DIFFERENCES IN ELECTRIC VEHICLE START-UP COMPANY FUNDING MODELS AND ITS EFFECT TO LOCATION OF COMPANY ESTABLISHMENT PDF Free Download
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DIFFERENCES IN ELECTRIC VEHICLE START-UP COMPANY FUNDING
MODELS AND ITS EFFECT TO LOCATION OF COMPANY ESTABLISHMENT
Lappeenranta–Lahti University of Technology LUT
Master’s Programme in Industrial Engineering and Management, Master’s thesis
2024
Mikko Vainio
Examiner(s): Professor, Timo Pihkala
Post Doc. researcher, Tuuli Ikäheimonen
ABSTRACT
Lappeenranta–Lahti University of Technology LUT
LUT School of Engineering Science
Industrial Engineering and Management
Mikko Vainio
Differences in electric vehicle start-up company funding models and its effect to
location of company establishment
Master’s thesis
2024
63 pages, 21 figures, 2 tables and 1 appendix
Examiners: Professor, Timo Pihkala; Post Doc. researcher, Tuuli Ikäheimonen
Keywords: Electric vehicles, start-up, innovation, funding, financing, incentives, public
funding
This thesis focuses on examining the geographical differences in financing instruments
available for electric vehicle start-up companies and whether these differences affect the
locations where these companies are established. Additionally, the thesis identifies the
funding models that enable EV start-up companies to reach the mass production phase in the
swiftest possible manner.
The research aims to enhance the understanding of different funding models used and the
importance of funding for business growth. It also aims to increase understanding of how
funding and public incentives can have significant short- and long-term effects on start-up
businesses and local economies.
The study utilizes quantitative research, with exposure to qualitative methods as well. The
first section of the study provides a comprehensive overview of the theory related to the
research, followed by multiple case study introductions. The empirical data used in the
analysis section is collected from open sources and through interviews with various
stakeholders.
The thesis highlights the differences in funding possibilities between different geographical
areas and the importance of selecting the most feasible financing instruments to support
businesses in a capital-intensive start-up environment.
TIIVISTELMÄ
Lappeenrannan–Lahden teknillinen yliopisto LUT
LUT Teknis-luonnontieteellinen
Tuotantotalous
Mikko Vainio
Sähköautoteollisuuden start-up yritysten rahoitusmallien alueelliset eroavaisuudet ja
niiden vaikutus yrityksen perustamisalueen valintaan
Tuotantotalouden diplomityö
2024
63 sivua, 21 kuvaa, 2 taulukkoa ja 1 liite
Tarkastajat: Professori Timo Pihkala, Tutkijatohtori Tuuli Ikäheimonen
Avainsanat: Sähköautot, start-up, innovaatio, rahoitus, insentiivit, julkinen rahoitus
Tämä diplomityö keskittyy tutkimaan maantieteellisiä eroja rahoitusinstrumenteissa, joita
on saatavilla sähköautoja valmistaville start-up yrityksille. Tutkimus keskittyy myös siihen,
onko näillä eroilla vaikutusta siihen, mihin yritys päätetään perustaa. Tutkielma pyrkii myös
tunnistamaan rahoitusmallit, jotka mahdollistavat näille yrityksille massatuotantovaiheen
saavuttamisen mahdollisimman nopeasti.
Tutkimuksen tavoitteena on parantaa ymmärrystä käytetyistä rahoitusmalleista ja
rahoituksen merkityksestä liiketoiminnan kasvulle. Tutkimuksen tavoitteena on myös lisätä
ymmärrystä siitä, miten rahoitus ja julkisen sektorin kannustimet voivat vaikuttaa
merkittävästi start-up yrityksiin ja paikallisiin talouksiin lyhyellä ja pitkällä aikavälillä.
Tutkimus hyödyntää kvantitatiivista tutkimusta, mutta sisältää myös laadullisia menetelmiä.
