Automotive Ventures is emerging as the global Seed-stage Mobility venture firm.
Three years ago, we decided to launch our first mobility-focused fund.
Fast forward to today: we’ve made 25 investments out of two funds and we’re about to start raising our third.
Success in life has a lot to do with timing, and we’re benefitting from strong macro trends pushing us forward: the pace of change and innovation across the Mobility landscape is accelerating, providing significant wealth creation opportunities.
Our focus is simple and singular: positioning Automotive Ventures to win.
What does that look like? Let’s reflect on what we’ve learned so far and discuss the path we’re on, as we focus on funding the next wave of innovation in transportation technology.
The firm allocates time across four functions:
1. Helping our investments (Portfolio Companies)
2. Managing our startup pipeline
3. Working with our investors (Limited Partners)
4. Managing our Brand
For today's discussion, we'll continue with section 3: How we work with our investors (Limited Partners).
PRIORITY: LIMITED PARTNERS (LPs)
VCs invest money on behalf of their Limited Partners (LPs). These LPs are typically High Net Worth (HNW) individuals or institutional investors.
When LPs allocate their money to a VC fund, they typically expect at least a 3x-3.5x return on this capital. (i.e., If they invest $1M, they expect to see at least $3M-$3.5M returned gross of fees).
So, if a VC fund raises $25M, they ultimately have to return at least $75M to satisfy their LPs. The fund might invest $500K into ~25 startups, holding back 50% of the fund to support their entrepreneurs to participate in future funding rounds. To return $75M, this means that each startup, on average, would need to return at least $3M to the investor.
But this isn’t how typical early-stage VC portfolio companies perform. In fact, research from Harvard professor Shikhar Ghosh has shown that about three-quarters of venture-backed firms in the U.S. don't even return investors' initial capital.
In venture capital (especially in Seed stage, where we invest), fund performance will be attributed to a small number of winners. Our job is to find and get into the right deals.
Investing at the Seed stage means that these are all risky investments, any of which could easily go to zero. Our job is to diversify across 20+ investments, while having a very high-quality bar: to avoid deals that lack high potential upside.
The “Power Law” is a phenomenon that describes the distribution of returns in venture capital investing: a small number of investments in a portfolio will generate the vast majority of returns. If you miss out on the top deal, you’re going to miss out on most of your returns.
In his book Zero to One, Peter Thiel explains, “The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund…This leads to rule number two: Because rule number one is so restrictive, there can’t be any other rules.”
Automotive Ventures aims to deliver long-term capital appreciation by investing in early-stage automotive and mobility technology companies that are best positioned to benefit from the industry’s biggest trends; seeking out innovative companies with strong potential for growth and profitability.
We believe every investor should have a strategic allocation to innovation, not only to access potential exponential growth opportunities typically absent from other asset classes, but also to hedge against the increasing risk that industry incumbents will be disrupted.
Alpha is one of the key metrics used to evaluate the performance of an investment and is defined as a portfolio manager’s ability to outperform a market index, when adjusted for risk.
How does a fund generate above-average returns? Delivering Alpha can be attributed to multiple factors, outlined below.
Propriety Deal Flow: One of the most effective ways to find alpha is to identify promising companies at an early stage of their development. Access to superior deal flow is driven by “proprietary” networks and the Brand of the VC fund. (you can skip ahead to see how we think about the Automotive Ventures brand)
Domain Expertise: Our experience, network, and expertise run deep in the space. We also benefit from the tailwinds behind the massive changes coming to Mobility.
Value Creation: We invest resources to help our companies improve their products, access new markets, and make their teams more productive: lowering the mortality rate of our investments and improving our internal rate of return (IRR). We add value through strategic introductions, business-building, and future financing support.
Portfolio Construction: We believe in building a large and diversified portfolio (including diversity of founders, geography, and industry). By working with many diverse companies at once, we aim to simultaneously insulate ourselves from risk and increase the chances that we’ll select winning companies.
Investment Strategy & Process: Alpha is produced through the successful formulation and execution of investment strategy, process, portfolio construction and management. We focus our internal operations to allow ourselves to parse, digest and prioritize the multitude of potential choices and ultimately select a portfolio of companies that is optimized for the Power Law returns of this asset class.
Investment Mindset: We believe in the importance of an articulable, iterative, scientific and repeatable investment process.
Portfolio Management: Portfolio management has been empirically shown to result in fewer portfolio company bankruptcies as a result of focusing time and resource on the correct company. There is debate around concentration of a VC’s time, with the rational, non-emotional investors recognizing that so-called “loser” investments should be abandoned, and time and resource focused on the “winners”.
Fund Size: Historical fund performance analysis indicates that smaller funds in aggregate perform better on a net multiple and net IRR basis. Smaller funds have greater long-term persistence than larger funds. (Link) Smaller funds tend to outperform. (Link)
Differentiation: Specialist funds tend to outperform. (Link) We believe that investment in Mobility solutions will uniquely alleviate many of humanity’s biggest challenges; making dramatic advances in the way we move humans and cargo. This potential impact is one of the key reasons investment into Mobility startups is pacing at an all-time high. Venture capital funding is being deployed across a number of categories, including micromobility, electrification, connectivity, autonomy, air mobility, last-mile delivery, subscription, ride-hailing and even space travel. (Link to our Investment Thesis)
Emerging Managers: Emerging managers tend to outperform. (Link)
(if you liked this article, read on for how think about building the Automotive Ventures brand) (link)