Text/Sabbir Rangwala
Since the beginning of 2020, six lidar companies have gone public through SPAC, namely Velodyne, Luminar, Aeva, Innoviz, Ouster and Aeye, while two other companies, Quanergy and Cepton, are scheduled to go public as SPAC later this year. SPAC has been around for a while and was previously often seen as a last resort for businesses to go public, but that changed in 2020. During the year, 60% of IPOs were achieved through SPAC in healthcare, automotive and real estate, with a focus on high-growth potential industries in the early stages, such as satellite services, electric vehicles, and other automation technologies/services. Unlike traditional IPOs, which require demonstrative historical performance, SPAC offers disruptive and technology-driven companies a way to raise large amounts of money by promising future revenues and profits. It creates a pathway for public investors and large PIPEs to participate in the potential growth and success of these companies.
The six lidar companies raised more than $1 billion in private funding before going public and received an additional $2.6 billion after SPAC went public. So how will these funds be used before they start generating profits and cash? There seem to be three general directions:
Invest in manufacturing and supply chains
The average valuation of the six companies at the time of listing was $1.8 billion (ranging from $1 billion in Innoviz to $2.9 billion in Luminar). According to these companies' forecasts, the average total market volume (TAM) in markets such as automotive, trucking, healthcare, smart infrastructure, smart cities, robotics, and industrial automation will reach $120 billion by 2030. Achieving revenue at this scale (and increasing share prices) requires manufacturing partners and strong supply chain support, especially in optics. Considering that none of the six companies have the experience or infrastructure to build millions of lidar devices to achieve this revenue, they need to invest in manufacturing and supply chains. In the automotive sector, for example, most automotive companies require the involvement of professional Tier 1 automotive suppliers to ensure timely access to reliable, performance-compliant products. In addition, these lidars often use specialized optics such as lasers, detectors, electronics, scanners, and lenses, which requires the optical supply chain to be involved in the customization and development of these components, and often requires significant funding, as well as spending on development, NRE (non-recurring engineering) and testing.
Recruit and develop high-quality talents
Investments in recruiting and retaining highly qualified talent in the fields of technology, management, sales and operations, which span optics, electronics and software, are critical. Competition from other industries, such as defense, social media, the Internet, consumer electronics, space, quantum computing, and more, is fierce in these areas, and many lidar companies are located in expensive areas like San Francisco, further exacerbating the competition, not to mention that the lidar teams within the self-driving stack companies are also competing for the same talent. Transforming a company from a venture-backed start-up to a high-growth operating enterprise requires managing talent and dealing with public investors, established clients, regulators, the media and suppliers. Automotive executives are particularly popular in the market because they have a close relationship with customers and have deep insights into customer acquisition, supplier management, and scale manufacturing. The cost of recruiting and retaining such employees is high, although equity pay is a good temptation for them.
Mergers & Acquisitions
There are currently about 70 lidar companies on the market, both private and public, and their operations span different technology and market segments. Obviously, not all companies will succeed in achieving their goals of survival, raising private money, scaling up, and going public until they are profitable. The chart below shows the market environment from a technical point of view.
Of the six lidar companies listed, two are in ❶ grid (Velodyne, Innoviz), two are in Luminar ( Aeye ) , and two are in ❷ grid (Aeva) and ❹ grid (Ouster). Cepton and Quanergy are in the ❶ and ❹ lattice, respectively. If the six companies use the $2.6 billion raised after the listing to make acquisitions, a merger is likely to occur in the lidar space. Acquisitions are motivated by acquiring new customers and new markets, or filling gaps in technology and products. In fact, this is already happening: Ouster recently acquired Sense Photonics to create synergies in technology and supplier management (both use photon counting and focus on 8XX-9XX nm wavelengths), which will allow Ouster to respond more effectively to changes in the automotive market. Similar transactions may occur between ❶ and ❹ lattice.
The ❷ and ❸ lattices focus on the 15XX nm wavelength, a field where lasers, detectors, and optics are much less industrialized and much more expensive. For companies that want to make a profit in this space, it is very expensive to continuously source these components from the outside (from a customization and gross margin perspective). As markets industrialize and product prices fall (lidar for automotive deployments is expected to reach $100-200 per lidar by 2030), acquiring strategic suppliers and becoming more vertically integrated may be the way to achieve profitability. To do this, the cost of the BOM (Bill of Materials) needs to be controlled in the range of $50-100, of which optics account for about 50%. This is difficult to achieve without vertical integration. Luminar recently acquired Optogration, a specialist detector supplier that has been working with the latter for the past five years to supply APDs (avalanche photodiodes). It wouldn't be surprising if these companies continue to look for acquisition opportunities, especially in the laser and silicon photonics sectors. In addition, manufacturers focusing on non-optical automotive have also joined the ranks of acquisitions. Indie Semiconductor recently completed the SPAC merger, raising hundreds of millions of dollars while acquiring Canada-based specialist laser company Teraxion.
Due to the rapid consumption of funds in the above areas, it is necessary to look at the rate at which these six companies burn money on operating expenses. On average, non-GAAP losses per company for the second quarter of 2021 were about $25 million, and they predict gross margins of 50%-81% for 2023-2024 in filings with the U.S. Securities and Exchange Commission (SEC). Will automakers allow their gross margins to reach such levels? Will the power of buyers have an impact on them? Assuming another 2-3 years to achieve positive net cash flow, a significant portion of the $2.6 billion could be spent on supply chain, infrastructure, employees, and operating costs, and the key to correcting the burn-in trend is to capture real customers, markets, and revenue.
M&A deals can also occur as companies need to fill product supply gaps, secure key supply chain links, reduce customer acquisition risk, and try to add more shipping software and SaaS-based service offerings. Considering the "burn money balance method", larger-scale transactions are likely to be carried out in the form of all or part of the stock. As long as the stock price can rise, this way is still good. However, as John Dexheimer, president of Lightwave Advisors, discussed in a recent article, from January to August 2021, the total market capitalization of newly listed lidar companies fell by an average of about 50%. John Dexheimer further noted: "Companies that can provide unprofitable services to cost- and reliability-sensitive car companies over the long term can survive and thrive, but as delayed deliveries and price and margin pressures increase, they may have to prepare more cash." ”
Getting more money is already difficult, and figuring out how to allocate it wisely will become even more difficult.
Sabbir Rangwala is a Forbes contributor.