VC fuels Europe's journey towards self-driving future

Once the preserve of science fiction, autonomous vehicles are en route to becoming commercially viable modes of private transport in the coming years. At 2017's consumer technology trade show CES, Scott Keough, head of Audi America, said the company would have a fully autonomous car on the roads by 2020 – a timeline that Tesla CEO Elon Musk reinforced when speaking at a separate conference in December 2017.

According to a recent report by technology-focused data provider CB Insights, autonomous technology accounted for around three quarters of the $4bn invested globally in automotive tech financing rounds between January and November 2017. Technology and automotive conglomerates – including Tesla, Audi's parent Volkswagen Group, BMW, Jaguar Land Rover, Toyota, Alphabet, Apple and Uber – are all investing heavily in development and testing.

With the scale of both the challenges and opportunities ahead, in addition to the significant barriers to entry in the car manufacturing segment, it is perhaps no surprise that trade investors are leading the way when it comes to mass-scale innovation. Yet despite the sector being heavily populated by trade backers, venture capital firms are also making an increasing number of deals within the space. Indeed, the CB Insights report reveals that 144 VCs invested in the autonomous vehicle segment in the first 11 months of 2017, compared with 96 corporations and corporate venture players.

Along for the ride
One approach being taken by venture players is to invest alongside automotive giants, or their respective venturing arms. A host of firms including Atomico, Sequoia Capital, LDV Capital, Maven Ventures, Y Combinator, Episode 1 and Capnamic Ventures have recently invested alongside BMW i Ventures and Jaguar Land Rover's InMotion Ventures. Meanwhile, UK-based firm Foresight Group took its approach to collaboration a stage further, when it launched an EIS fund in collaboration with Williams Grand Prix Engineering in November 2016.

Despite the bold predictions made by Tesla's Musk and Audi's Keough, most industry insiders anticipate that it will be a decade or longer before fully autonomous vehicles are available to consumers on a mass scale. While this might not restrict the appetite of investors with a long-term outlook, it raises questions as to the role of institutional investors from funds with industry-standard lifespans of around 10 years.

The market does not only require the technology to make this work, it also requires the right regulatory environment and the relevant infrastructure to fulfil its potential" – Simon Cook, Draper Esprit

"A patient capital approach will definitely be the most relevant for the biggest wins in the space," says Simon Cook, founder and CEO at Draper Esprit. "The market does not only require the technology to make this work, it also requires the right regulatory environment and the relevant infrastructure to fulfil its potential."

Nevertheless, fund managers that cannot deploy cash on a patient capital basis are finding ways to gain exposure to the growth potential of the autonomous vehicle industry. Many are investing in companies that, while strategically positioned to capitalise on the self-driving vehicle market, offer services and products that are applicable to other fields. Of particular note are investments in the artificial intelligence space, which has seen numerous European investments in H1 2018.

In the driving seat
Since the start of the year, iBionext has led a $15m round for GrAI Matter Labs; Cambridge Innovation Capital has led a $6.6m investment in GeoSpock; Prime Ventures and B Capital Group have led a $38m series-C for AImotive; and Foresight has invested £2.1m in Codeplay Software. Meanwhile, in other related fields, Atomico, Sequoia, PlayFair and LDV have taken part in a $15m BMW i Ventures-led round for street-level imagery mapping platform Mapillary; while Road Ventures has led an $11m series-A for autonomous fleet management software developer Bestmile. Of these investments, just two - AImotive and Bestmile – are exclusively exposed to the autonomous vehicle market.

However, while such portfolio companies may have the ability to generate revenues in other fields, it is primarily their positioning in the self-driving car space that is expected to prove most lucrative, explains Draper Esprit's Cook. He says the success of the sector will become dependent on related segments - such as fleet management software, electric vehicle infrastructure, supply and demand simulation software, and consumer apps - that support the wider ecosystem.

"There will be short-term demand for acquisitions as major tech companies and the automotive industry attempt to become the dominant players in the space," says Cook. "Whether these [startups in adjacent segments] will generate returns before they are commercially viable will be entirely dependent on the value of the companies' IP. These businesses will be bought based on the value of the technology they create, rather than user acquisition."

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