Venture capital (VC) investment as a financing option has been gaining importance in automotive transactions. This is due to the credit crunch in most economies which has made getting loans from financial institutions increasingly difficult.
An analysis from Frost & Sullivan (financialservices.frost.com), Venture Capital (VC) Investment Trends in the European Automotive Industry, finds that VC activity has been gaining strength in terms of value as well as volume. The volume of VC funding in the European automotive market has been rising at a compound annual growth rate (CAGR) of 13 per cent over the past 10 years.
A key factor driving VC investments are high gasoline prices. This has motivated companies to access VC funding in a bid to identify and develop viable alternatives to fossil fuel-based technologies.
"VCs are very bullish on investments that would help create a greener environment," explained Frost & Sullivan Financial Analyst, Vinodh Ramani. "Spiralling crude oil prices are intensifying the demand for alternative energy sources, an area in which VCs frequently invest. As a result, there has been a positive correlation between VC investment values and crude oil prices over the years."
Government initiatives are also encouraging VC investments in the automotive industry. For instance, tax reductions and subsidies are helping entrepreneurs as well as VCs reduce their capital expenditure and recover their investment sooner.
In addition to governments, customers are playing their part in promoting VC interest. Customers' preference for new technology in the powertrain domain and other sub-classifications such as telematics are positively influencing VC funding.
"Based on current customer trends, any investment related to technology in powertrain, driver interface (navigation maps, parking assist), and clean energy is expected to be recouped more quickly, as the demand for these technologies is greater than for other sub-classifications," added Ramani.
A challenge for most VCs, however, is the time required for a return on their investment.
"Generally, an average VC investment horizon would be five to seven years, within which companies need to adopt new technologies/products and get OEMs to use them on their vehicles," remarked Ramani. "In some cases, the rate of adoption by OEMs may delay the time it takes for VC investment to break even."
Despite this challenge, the VC community is optimistic about its future role in the automotive industry.
If you are interested in more information on this study, please send an e-mail with your full contact details to Katja Feick, Corporate Communications, at katja.feick[.]frost.com.
Venture Capital (VC) Investment Trends in the European Automotive Industry (M7CE-F1) is part of the Financial Benchmarking in the Business and Financial Services Industry subscription, which also includes research services in the following markets: Financial Benchmarking & Analysis in the Automotive Industry, Financial Assessment of the Global Aerospace & Defense, Airlines and Airport Services Industry, Financial Analysis of the Information Technology Industry. All research services included in subscriptions provide detailed market opportunities and industry trends that have been evaluated following extensive interviews with market participants.
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Venture Capital (VC) Investment Trends in the European Automotive Industry / M7CE- F1