Where Will The Electric Aviation Start-Ups Find $40B?
Urban Air Mobility (UAM) has generated a lot of excitement over the past two years, fueled by significant investments from Uber, Airbus, and others. Witness the advent of some new services such as Voom in Sao Paolo and Mexico City and Uber Elevate’s new Uber Copter multi-modal service from JFK to Manhattan. Helicopter services like Blade have gained traction in New York and Skyryse has invested aggressively to build a fully autonomous UAM technology that will fulfill the promise of low-cost urban flight. The enthusiasm for this space can be seen in the yearly Uber Elevate conference on Urban Air Mobility, which drew over 1200 in 2019, up from a couple of hundred in 2017.
The Start-Up Boom
The excitement around the potential of electric flight in general, but especially UAM, has led to an explosion of investment in the electric aviation space for aircraft heavier than 55 pounds. Although counts vary, Roland Berger believes that there are over 170 electric aviation concepts underway at the current time. The Vertical Flight Society says that investors have put over $1B to work in Electric Vertical Take-Off and Landing (eVtol) concepts alone. These aircraft span a vast set of use cases including fixed wing regional flying like eViation’s Alice or Ampaire’s Skymaster conversion, hydrogen fuel cell concepts like ZeroAvia, eVtol based UAM concepts like CityAirbus and Volocopter, single-seat eVtol concepts like BlackFly, electric jet concepts like Lilium, Pipistrel trainers and luxury flying cars like Terrafugia and AeroMobil that you could drive to the airport and then fly to work. This doesn’t even cover freight concepts like Volans-i, SabreWing, Elroy or Bell’s APT 70. (DiamondStream Partners has invested in Elroy.)
The question is, will this be an investor bonanza or a wipeout? As usual, it will depend on your concept and what you are trying to achieve. Unlike many new technologies, customer adoption will probably not become the key question for success. The market demand for regional air service has been relatively bigger in the past than today and all the evidence we have suggests that lower costs and point-to-point service will stimulate demand and take a lot of people out of cars (or trucks in the case of freight). Not surprisingly, several carriers have signed (usually non-binding) letters of interest in these new concepts, including Cape Air’s recent announcement regarding eViation’s Alice and Ampaire’s order of 50 Electric EEL’s from Personal Air Exchange.
Despite the demonstrated customer demand, few of the 170 deals that have received funding were funded at scale. Those that have significant funding often benefit from a relationship with a government, strategic player or a rich individual. For example, Boeing’s HorizonX and JBTV funded Zunum. Intel Capital, Jet Blue Technology Ventures, Toyota AI Ventures, Defense Innovation Unit (DIU) and EDBI (a Singapore sovereign wealth fund) among others funded Joby Aviation. Geely, a Chinese car company that owns Volvo, funded Volocopter for $55MM. Robert Chandler’s Clermont funded eViation and its propulsion supplier MagniX. Larry Page, Boeing’s HorizonX and DIU funded Kitty Hawk. In addition to investing in start-up plays, the strategic players often have self-funded concepts like Airbus’s CityAirbus and Vahana concepts or Boeings PAV.
Looking for Institutional Investors
So where are the institutional investors? Well, they have good reasons for caution. The Very Light Jet investment boom of the 2000s, the last time new aircraft designs created as much excitement as today, generated some spectacular financial adversity. The Eclipse 500, which cost $1.4B to develop, certify and put into production, led to the bankruptcy of not only of Eclipse Aviation in 2008 but also its key customer Dayjet. The Honda HA-420, a very light jet program started in the late 1990s, had its first flight in 2003, but deliveries did not begin until December 2015 after the project costs ballooned to over $1B.
The absence of private institutional funding at scale to date leaves a gap between the financial needs of the various concepts in development and the funds available. While electric aviation’s total funding needs remain unknown and unknowable at this point, history shows it can cost hundreds of millions of dollars to certify a new aircraft even for well planned, efficiently executed concepts. If these 170 new electric aviation companies required $100MM in funding from institutional sources, a fairly low number for a new aircraft, the industry would require $17B of funding. At $250MM the cost would exceed $40B. However, according to the 4Q 2018 PitchBook-NVCA Venture Monitor, between 2015 and 2017, the entire venture industry invested approximately $80B a year across all sectors, whereas in 2018 investment totaled $130.9B. Either way, this would represent a large allocation of capital to a relatively small sector (compared to say auto, retail or financial services).
Some might argue “so what?” After all, capital flows to where the opportunity lies. Unfortunately for the aviation start-ups, the cash flow profile will challenge institutional investors. Software start-ups, where entrepreneurs focus on a minimum viable product, often only require limited features targeted at a limited set of initial users to establish a basis for customer momentum. In contrast, the certification requirements for aerospace start-ups and the carriers that use their products drive a high (and expensive) standard for initial deployment. While this standard is being met and the company is spending tens if not hundreds of millions of dollars to do so, it will generate little or no revenue. So, let’s say you take your software start-up to your local venture capitalist and say, “I have this great product the government might let me sell in five years. If it does, it will make a lot of money. In the meantime, I plan to spend $2MM a month. Will you give me $100MM and back me up just in case it costs $1B?”
You can see the institutional funding problem here. When the seed funding runs out, the game of musical chairs will begin.
Despite the funding gap, there is lots of market opportunity and lots of financing available to pursue it. How should companies seize the opportunity? The short answer is the businesses that survive will manage cash carefully, have solid fundraising strategies, and create business models that demonstrate customer and financial momentum even if the largest markets are initially beyond the technological limits of the early products. More on this in the future.