I’m on my way to Techstars Mobility’s first Demo day in Motor City where 10 exciting transportation companies will reveal their progress during the program. While the transportation sector historically has not been a strong sector for Start-ups and Venture Capital – it is now booming!
Long lead times to get to market, high CAPEX and a rigid value chain have been some of the reasons in the past. However the last few years we have seen the rise of a new set of Transportation Start-ups that utilize tech and new business models to change the way the market function. We have seen fantastic customer experiences as a result with Uber and Tesla being the poster success cases. New accelerators such as Techstars mobility, Startup Bootcamp Transportation and an inflow of corporate venture capital are all contributing to the increase.
I have analyzed the transportation Venture landscape in an attempt to quantify this trend. The underlying data includes uncertainties, especially when it comes to define a Transportation Start-ups but the trends presented are so clear that I feel confident that they hold true. (And is looking forward to feedback that points other directions.)
It is for sure exciting to see that the amount of Venture Capital invested in 2014 supersedes that of 2010-2013 combined(!) and reached a new record of almost 7 BUSD. 2015 will likely significantly surpass that since 6 BUSD already have been invested in the first half of the year.
The increase in number of deals is also significant but not as dramatic, approximately a doubling since 2010.
Looking at the geographical distribution of the capital being invested into the transportation sector it is clear that US is highly dominant. Europe´s share has decreased from 14% in 2010 to only 1% in the first six months of 2015. Significant growth has come from China and India that represents 27% the first half of 2015.
Looking at California’s share of global activity it is clear that California increasingly dominates dollar invested. This is no surprise given the presence of Uber, Lyft and Tesla but solidifies Silicon Valley’s new role as the epicenter for the next generation of automotive innovation.
What does this inflow of entrepreneurship say about the Transportation sector’s future?
- The pace of innovation is rapidly increasing
Connectivity, autonomous technology and new business models have the potential to change industry fundamentals. The features and technology areas that historically have been the competitive fighting grounds are now being complemented or even substituted with the ability to fit into consumers’ digital lifestyle. Tech companies such as Apple and Google as well as several Start-ups such as Uber, Getaround, Automatic, Zirx, Waze, etc are leading the charge of building the tech and services that are winning. At the same time OEMS need to continue to invest heavily in powertrain development to meet future greenhouse gas emission legislation. BMW is for example expected to electrify all models within a decade.
- The traditional Automotive value chain is being challenged by entrants with Software as a core differentiator
It is no news that software development is now a large part of Automotive R&D. Several of the new VC founded entrants have founders and teams with software skills at their core. Building the tech based services of tomorrow demands rapid iteration, use of the latest platforms and relentless execution. It seems as if VC backed entrepreneurs are better equipped than the existing value chain to drive change.
- New business models leading to changed customer behaviors and resulting changes in demand are currently being implemented in US and China first
The significant concentration of Transportation Venture investments into US, (67%) and China (18%) results in customers experiencing innovative services in these markets first. This leads to changed customer needs for the whole value chain. A person who utilizes ridesharing to get to and from work might have reduced interest in car ownership. And a driver for these services probably changes her criteria when buying a car. Being active and sensitive to these changes allows companies to adapt their products, create partnerships and potentially launch competitive services.
It is not surprising that US and Silicon Valley is dominating Transportation/Automotive investments provided its role as the Software capital of the world. However the highly marginalized role of Europe is hard to explain given its strong automotive industry.
Europe is still a dominant area for Automotive R&D with almost 40 BUSD in annual R&D investments compared to less than 20 BUSD for US. It will be interesting to see what effect the low rate of Automotive European Start-ups will have on the relative competitiveness of the global automotive sector going forward.
I think it is safe to assume that companies in the automotive value chain that are able to find efficient ways to collaborate and leverage the new entrants, (both Start-ups and Tech companies) will have significant advantages in the marketplace.