Since the invention of Uber, our daily mobility activities have changed a lot. Mobility has also become a hot investment topic since then. From the early stage when people chased the copycats of Uber everywhere in the world, to the stage when people made a lot of investments into self-driving cars, almost all of us believe that mobility has to be changed dramatically in the future.
When the urban shared-mobility space (B2C) has saturated, people moved to invest in technologies/businesses (B2B) that will enable bigger changes — from EV/EV infrastructure to driver monitoring, in-car voice assistant, and V2X solutions.
When making investments into the enabling technologies, investors usually do not expect these companies to survive after 10 years — if that happens, it can be a bad thing. Instead, investors are expecting these companies to be acquired by the “big guys” such as OEMs/Tier-1s in the future. The investment thesis is fairly simple: the “big guys” have deep pockets and can benefit from these technologies, why should they not acquire?
However, the story that happens may be different from what investors might think.
Automotive industry players are cautious when acquiring software companies
When we look into the M&A history in the automotive space, we will realize that <5% of the deals are made to acquire software companies. Automotive companies are still spending most of their money in building their muscle in hardware manufacturing (from components to vehicles).
Though there is a growing trend of acquiring software companies, the number of acquisitions is still far below what investors would have expected. In 2018, there are only 24 M&A deals for software companies in the automotive industry.
Besides the low volume of M&A deals, the time before acquisition is also relatively long. The average life of software startups before acquired by an automotive company is about 10.4 years, and the median number is 7 years.
Personally, I assume three reasons will account for this situation. First, corporate companies have complicated organizations — many interest parties need to be bought in before an acquisition can be made. Second, corporate companies are very risk-averse — they prefer to wait and see. Third, automotive companies are simply hardware-minded, which makes it difficult for them to understand how the agile software world works.
The return from acquisitions can be bad for investors
If we look into the M&A deals for the enabling technologies for hardware manufacturers (e.g. software/hardware that will be integrated into vehicles to improve existing/add new features), we will find out that the average acquisition value is about $30 to $80 M (See detailed data here).
Think about if you invest a company at a very early stage (and take huge risks) at a valuation of about $8 M and you eventually get a capped return of 10X in 7–10 years, do you still feel excited?
Going back to the B2C space?
If the enabling technologies for the hardware manufacturers are not that fancy to investors anymore, where should we go next?
Let’s take another look at the mobility investment landscape. We will see that:
- The same problem has not been solved in every market for every group of people.
For example, medium-distance trips have been solved by bus/subway in many developed countries, but the need has not been met in countries such as Pakistan and Egypt where public transportation is poor. Companies working in this space include Swvl, Airlift, and Fluxbie.
For example, a ride-sharing solution for daily commuters, airport-downtown travelers, and school kids is still needed. Companies working in this space include: co-mute, Hugo, Part.co, etc.
For another example, Amazon has been building its Flex platform for truck drivers in the US. A marketplace for truck drivers and shippers is still needed in many other markets such as the emerging markets. Companies working in this space include: Truckpad, Loop, etc.
- The same problem can be solved using better methods.
For example, in countries such as Nigeria and Egypt where the traffic is extremely crowded, a motorcycle for medium-distance urban trips will be much faster than passenger cars. Companies working in this space include Gokada, Max, SafeBoda.
For example, though there are already many last-mile delivery robot companies, new and better solutions are being innovated. Refraction AIis working on a lighter and cheaper robot to cover deliveries between 1–3 miles.
For example, instead of spending heavy capital building a last mile delivery network, logistics companies can leverage existing under-used urban spaces and extract value from those tiny spaces. Companies working in this space include: Shookit.
For example, instead of waiting for EV infrastructure, which will take decades to build, companies are making batteries portable or delivering battery to users. Companies working in this space include: Sparkcharge, Chargewheel.
- New business model is being invented.
For example, instead of consumers paying for the trips, physical places (e.g. restaurants, event spaces, etc.) that want to attract people can bid and compensate Uber trips to invite people. Companies working on this space include: Berymo and Freebird.
- New problems have come up.
For example, with the introduction of different mobility solutions, people need an all-modal platform to plan their trips and buy tickets instead of downloading apps for each service operator. Companies working on this space include: Ubirider.
For another example, with the introduction of e-scooters into the cities, charging the e-scooters has become a challenge. Companies such as Swiftmile are innovating solutions to solve the new problem.
To conclude, it is still necessary to put an eye on the enabling technologies, particularly those for service operators — since these enabling technologies can survive as infrastructure operators. However, we may need to avoid putting most of our energy on enabling technologies — particularly those prepared for hardware manufacturers.
Given the opportunities left on the B2C market, it may not be a bad idea to make some bets on the space that we thought to have already saturated.
Disclaimer: The article is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation.
See all M&A deals made by companies in the automotive industry here.