Why VCs are backing newer EV start-ups despite the OATS phenomenon

Early-stage funding in the segment rose almost three times to $74 million in 2021 compared to the previous year

“We are champions and champions eat OATS for breakfast.” When Rajiv Bajaj uttered these words a couple of months ago, it set the automobile industry abuzz and ruffled feathers among players in the emerging electric vehicle (EV) market. The managing director of Bajaj Auto said that the country’s major two-wheeler makers – BET, or the trio of Bajaj, (Royal) Enfield and TVS – have a better chance of winning the EV market than the start-ups like Ola, Ather Energy, Tork and SmartE (OATS).
 
But it seems that venture capital (VC) investors are neither wary of the might of the legacy players nor the deep pockets of the OATS start-ups with the first-mover advantage in the EV space.
 
According to data sourced from Venture Intelligence, early-stage funding (pre-seed to Series A) in the segment rose almost three times to $74 million in calendar year 2021 when compared with the previous year – even as total funding attracted by EV start-ups increased 72 per cent to $362 million.
 
“The auto industry is going through a once-in-a-century technology upgrade, which will create investment opportunities for many years to come. These opportunities are not limited to vehicle manufacturers,” says Ritesh Banglani of VC firm Stellaris.

 
“An entire ecosystem needs to come up to enable EV adoption, including charging and swapping networks, component manufacturers, vehicle and charger financing, forward and reverse supply chain for batteries and software that ties all the pieces together. We are investing in all these areas, as well as specific vehicle form factors,” he added.
 
Most of the early-stage start-ups that got funding this year are EV charging companies like Charge+Zone, goEgoNetwork, ElectricPe and Revos, among others. These start-ups are either setting up EV charging hubs in cities and towns or selling swappable batteries for electric two- and three-wheelers mostly.
 
 
“I am not a big fan of battery swapping as the typical need is at most 10-12 kilowatt hour of power for 80-85 kilometres of range. This can be achieved through a few hours of charging the vehicle when it is on standby during the night,” says Vikash Mishra, founder and CEO of MoEVing, an EV start-up that raised $5 million in seed capital this year.
 
Apart from providing charging infrastructure to e-commerce companies for their EV fleets where it competes with established start-ups like SmartE and Bounce, MoEVing is also planning to offer financing to delivery workers.
 
According to Mishra, who has worked with energy major Shell and consulting company McKinsey before starting MoEVing in January 2021, e-commerce companies will start seeing their delivery costs drop by 10-15 per cent once they go 100 per cent electric in any particular geography.
 
Another start-up in the EV sector that has caught investors’ attention is Oben EV. Founded by an IIM husband-wife duo, the company is planning to launch its made-in-India two wheelers early next year. Oben EV’s first of four planned products is an electric bike which runs for 200 km on a single charge, clocking a top speed of 100 kilometres per hour. The startup claims that it has over 16 patented innovations ranging across improving product performance, customer experience, and data analytics.
 
“While it is true that legacy players are ramping up their EV presence, we also know that they have their constraints. Having done a lot of capex in petrol and diesel, they did not rationalise EV price points to avoid cannibalising their main business,” says Madhumita Agrawal, COO and co-founder of Oben EV.
 
One of the major criticisms of EV start-ups in India has been that they import parts from China or South Korea, assemble them, and then sell those under their brand names. Ola Electric, which has raised more than $660 million to set up its manufacturing base in Tamil Nadu, had to acquire Dutch EV company Etergo to accelerate its plans.
 
However, Agrawal says that Oben is manufacturing all the major components in India to its own specifications. “And we are asking investors to come and ride the bike first. Powerpoint presentations are not enough to communicate how well the vehicle will perform on hitting the road,” she adds.
 
But the one nagging issue for the ‘Make in India’ ambitions of the industry in the EV space is the manufacture of batteries. While start-ups like Oben EV make their own battery packaging, the cell component still has to be imported.
 
“The thing is that India is a decade late in entering the EV race. The battery supply chain has already taken root in China and it is the cheapest to import unless a company hits a certain scale of production,” says Nakul Kukar, co-founder and CEO of commercial EV manufacturing start-up Cell Propulsion.
 
“The major challenge is how to time the battery output with EV demand in the market,” he says, adding that companies like Mahindra and Exide are trying to set up lithium-ion battery plants in the country through their subsidiaries.
 
Earlier this year, the government approved a Production Linked Incentive (PLI) scheme for manufacturing of Advanced Chemistry Cell (ACC) in the country with an outlay of Rs 18,100 crore for five years. “One can hope that in the next three to five years, several companies will be producing the batteries locally,” says Kukar.
 
But for start-ups to enter and play in capex-heavy segments like manufacturing EVs and batteries is not going to be a simple task – their fate will depend as much on funding as technology.
 
According to a report by NITI Aayog and Rocky Mountain Institute (RMI), India’s transition to electric vehicles will require a cumulative capital investment of $266 billion (Rs 19.7 trillion) in EVs, charging infrastructure, and batteries over the next decade.
 
Gaurav V K Singhvi, co-founder of angel investing syndicate We Founder Circle, which invested in three early-stage EV start-ups this year, says: “A lot of big funds are waiting to invest in India’s EV story. Of course, it is a capex-heavy industry – but it requires less capex deployment than petrol and diesel vehicles.”
 
“Moreover, the legacy players simply do not have the agility to move fast in the EV space at present. It will take them another five to seven years by which time at least a few start-ups will become very big EV players. The rest will become acquisition food for the auto majors,” he adds.