How Will Pure Play Public LiDAR Companies Use Their Money?
Six LiDAR companies have gone public to date (starting in 2020) via SPAC (Special Purpose Acquisition Companies) mergers. These include Velodyne, Luminar, Aeva, Innoviz, Ouster and Aeye. Two more (Quanergy and Cepton) are scheduled to do so later this year. SPAC mergers have been around for a while, historically as avenues of last resort for entering public equity markets. This changed in 2020 (because of the pandemic?) during which 60% of the IPOs (Initial Public Offerings) were SPAC mergers focused on diverse areas like healthcare, automotive and real estate, with a particular focus on early stage high potential growth sectors such as satellite services, electric vehicle, and other autonomous technologies/services. SPACs offer a way for disruptive and technology driven companies to raise large amounts of money by promising revenues and profits in the future, as opposed to traditional IPOs which need to show historical performance. They create an avenue for public investors and large PIPEs (Private Investors in Public Entities) to participate in the potential growth and success of these companies.
The six LiDAR companies mentioned above raised over $1B in private funding prior to going public. The SPAC mergers brought in an additional $2.6B. The billion $ question is — how will this money be spent until the time they become profitable and generate cash?
As discussed in a April 2021 photonics webinar organized by SPIE (Society of Photo-Optical Instrumentation Engineers), there seem to be three large buckets where the money would go:
- Investments in manufacturing and supply chain
- Recruiting & retaining high quality & experienced people
- Mergers and Acquisitions
Manufacturing and Supply Chain Investments
The average valuations of the six companies when they went public was $1.8B (ranging from $1B for Innoviz to $2.9B for Luminar). The average 2030 TAM (Total Available Market) that was projected by these companies was ~$120B, in markets like automotive, trucking, healthcare, smart infrastructure, smart cities, robotics and industrial automation. Achieving this scale of revenues (and growing the stock price) requires manufacturing partners and a robust supply chain, especially in the optics arena. This is especially true given that none of these six companies have the experience or infrastructure to build the millions of LiDAR units required to realize these revenues. In the automotive world, most car companies require the involvement of specialized automotive Tier 1 suppliers to guarantee reliable, performance-compliant product on a just-in-time basis. Additionally, these LiDARs typically use specialized optical components like lasers, detectors, electronics, scanners and lenses. The optics supply chain needs to be engaged to customize and develop these components. This typically requires substantial capital, development and NRE (Non Recurring Engineering) and testing outlays.
Recruiting and Growing High Quality Talent
Investments in recruiting and retaining high quality talent in technical, managerial, sales and operations arenas is essential. Technical talent includes optics, electronics and software. Competition from other industries (defense, social media, internet, consumer electronics, defense and space, quantum computing) is intense in these areas, exacerbated by the fact that many LiDAR companies are located in high cost-of-living areas like San Francisco. AV (autonomous vehicle) stack companies have internal LiDAR groups vying for the same talent. Managerial talent is required to pivot the company from a venture funded start-up to a high-growth operational company with the experience to deal with public investors, sophisticated customers, public investors, regulatory bodies, media and suppliers. Automotive executives are in special demand because of their relationships and deeper insights into customer acquisition, supplier management and manufacturing scaling. These employees are expensive to recruit and retain, although having equity compensation is a good lure.
Mergers and Acquisitions
There are ~70 LiDAR companies in existence today (private and public), spanning different technologies and areas of market focus. Clearly, all of them cannot survive, scale and continue to go public or raise private funding, until they become profitable. Figure 2 illustrates the landscape from a technology perspective.
Of the six LiDAR companies to go public, two are in cell ❶ (Velodyne, Innoviz), two in cell ❸ (Luminar and Aeye) and one each in cells ❷ (Aeva) and ❹ (Ouster). Cepton and Quanergy fall in cells ❶ and ❹ respectively. Consolidation in the LiDAR space is likely to occur, primarily by these six companies using some of the new cash ($2.6B) to acquire other companies. The motivations are to acquire new customers and markets, or to fill technology and product gaps. This is already occurring. Ouster recently acquired Sense Photonics to create synergies in the technology and supplier management fronts (both use photon counting and work at the 8XX-9XX nm wavelength). It also enables Ouster to more effectively address the automotive market. More such transaction are likely to occur between and within cells ❶ and ❹.
Cells ❷ and ❸ operate at the 15XX nm wavelength, where lasers, detectors and optics are substantially less industrialized and significantly more expensive. For these companies to be profitable, continuing to procure these components externally is expensive (from customization and gross margin perspectives). Acquiring strategic suppliers and becoming more vertically integrated may be a solution to achieve profitability, as the market industrializes and product prices drop (price points of $100–200/LiDAR for automotive deployment are typically projected by 2030). To do this, BOM (Bill of Material) costs need to be in the $50–100 range, with the optics occupying ~50% of this. This is incredibly difficult to achieve without vertical integration. Luminar recently acquired a specialty detector supplier (Optogration), a company they had been working with for the last five years as a supplier of APDs (Avalanche Photo Detectors). It would not be surprising if these companies continue to look for acquisitions, especially in the laser arena and silicon photonics arena. Non-optics automotive players are also entering the acquisition fray. Indie Semiconductor, which recently completed a SPAC merger, raised several hundred million dollars and acquired Teraxion, a specialty laser company based in Canada.
As money is consumed in the above buckets, it is worth looking at operating expenses and burn rates in these six companies. On average, each had a non-GAAP loss of ~$25M in the second quarter of 2021. The forecasts in their SEC filings project profitability in the 2023–2024 timeframe at gross profit margins of 50–81%. Will the auto firms buy into allowing margins at those levels or will buyer power impact these dynamics? Assuming another 2–3 years until positive cash flow is achieved, a big portion of the $2.6B will likely be consumed on supplier chain, infrastructure, employee, and operating costs. Acquiring real customers, markets and revenues are key to correcting the cash-burn trend.
M&A transactions are also likely to occur as players fill gaps in product offerings, secure critical supply chain pieces, de-risk customer acquisition, and attempt to add more transportation software and SaaS based service offerings. Given the cash-burn balancing act, larger deals are likely to occur on an all or partial stock basis. This is great as long as prices rise. However, as discussed by John Dexheimer (President of Lightwave Advisors) in a recent article, the total valuation of the newly public LiDAR companies has dropped by ~50% on average from January-August 2021. Mr. Dexheimer¹ notes further: “Those that can play the long game of profitless prosperity of serving cost and reliability sensitive automotive firms can survive and thrive, but they may need more cash investment as push-outs and price and margin pressures play out.”
Getting more money was difficult enough. Figuring out how to spend it judiciously is going to be harder!
Sabbir Rangwala, is a Board of Advisor for AutoM8 (A Fountech Ventures portfolio company). In the past he has led the automotive LIDAR business at Princeton Lightwave until 2017. Currently the Founder at Patience Consulting, the company provides expertise on AVs, perception and LiDAR. Patiently!
