharing industry. Their data driven approach powered by software as a core capability makes it somewhere between hard to impossible for existing companies to compete with them.
Figure 4: Start-ups with a Full stack approach dominate VC funding during 2012-2014.
It has proven to be difficult to build start-ups based on developing and selling electric components into the automotive value chain. Tesla came along and designed an electric car from the ground up and created a multi-billion dollar company. One can argue that there were other examples of Full stack start-ups that did not make it, (Fisker and Better place)) and component companies that did ok. Still it is hard to see any company selling into the traditional automotive value chain to have such a big impact on the industry in such a short amount of time as the Full stack start-ups we now see develop.
The transportation sector represents a huge market and Uber/Lyft and Tesla have showed that technology in combination with business model innovation can create very successful companies.
We believe this is just the beginning and that we will see significantly more funding going into disrupting additional verticals of the transportation sector utilizing technology to change the way transportation of goods and people is done.
1 Primary data source is Pitchbook.