Why are the new start-ups in EV space finding it hard to secure funding?

Recently, I was approached by a start-up founder who wanted help in raising funds for his new start-up which is planning to build an 4W -EV (yes you heard it right). He along with his co-founders come from good, reputed college with degree in engineering but without any experience in the industry. When I asked him, why he had picked this idea, he said he along with his co-founders felt that they can build an EV (four-wheeler) which can beat others on price and address the rural markets. When I asked him, how much had they invested in their venture in terms of money and time to research the problem, he told me about a couple of lakhs (all together) and mostly their idea has been on paper only for last 3-4 months. When I asked him, how much money was he looking to raise, he said Rs 120 cr. Wow! I was just taken aback. From just a few lakhs to hundreds of crores is what he was expecting support for.

I am seeing many such start-ups which have hardly invested any money and time but want to dream big and raise a large quantum of money. I don’t know what is the perception or notion that these founders carry about raising money for their ventures. All have read about the great stories of money getting raised by other start-ups and get mesmerised thinking that they can get funded too. I even saw some of them showing me a greatly articulated table comparing what other start-ups have raised in various stages of development. They seem to think of this as a pure transaction and think that if they pay the fees for raising money, getting money is guaranteed.

This may sound harsh and to the point, but many of these founders are far away from reality. Raising money for start-up in EV space is very challenging (it is challenging in every segment but more so here) since there is huge amount of engineering support which is required for such start-ups. Engineering,  Design and then Manufacturing are very capital & resource intensive activities and require time and patience. These developments can’t be fast forwarded. Taking a product from prototype (MVP) to commercialisation involves lot of steps including the most critical which is testing and homologation (approvals from Testing agencies). The development cycle can’t be crunched as you need to perform all steps before you reach the external testing agency stage.

Most investors wouldn’t commit to start-ups which have not put their own capital to atleast navigate a substantial part of this journey till commercialisation simply because they are not sure when these start-ups will run out of money and stop all work. They may be forced then to get acquired by someone at a very discounted price or simply lose all money invested in them till now. They also see if your product is really addressing a genuine problem and how many others are already doing so. The way things stand today, many start-ups which have already navigated through the first hurdle of capital raise and are on their way to commercialisation or already in revenue stage are the ones getting backed by larger investors (both financial and strategic).

The legacy players may complement such start-ups as they have the capital to back such start-ups and acquire them once they believe that the product can overcome the hurdles of commercialisation. While lot of companies have ventured into the 2 & 3-Wheeler segments and are also likely to see consolidation in sometime, there are hardly any start-ups dreaming to create the same magic in the 4-Wheeler or CVs segments – simply because they don’t have the technological bandwidth and depth to navigate through the engineering tenacity required for product development and the intense competition that already exist in this segment from large established legacy players.

There are misplaced conviction about ideas and abilities (not trying to belittle anyone, but it almost seems like some are living in a dream world). Young entrepreneurs without understanding the nuances of such a tough Industry want to venture into it. They should be doing their homework before looking at ideas which look far more challenging to execute. They should be asking themselves the question, will they as investors ever back such ideas? If the answer is no, then they should also be prepared for the same from others. I hope that better sense prevails amongst entrepreneurs and they do the course correction today and not waste their and others time and resources without really mapping all the risk vs opportunities.

PS: I know there are some brilliant minds at work but the efforts should be channelised at solving problems that are in the realm of practicality and feasibility. Many ideas have already been picked up and so one has to really see what are the ideas that are executable.