It is too early to predict the full impact of the COVID-19 pandemic on the long-term viability of automotive-semiconductor startups. However, a few early trends are already emerging in the broader market that give some indication of where things might be headed.
The ecosystem disruptions wrought by ADAS and AV development have made the automotive-semiconductor market more hospitable to startups. This four-part series explores the contextual drivers of the recent increase in startup activity, the challenges these new players will face as they build their businesses, strategies for success, and the potential impact of the Covid-19 pandemic on the startup — priced at a ‘Covid discount’ — trend going forward. This is the Part 4 of a four-part series on Chip Startups are Gaining Traction in Auto Industry.
It is too early to predict the full impact of the Covid-19 pandemic on the long-term viability of automotive-semiconductor startups. However, a few early trends are already emerging in the broader market that give some indication of where things might be headed.
According to PitchBook, venture investment in the mobility space (the broader automotive and transportation industries, including autonomous driving and ride-sharing) increased in the second quarter of 2020 on both a quarter-on-quarter and year-on-year basis, though the vast majority of that investment was in a single deal: Waymo’s $3 billion late-stage round.1 Without the Waymo deal, investments were actually down substantially relative to Q2 2019 and Q1 2020.
At the beginning of the pandemic, many investments were being priced at a “Covid discount,” meaning that the companies were being valued below where they were before the pandemic. More recently, there appears to be a bifurcation in deals: Well-known experienced founders with established records are again starting to attract larger amounts of capital at higher valuations, while newer, relatively unknown entrepreneurs are finding the well nearly dry. Complicating matters for semiconductor startups is that there is a renewed bias toward less capital-intensive businesses such as software and services, according to VCs I’ve spoken to. It is believed that there is a better return-to-risk profile than for hardware companies.
In terms of the end market, the pandemic has exerted tremendous financial pressure on the traditional automotive industry. Car sales turned down sharply at the beginning of the pandemic, and car OEMs and their associated Tier 1s came under significant profitability pressure. As a result, their investment in new technologies slowed commensurately. In the long run, this pull-back may have put some of the incumbents at a competitive disadvantage in the race toward electric vehicles (EVs) and especially fully autonomous vehicles (AVs) against Big Tech rivals such as Tesla, Waymo, and Zoox (recently acquired by Amazon). This competitive shift could work to the detriment of semiconductor startups that would otherwise have been potential technology suppliers into OEMs’ next-generation ADAS. Meanwhile, companies like Tesla and Waymo tend to be more vertically integrated than the traditional automotive industry. That will make them more difficult — though not impossible — targets for the semiconductor startups going forward.
Taken together, the Covid discount, the current bias against more capital-intensive hardware businesses, and the economic impact of the pandemic on the end customers mean that challenges will persist for a while for automotive-semiconductor startups. Nonetheless, the most competitive startups can still find customers and attractive sources of funding if they can demonstrate that they have the right business case, sufficient upside potential to compensate for the increased risks, a great team, and a strong product/market fit with differentiated technology — and if they are solving a problem that cannot be put on hold while everyone waits for life to return to normal.
Quick and steady wins the race
The most competitive automotive-semiconductor startups will be those that can develop operational and customer excellence while remaining nimble innovators. They should have quick feet and steady hands. First and foremost, they should be the disruptors in their segments – simply being a little bit cheaper, a little bit faster, or a little bit higher-performance will not be sufficient to break through customer inertia, given the risks customers face when working with startups.
But in addition, they will eventually have to become experts in operating according to the established rules of a still very traditional industry. They must have their supply chain firmly under control in order to ensure they are able to meet their customer’s delivery and quality requirements. Their hardware and software designs must have undergone stringent verification and validation before release to manufacturing, and the products must have gone through extensive and time-consuming automotive qualification.
In some cases, the entire product development process, from definition to production, must adhere to functional safety specification. In my article, “Disruption and Resilience: Lightning Strikes in the Automotive Semiconductor Industry,” I describe how companies that master the innovation but not the quality and safety side of the equation risk finding themselves engaged in various proof-of-concept programs with the automotive industry only to lose out to more trusted suppliers when those programs ramp into volume production.2 On the other hand, the startups that can outmaneuver larger,` entrenched competitors through innovation, while breaking through the barriers to entry by demonstrating a robust automotive capability, not only will win business but can position themselves to win the lion’s share of the market.
1“Mobility Tech: Q2 2020” PitchBook Emerging Tech Research, July 2020.
2Drue Freeman, “Disruption and Resilience: Lightning Strikes in the Automotive Semiconductor Industry.” Mechanix Illustrated, June 23, 2018