Why Have Start-Ups With $1B Valuation Still Failed To Disrupt The Automotive Industry?

Forbes

20-05-2025

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Yet arguably, it is being disrupted but not from these players. But we will get to that later.
The automotive industry is complex, capital-intensive, and highly competitive. It has been a long road to get where we are today. Ford was one of the first automakers in the USA to be formed in 1903, when 12 investors raised $28,000. In Europe, Daimler was formed around the same time in 1890 and sold the first contemporary automobiles, the Mercedes, in 1901. Since then, the Big Three, General Motors, Stellantis (formerly Chrysler), and Ford Motor Company have long dominated as the American car companies. In Germany, the Big Three have been Volkswagen, Daimler and BMW. A lot can be said about the positive progress and impact these companies have had on the GDP, job creation, and innovation. But when comparing this to the progress in market capitalization, there is a disconnect.
The new kids on the block
Shanghai,China-April 3rd 2024: Chinese customers at Xiaomi ev store test SU7 electric car
Today the market cap for the USA 'Big Three' companies summed together is roughly $112 billion and for the German 'Big Three' it is $140 billion. This pales in comparison to the not-so-new newcomer (founded in 2003), Tesla, which has a market cap larger than all of those 6 companies combined, at ~$800 billion (even with the recent turmoil). And has survived the valley of death around 'scaling' and impressively sold ~1.8 million vehicles in 2023 (of the 17M global EVs sold).
BYD was founded in 1995 and designed and sold their first car in 2005. This, similar to Tesla, is nearly 100 years after the first car companies in Michigan and Germany were formed! Yet, BYD has a market cap of ~$107B, equivalent to more than 2 of the 3 'Big Three' in the USA or Germany.
Xiaomi was founded even later, in 2010, focused on smartphone devices, and only in 2021 was Xiaomi automobile founded. They recently just reached their 100,000th unit of their first production vehicle, the SU7. This pales in comparison to the production numbers at Volkswagen, where ~9M vehicles were produced in 2024. Yet Xiaomi has a market cap of nearly 3x that of Volkswagen.
Surviving the valley of death
How have these new kids on the block survived and apparently thrived, when so many others have not. Starting from the beginning, starting a new automotive OEM is monumental and requires billions – up to $1 billion alone for the vehicle R&D. Production of a new vehicle can cost between $1 billion and $5 billion (e.g., one capable of producing 20,000+ cars annually), tooling can add another $1 billion. This is all before the supply chain, sales and marketing, and working capital. To put it in perspective, new full-scale OEMs would need to raise $10-$20 billion to just join a ticket to the party.
And surprisingly – or maybe not so, Tesla did exactly that. It did not hurt that Elon Musk was able to personally invest, he contributed $70 million since 2004 and this helped keep the company afloat during critical times such as the 2008 financial crisis. Turns out this was a good investment, as in November 2024, the shares of Tesla soared again reaching $1 trillion (valued more than Toyota, Ferrari, Porsche, GM, and Ford combined) and continued to increase until January, 2025 – but due to several months of turmoil it has fallen ~32%. And there is uncertainty about the future.
Unicorn failure
GENEVA, SWITZERLAND - FEBRUARY 26: A Lucid Air Pure fully electric EV car is displayed during the ... More Geneva Motor Show 2024 at Palexpo on February 26, 2024 in Geneva, Switzerland. The 2024 Geneva Motor Show opens today for the first time in five years. The event last took place in 2019 with the coronavirus pandemic forcing organisers to cancel the 2020 show just days before the show was due to open. This year's Show will be a smaller affair with just four major manufacturers confirmed to attend. (Photo by)
There have been other companies successful in fundraising ~$1 billion, but their success has not followed the same path.
Arrival, the British electric vehicle startup, raised over $1.3 billion during its development and was valued at $13 billion before going into bankruptcy. And this all happened before delivering a single electric van.
Rivian raised a $1.3 billion round led by T. Rowe Price in 2019 and a $2.5 billion round in 2020, with major backers such as Amazon, Ford, and BlackRock. In total, Rivian raised over $10 billion prior to its IPO in 2021. It has a market cap of ~$13 billion. Recently, it created a joint venture with Volkswagen Group combined with a total investment of $5.8 billion. But in 2024, Rivian sold only ~51,600 vehicles.
Lucid raised over $1 billion from Saudi Arabia's Public Investment Fund (PIF) in 2018, and more recently another $1.75 billion to secure runway for 2025. It has a market cap of ~$7 billion. Yet again in 2024, it sold only ~10,241 vehicles.
Adding contrast again, GM sold ~6 million vehicles in 2024 worldwide and in their peak sold 10 million in 2016.
It is safe to say that these newcomer OEMs are still in the scaling phase. And there are several other newcomer OEMs who have recently had a stop in the road, filing bankruptcy or are shortly before doing so.
This includes companies like Faraday Future, which raised $2 billion since its founding in 2014. It has not formally declared bankruptcy but has consistently struggled with funding shortages and scaling production. Fisker Inc. raised significant funds, including through a SPAC merger in 2020 that brought in approximately $1 billion, but was not able to scale. There are other players such as Canoo, Lordstown Motors and Electric Last Mile Solutions, all raising significant cash – but somehow not enough to survive 'the death valley curve'.
According to Joan Magretta, award-winning contributor to the Harvard Business Review and author, it could be as simple as ensuring the growth ambitions align with the right business model. This makes a lot of sense as the growth ambitions help secure the initial VC funding with a compelling vision and narrative, which led to many companies reaching unicorn status with valuations exceeding $1 billion. But often the start-up underestimates the costs associated with the challenges of scaling an OEM and eventually just runs out of cash. This is the nut that needs to be cracked.
Being the fast fish is key to success
LEIPZIG, GERMANY - MAY 6: Workers assemble the new all electric Porsche Macan at the Porsche ... More assembly plant on May 6, 2024 in Leipzig, Germany. The electric Macan is Porsche's second electric car after the Taycan. The company also offers two hybrid cars. (Photo by)
But there is immense value in helping to ensure that new players do not just come on to the field, but stay to play, and disrupt – as they can help push the boundaries of innovation as shown in the software race and how Chinese newcomers are revolutionizing the customer experience. They can accelerate sustainability as shown with Tesla, which doubled down on an all-electric fleet from day 1. And can increase competition and consumer choice.
Mobility is the backbone of economic growth, social connectivity, and sustainable development. It ties together commerce, urbanization, and technology. And this is true both in Europe and the USA with it representing about 14 million jobs and ~7% of the GDP and 10 million jobs and ~3% of GDP, respectively. In order to stay competitive, the Western incumbents have started considering to join forces with the newcomers (as shown with VW Group and Rivian). But this alone will likely not be enough.
For newcomers to establish themselves and achieve commercial viability, they need a supportive ecosystem that fosters growth. Access to venture capital funding, state grants, loans, and tax incentives can provide the necessary financial boost. Beyond financial backing, technical expertise is critical. New OEMs must leverage experienced development and manufacturing partners to properly implement their innovations, scale production efficiently and take off into the right direction. Strategic investments from industrial players and tech giants can offer private growth capital that ensures long-term sustainability.
It was nearly 10 years ago but couldn't be more true today as stated by Klaus Schwab, WEF, '… it is not the big fish which eats the small fish, it's the fast fish which eats the slow fish.' And in the automotive industry, it is time to do what cars do best - speed up!