The AutoTech Boom – How Investors Can Determine Which Companies are Worthy Investments
Automotive Technology also known as AutoTech, has become a booming business and one of the hotbeds for future investment thanks to the billions of dollars pouring into the industry. Technology investment in the automobile and AutoTech sector seems limitless thanks to the tech boom itself. As a result, the sector has been growing exponentially every year. Uber is planning to launch its commercial fly car by 2023. And recent research carried out by Allied Market Research concluded that the global market for autonomous vehicles will be worth $556.67 billion by 2026. Another analyst report by BoA estimated that investment demand could top $2.5+ trillion over the next decade plus financing for EV/AV.
For these reasons, investors are flocking to AutoTech, and perhaps this is just the beginning. Driven by advances in solar and electrical energy technologies, autonomous technologies and data, along with demand for industry-wide changes, AutoTech has investment fuel to run on.
A variety of new businesses have made their way into public markets through SPAC reverse mergers. And this comes long before many of them have even produced or sold any goods, let alone before they have earned any material sales or hit EBITDA/FCF breakeven. With this in mind, some have drawn parallels between AutoTech and BioTech, where some of these younger competitors will be popular and others will struggle. Some will see major upside valuations and some will vanish altogether. And many large, existing firms will certainly remain important (maybe even dominant) market players. In the meantime, investors are left to determine which newcomers are worth investing in. Here, we outline 8 parameters for evaluating the strategic positioning of AutoTech entrants over time.
It always starts with the technology. Always consider how a particular entrant solves a problem differently than incumbents. Entrants with proven technology are always given priority over a company with unproven, next-generation tech.
For entrants to be successful in the ever-evolving automotive market, it is better they focus on a particular market segment with a clearly defined audience. Entrants should narrow their market range in order to gain a stronghold early on. This will make the execution stages more seamless and help ensure commercialization across the target market.
What does the competition scene look like? A competitive landscape is generally more difficult for entrants, whereas a less crowded market is typically better. Consider new or existing rivals – OEMs, Tier 1 vendors, or software companies. Aside from technology, what is the entrant’s comparative benefit? And are their rivals increasing or decreasing?
4. Go-to-market strategy
Entrants leveraging and collaborating with seasoned incumbents for validation, procurement, processing, etc. will likely have higher chances of success. And also always keep in mind where the entrant is in terms of validation, quote and marketing/manufacturing. What aspects of the supply chain and other processes are outsourced and why.
Expanding and/or accelerating new contracts and booked orders are strong indicators of an entrant's future performance.
Entrants with a higher likelihood of becoming self-funded are better positioned so long as growth isn’t compromised. Things to keep in mind include whether the entrant expects the latest fundraising round to be final; whether growth beyond current revenue/EBITDA/FCF targets will require additional capital; and whether fundraising rounds have been an ongoing trend as opposed to typical milestones.
It goes without saying that management teams with automotive expertise are typically better positioned than those with tech backgrounds alone.
Entrants that have been assigned more robust valuations can pose greater threats to their competitors as investors' will be more enthusiastic to commit capital.
The AutoTech sector guarantees one of the most optimistic markets for investing over the next decade. It is difficult not to underscore the considerable competitive advantage currently being provided to AutoTech entrants – access to capital for continued development. With competition rife, deciding which ones are worth the risk is another consideration. Identifying solid deal drivers and thoroughly examining entrants’ positioning on various strategic and comparative levels will play a critical role in helping investors select viable companies for the long term.