Battling the Tesla shadow: EV startups struggle with cash crunch, impacting big investors

Tesla Is EV King: Electric vehicle (EV) startups that once soared on promises to revolutionize the automotive industry are now grappling with financial turbulence, according to a recent Wall Street Journal analysis.

At least 18 EV and battery startups, which went public in recent years, are at risk of running out of cash by the end of 2024, signaling a stark contrast to the optimistic projections that initially captivated investors.

Honeymoon phase ends soon

Among the struggling companies are Nikola and Fisker, both of which lured investors with ambitious plans to reshape the industry and combat climate change through innovative electric trucks and SUVs.

The honeymoon phase for these startups was cut short as they encountered obstacles such as surging costs and manufacturing challenges.

Notably, three companies—Lordstown Motors, Proterra, and Electric Last Mile Solutions—have already filed for bankruptcy, while others, like battery maker Romeo Power and charging firm Volta, have been sold at considerably lower valuations than their initial public offerings.

The median stock value among the scrutinized companies has plummeted more than 80% from its market debut, erasing tens of billions of dollars in market value within just a couple of years.

Gavin Baker, Chief Investment Officer at Atreides Management, described the EV market to The WSJ as “the most insane bubble” he has ever witnessed.

Many of these struggling startups opted for special-purpose acquisition companies (SPACs) to go public, a trend that gained momentum during the pandemic.

Unlike traditional initial public offerings (IPOs), SPACs allowed startups to make unchecked growth projections. However, the rollercoaster ride experienced by these companies underscores the risks associated with investing in an industry that continues to evolve in unexpected ways.

The big Tesla challenge

While the demand for EVs is steadily growing, it hasn’t exploded as anticipated by startups and investors alike.

Established market leaders like Tesla are even reducing prices to remain competitive, putting additional pressure on newcomers still grappling to kickstart production.

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Cash crunch

To assess the performance of EV and battery startups, WSJ examined 43 companies that went public between 2020 and 2022.

Five of these have either filed for bankruptcy or been acquired.

The analysis revealed that 18 companies were on track to exhaust their cash reserves by the end of 2024 unless they implemented cost-cutting measures or secured new capital. Seven of these companies had only weeks of cash on hand.

Several companies, when approached by the Journal, indicated plans to raise new financing and reduce costs as they strive to boost sales.

Fisker emphasized that its third-quarter costs might not be indicative of future quarters as it accelerates deliveries and enhances logistics infrastructure.

Sixteen companies had sufficient cash to continue operations beyond 2024, but their share prices are under pressure due to ongoing struggles to increase sales. Rivian Automotive, known for its high-end pickup trucks, and Lucid Group, a manufacturer of luxury sedans, are among these companies. Four companies were generating cash from operations.

One company under significant pressure is Faraday Future Intelligent Electric, which went public in 2021, promising record-setting revenue growth. However, due to supply-chain disruptions, its futuristic electric car with features like self-driving capabilities took longer than expected to produce.

Faraday burned through approximately $875,000 a day in the quarter ending in September, bringing its cash and short-term investments down to $8.6 million. The company, however, stated that it has an agreement to raise capital and is focused on increasing production and reducing costs.

Cash in hand but challenges loom

Even companies with a cash runway beyond 2024 face challenges.

Li-Cycle Holdings, aiming to recycle old batteries for electric cars, cited rising costs for pausing construction on its first facility in Rochester, N.Y. Its shares have plummeted from $10 to about 65 cents.

Among those at risk of running out of cash by the end of next year is Canoo, which projected in 2020 that it would generate over $1 billion in revenue within a few years.

CEO Tony Aquila, who took over in 2021, acknowledges that the targets were based on a firm market and unlimited access to capital. Canoo’s shares have nosedived more than 95% to about 25 cents, prompting a change in the company’s strategy to save money.

Bleeding big investors

The fallout in stock prices has also affected major investors such as BlackRock, Fidelity Investments, and Koch Industries, all of which invested substantial amounts in the EV sector.

Individual investors, too, were not immune to the allure of the promises made by EV startups. Brian Dobson, a Managing Director at investment bank Chardan, highlighted the widespread sentiment of everyone searching for “the next Tesla.” As the industry navigates these challenges, the cautionary tale of these startups serves as a reminder of the inherent uncertainties and risks within the rapidly evolving electric vehicle landscape.

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