Making an investment decision is not easy. The process entails dealing with multifaceted challenges, and when it comes to emerging sectors such as electric vehicles (EVs), the complexity involved in making an investment decision becomes much higher. Not only do investors need to analyse the structural patterns of EVs they also need to continuously monitor the fast-changing requirements on the regulatory and technological front. Further, the fickle tastes of prospective buyers and the high pace at which the ecosystem for EVs is developing also need to be taken into account. While the list of desired attributes is long, let's look at a few key points that investors should consider — and importantly, avoid — while betting their money on EV startups:
Key Things to Consider
Founders' background: According to a study conducted by Harvard Business Review (HBR), a whopping 95 percent of venture capitalists (VCs) agree that the background of the founders is the most important parameter of investing in the business. Taking a cue from the research, investors must conduct a background check on the founders and only invest in those startups, the founders of which have the domain knowledge of the sector, understanding of customers, and a thorough command of creating sustainable business models in the EV space.
Innovating abilities: The segment of EVs is in its nascency and presents attractive opportunities for creating novel products and solutions. In such a scenario, startups which are developing ground-breaking innovations and proprietary technologies are likely to stay ahead of their rivals by leveraging the early window of opportunity. These organisations will exhibit a rich repository of intellectual property in terms of patents, designs, and trademarks and become the preferred choice of investors from across the funding ecosystem.
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Scalable model: It's very important to look out for the scalability of business models adopted by startups in the EV segment. As the category is set to become a mainstay of future transport, business ventures lacking the ability to scale production for the masses are unlikely to find favour with a cost-conscious market like India. Therefore, investors should take into account scalability as a core function while choosing the ventures to invest in.
Collaboration-focused approach: With EVs spanning multiple categories and segments, it could be beneficial to invest in startups which have struck partnerships in their respective business verticals. Investors could prioritise ventures which have a laser-sharp focus on their core competencies but at the same time, are willing to join hands with suppliers, partners, and even competing interests to establish mutually beneficial relationships across the ecosystem.
Agility along with long-term sustainability: Investors may consider making investment in EV startups which project long-term vision for the future. Keeping in mind that the lure of short-term ideas in the EV domain is quite strong, these quick fixes disappear as fast as they appear. The sane investment decision, on the other hand, entails focusing on sustainable solutions that address structural issues of the EV industry while keeping their focus intact on the emerging needs and requirements of customers.
Key Things to Avoid
Ultra-competitive segment: Startups that are striving to foray into already crowded segments of the EV industry are less likely to survive and achieve sustainable growth in the future. Hence, investors may avoid backing such startups and rather identify investment opportunities in less-crowded spaces.
Lacking a USP: Like other fields, startups in the EV segment which lack novel business models or Unique Selling Propositions (USPs) could be avoided. In the absence of distinctive competence, customers are unlikely to stick with these ventures which, in turn, doesn't bode well from the perspective of an investment.
Compliance failure: Before investing in EV startups, it is mandatory for investors to closely analyse the capability of the ventures to meet the regulatory compliances that are changing rather quickly today. The evolutionary nature of EVs makes them more susceptible to regulatory changes and startups which are unable to cope with the norms would ultimately vanish from the market.
Ignoring due diligence: A lack of due diligence can prove detrimental to the returns prospects of any investment. Hence, investors must conduct a detailed assessment of the startups, their strengths and weaknesses, value propositions, and the like before pledging any capital. Further, a thorough examination of customer feedback will also help investors in choosing the right startups for investing money.
Deriving profitable returns from investment is a combination of art and science. The EV segment today is at the cusp of a revolution with categories across the industry poised to undergo a comprehensive transformational process. This inflection point, thus, offers a novel opportunity for all stakeholders to come together and work towards creating a self-sustainable EV ecosystem that is capable of delivering holistic and encompassing benefits to all.
—The author, Karan Mittal, is a partner at EV2 Ventures, a Pre-Series A Venture Capital Fund. Views expressed herein are personal.
(Edited by : C H Unnikrishnan)
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