Auto tech startups' capital access may worsen with SVB failure

Auto industry startups were already struggling to access new capital before the March 10 collapse of Silicon Valley Bank, an influential player in the country's innovation economy. Its demise could make those problems even worse.

Accessing fresh funding for growth is an existential need for startups. Financing is required to mature from vulnerable infancy to stability and, hopefully, success. Without it, the end is all but certain unless a larger player or well-funded rival steps in as a savior. Self-driving truck company Embark Technology, for example, couldn't raise new capital, laid off hundreds of workers and now faces liquidation. Argo AI, another autonomous technology company, closed in October after backers Ford Motor Co. and Volkswagen Group pulled the plug.

Ripples from the bank's collapse are already affecting the auto tech sector.

The cost of capital will be higher for auto tech and battery startups, Martin French, managing director at German auto industry consultancy Berylls Strategy Advisors, told Automotive News, while venture capital firms will be shrewder with their investments.

"The industry still needs these startups, they still need these companies to be well-funded in terms of the transition to electrification," French said. "It's just a question of whether or not the relationships are going to be there with other banks, with the VCs, to be able to help startups and give the startups what they need."

Silicon Valley Bank was a crucial resource for startups such as Liminal, which provides battery inspection systems, and for early-stage companies that have long product validation times, said Andrew Hsieh, Liminal's CEO and co-founder.

"Hopefully, other banks will step up to service the innovation economy, creating more competition among lenders and better terms for startups so we can continue the momentum toward a fully electrified automotive future," Hsieh said.

SVB was very much part of the Silicon Valley entrepreneurial culture, and may even have absorbed some of its hubris, said Shauna McIntyre, a former president of lidar company Ouster and a Lithia Motors board member. McIntyre also was CEO of Sense Photonics, which was acquired by Ouster in 2021.

An SVB client, Sense Photonics believed the bank's stability would allow the startup to take risks, McIntyre said.

Now, startups need other banks to take on SVB's role.

"With [SVB] going away and not being available when the next startup needs capital, there's less competition and less availability, and that's not good," said Steve Greenfield, CEO of Automotive Ventures in Georgia.

A March 14 analysis from investor website PitchBook referred to SVB as "an integral piece" of the venture capital ecosystem that was the bank of choice for nearly half of the U.S. technology and life sciences market. It was the lender to many venture capital-backed startups and served as a short-term financier to venture capital and private equity funds through capital call lines of credit.

Without SVB, the venture market faces greater pressure on top of the slowdown in financing over the past year, PitchBook said. The firm said the bank failed after quarterly capital invested dropped 60 percent and deal count fell 25 percent.

The analysis concluded that the "reallocation of resources and banking that may need to be done will only add to a slowdown in a financing market that was looking set for another soft quarter" in the first three months of this year.

Startups were already facing challenges before SVB collapsed, said Daniel Hoffer, a managing director of Autotech Ventures in Menlo Park, Calif.

"Between the market downturn, interest rate hikes, the war in Ukraine and COVID, startups have been buffeted by hurricane force winds that they never had any ability to control or even influence," Hoffer said. "The developments at SVB were just the latest unpredictable event that could have posed an unexpected and existential risk to startups."

While venture capitalists are still making deals, other forms of funding could take a hit, Hoffer said.

"The most likely impact may be that the terms under which startups can access venture debt and other loans will become more onerous, since SVB has traditionally offered the most startup-friendly terms," he said.

Auto technology companies, startups and their investors faced a stressful few days after the federal government seized SVB.

Legions of entrepreneurs were left with an instant cash crunch that could have snuffed them out. The decision to provide full federal deposit insurance coverage quickly resolved that issue.

Greenfield said that six of Automotive Ventures' 20 portfolio companies had more than half of their cash in an SVB account. The firm's portfolio companies are in areas including retail and auto technology, and data capture and validation for advanced driver-assist systems.

NuBrakes, an Austin, Texas, mobile auto repair startup with $16.8 million in venture funding, had 80 percent of its cash at SVB and couldn't access the funds when the bank failed, said CEO Walker Drewett.

"We were definitely in a precarious position with a high level of concern around our ability to operate," Drewett said.

Luckily, the company had access to "meaningful funds" in another bank account that allowed it to handle short-term expenses. "Multiple investors" also reached out to the company to make sure it had access to capital, he said. Without those extra funds, the company and its 55 employees faced the real risk of layoffs. NuBrakes is in the process of removing its funds from SVB and refining its finance strategy to reduce risk.

Going forward, startups will be reluctant to place all their eggs in one basket, regardless of their banking relationship.

"Lessons learned? More diversity for where you put your money is good," said Joseph Burke, CEO of Ottometric, a company focused on advanced driver-assist system validation and autonomous vehicle training. "The funny thing is, SVB is probably the most secure bank now."

Other companies are working to develop resilience plans to protect against repeat scenarios.

Jay Vijayan, CEO of Tekion, an automotive dealership management system provider, said startups need to spread their money through multiple financial institutions to reduce risk.

"It's good to get a proper plan in place," he said.

Drewett said NuBrakes is diversifying its treasury and that it has become "more cognizant" about where it is keeping cash.

In the end, the auto tech sector will come out of this situation stronger, said McIntyre, the former CEO of Sense Photonics.

"The learnings that the auto industry has had from its cycles and dealing with painful times has given the industry a muscle that is really critically important," she said this week on Automotive News' Daily Drive podcast.