Odds for auto startups are incredibly high; can Tesla beat them?

Much of the energy and growth in the U.S. economy comes not from large corporations but from small startup companies, as economic data shows.

By now, the model of a young, energetic entrepreneur with a bright idea who turns it into a world-changing business is well established.

Think Facebook or Google, or before them Microsoft or IBM or Kodak, or before them Edison Electric and Westinghouse.

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Automobile makers were startup companies 100 years ago, though even then consolidation had started. In 1917, more importantly, Ford was in the process of pioneering high-volume mass production that would change the industry.

A recent opinion piece in industry trade journal Automotive News argues that automotive startups now face survival odds that may be all but insurmountable if they choose to build more than a few thousand cars a year.

The challenges largely revolve around the prodigious capital needs of setting up volume production of automobiles.

Tesla Motors production line for Tesla Model S, Fremont, California

Tesla Motors production line for Tesla Model S, Fremont, California

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Combined with very long product development cycles and not-all-that-impressive profits against industries like software or consumer electronics, startups that make entire automobiles may not look that attractive to financiers.

The piece argues, bluntly:

Making successful cars and trucks … while building a company from scratch—an effort that can require investing hundreds of millions of dollars against zero revenue and wooing experts from more secure, high-paying positions at established companies—is virtually impossible.

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That brings the discussion to Tesla. After 13 years in business, seven of them as a publicly traded company, the company has yet to return a profitable year.

It has had two marginally profitable quarters during that time, both relying on such non-core aspects as sales of regulatory credits and delaying payments to suppliers.

Still, as the article notes, a recent wave of new entrepreneurs has sought to follow in Tesla CEO Elon Musk’s footsteps (although he’s not actually a Tesla founder) with vehicles from small to large.

Elio Motors prototype at New York Auto Show press conference, Apr 2015

Elio Motors prototype at New York Auto Show press conference, Apr 2015

Enlarge Photo

Elio Motors is trying to get funding to put founder Paul Elio’s idea for a three-wheeled, two-seat, allegedly 84-mpg “autocycle” into production at a price it says will be under $10,000. It’s still about $100 million short.

Faraday Future is in suspended animation while it seeks more capital to start production of its FF91 luxury battery-electric sedan.

Lucid Motors (nee Atieva) is also apparently seeking additional funds to start production of its Lucid Air, also a luxury battery-electric sedan.

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More recently, Robert Bollinger unveiled the design for the Bollinger B1, an eye-catching all-electric Class 3 utility truck that his company, Bollinger Motors, hopes to put into production—assuming funding can be lined up.

These companies follow in the footsteps of several recent failed startups.

Fisker Automotive collapsed into bankruptcy after less than 18 months of production; its striking low-slung Karma sedan is being rebooted at low volumes by a deep-pocketed Chinese auto-parts company.

Aptera finally declared bankruptcy six years ago after management turmoil and a shift in product direction away from its original concept for an ultra-aerodynamic, two-seat, three-wheel electric car that looked like a Cessna cabin on wheels.

Many of the companies had, or anticipated receiving, low-interest loans from the U.S. Department of Energy’s advanced-technology vehicle manufacturing program, which lost TK million on its loans to Fisker.

The lack of those loans is apparently what pushed Aptera over the edge and has kept Elio stalled, for instance.


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