Nikola founder Trevor Milton

Summary List Placement

The auto industry has long been a notoriously difficult environment for startups. Tesla is the only US automaker selling vehicles on a large scale that was founded after 1925.

“Over the last decades, there’s been well over a dozen electric-vehicle companies that haven’t survived,” said Garrett Nelson, an analyst at CFRA who covers the auto industry. Graveyard residents include Better Place, Fisker Automotive, Coda, and Bright Automotive.

But a new generation of EV startups is betting that a global transition from internal-combustion engines to electric motors will create openings for tech-focused firms without the institutional baggage and conservative mindsets of traditional automakers. Many of them have capitalized on soaring interest in the stocks of EV makers Tesla and Nio by going public through mergers with special-purpose acquisition companies (SPACs). Like traditional IPOs, SPACs allow startups to raise large sums of money to fund their growth plans. But they give startups a number of advantages traditional IPOs don’t always offer, including speed, convenience, and credibility.

Last year, at least seven EV companies have gone public through a SPAC or announced plans to do so. An eighth, Faraday Future, said in October that it’s in advanced talks to team up with a SPAC. Of them, only one, Canada’s Lion Electric Company, has delivered even a single vehicle. Some don’t plan to start until 2022.

Despite the lack of paying customers, some of these startups have raised hundreds of millions of dollars at multi-billion-dollar valuations and have share prices that exceed Ford’s. Fisker Inc. (led by Henrik Fisker, whose previous EV startup, Fisker Automotive, went bankrupt), raised $1 billion when it went public in October and traded at $16 when markets closed on Friday (Ford closed at $9). Lordstown Motors brought in $675 million from its SPAC deal and traded at $19 at the end of Friday.

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“Most of these companies are more like business plans, not businesses,” Nelson said. He expects few will survive.

That kind of competitive dynamic is common in the private markets, where new companies often try to build a strong customer base before subjecting themselves to the scrutiny brought by the quarterly financial reports required of public firms. What’s different now is that many young EV firms are going public well before they’ve proven they can make a product — let alone a profit.

Nelson and two other experts who follow the auto industry told Business Insider they think the stampede of EV startups going public through SPACs has created a speculative bubble similar to the one formed by internet companies in the late 1990s. In both cases, investors bet big on firms with little or no revenue.

The dot-com bubble burst in 2000, taking many web startups with it. The same could happen with new EV companies, the three experts said.

“The smaller startups really could get decimated,” said Ed Kim, an analyst at AutoPacific.

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Source:: Business Insider


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