Money for startups tighter, but still room for quality investments

DETROIT — Seed funding for automotive startups is harder to come by right now, and investor appetite for risk has been pared back, according to a panel of venture capitalists. But there is still money available for promising technologies with good founders and the right business plans.

Speaking Tuesday at the Automotive News Congress, the three venture capitalists said early-stage investors have pulled back substantially from automotive in the past two years, leaving many startups to turn to creative financing and longer ramp-ups before they are able to attract significant venture capital investments.

"A couple of years ago, even sort of mediocre companies that hadn't had much in the way of milestones were able to raise financing," said Reilly Brennan, founding partner of Trucks Venture Capital, a seed-stage venture capital fund with more than 50 venture investments in transportation. "In some ways, it's kind of just a tighter sort of look at the Darwinian nature of startups."

Jessica Robinson, co-founder and partner at Assembly Ventures, which focuses on investments in mobility companies on both sides of the Atlantic, agreed that venture capital and investors in general are now casting a more critical eye on startups and looking for quality.

"There is still funding available, and people are still investing in good ideas and good companies, but it is much harder, and it does take much longer," Robinson said. "We have folks that have made their fortunes in this industry as our investors, but the questions [facing those seeking funding] are harder, and the timelines for building relationships are longer."

Nancy Philippart, general partner and co-founder of Belle, an early stage group of venture funds that invest in women-led startups, said investors are now much more focused on a company's future opportunities and are being much more cautious.

"We're finding people will put first money in, but it becomes harder for companies to do those subsequent rounds [of financing]. And so the industry is getting very creative" in using debt and other forms of bridge financing to cover what venture capital used to provide, Philippart said.

"In the last couple of years, it is universally harder for new startups to raise money."

For venture capitalists, the pace of change within transportation as well as the variety of different technical innovations have forced investors to both diversify and focus on quality, the panelists said.

But even then, some of the investments remain risky.

"Having a robust portfolio is the best hedge," Philippart said. "Sometimes the company that we really think is going to be the biggest winner doesn't turn out that way."

She said it is incumbent on investors to "do their due diligence. As we like to say, trust but verify."

The three venture capitalists said that despite all of the industry funds being concentrated on electrification and developments in automated driving, venture capital is much more diversified and focused on backing winning firms that will ultimately be profitable.

"We're open to great founders who want to open our eyes up to the market," Brennan told the audience, saying that the cyclical nature of different portions of the auto industry opens up opportunities for investors over the long term. He pointed to sky-high valuations of electric scooter companies a few years ago as an example.

"Theoretically, there should always be a market that's undervalued right now and other markets that are way overvalued," he said. "There should always be something that you can find value in here if you want to sniff for truffles, like I do."