Tutkimuksen ensimmäinen osa keskittyy antamaan kattavan yleiskatsauksen tutkimukseen
liittyvästä teoriasta, jota seuraa useiden case-yritysten esittely. Empiirinen aineisto, jota
käytetään tutkimuksen analyysiosassa, on kerätty avoimista lähteistä ja haastattelemalla eri
sidosryhmiä.
Tutkielma korostaa rahoitusmahdollisuuksien eroja eri maantieteellisten alueiden välillä ja
rahoitusinstrumenttien valinnan tärkeyttä yrityksille, erityisesti pääomavaltaisessa start-up
toimintaympäristössä.
ACKNOWLEDGEMENTS
I would like to express my deepest gratitude to my supervising professor for his invaluable
guidance, support, and for being incredibly helpful and positive throughout the making of
this thesis.
Special thanks to my children and other close ones, for their patience and understanding
during all the moments which I spent in front of the laptop.
I am also grateful to all the stakeholders involved in this project, especially the individuals
who participated in the interviews and provided valuable insights.
Thank you all for your support and contributions.
ABBREVIATIONS
EV Electric Vehicle
FDI Foreign Direct Investment
ICE Internal Combustion Engine
ICEV Internal Combustion Engine Vehicle
IPO Initial Public Offering
IPR Intellectual Property Rights
OEM Original Equipment Manufacturer
R&D Research and Development
SME Small and Medium-sized Enterprise
VC Venture Capital
Table of contents
Abstract
Acknowledgements
Abbreviations
1 Introduction .................................................................................................................... 2
1.1 Background of the study ........................................................................................ 2
1.2 Theoretical framework and focus of the study ...................................................... 3
2 Literature review (theory) ............................................................................................... 5
2.1 EV start-up companies as a part of automotive industry ....................................... 5
2.2 Business strategies ................................................................................................. 6
2.3 Funding strategies for start-up companies ............................................................. 8
2.4 Funding green technology companies ................................................................. 11
2.5 Financing instruments .......................................................................................... 15
2.5.1 Start-up companies and funding cycle development ....................................... 17
2.5.2 Studied effects of government subsidies ......................................................... 19
2.5.3 Foreign Direct Investment (FDI) ..................................................................... 21
2.5.4 Venture Capital equity investing ..................................................................... 21
2.5.5 Crowdfunding .................................................................................................. 22
2.5.6 Angel investing ................................................................................................ 23
2.5.7 Initial Public Offering (IPO) ............................................................................ 24
3 Empirical and quantitative study .................................................................................. 25
3.1 Quantitative data of EV start-up company funding ............................................. 27
3.2 Case study companies .......................................................................................... 27
3.2.1 Toroidion, Finland ........................................................................................... 27
3.2.2 Lightyear One, Netherlands ............................................................................. 28
3.2.3 Sono Motors, Germany .................................................................................... 29
3.2.4 Rimac Automobili, Croatia .............................................................................. 30
3.2.5 Byton, China .................................................................................................... 31
3.2.6 NIO, China ....................................................................................................... 31
3.2.7 WM Motor Technology Co., China ................................................................. 32
3.2.8 Lucid Motors, United States ............................................................................ 33
3.2.9 Rivian, United States ....................................................................................... 33
3.2.10 Faraday Future, United States ...................................................................... 34
3.3 EV start-up funding geographically ..................................................................... 34
4 Research analysis.......................................................................................................... 39
4.1 Comparative analysis of funding ......................................................................... 39
4.1.1 Equity investments, origins and availability of FDIs between areas ............... 46
4.2 Pace of funding compared to company maturity ................................................. 48
4.2.1 Europe .............................................................................................................. 48
4.2.2 China ................................................................................................................ 52
4.2.3 United States .................................................................................................... 53
4.3 Funding models compared to theoretical model .................................................. 55
4.3.1 Funding model comparison ............................................................................. 55
5 Summary of findings .................................................................................................... 59
5.1 Summary of the research ..................................................................................... 59
5.2 Research questions and findings .......................................................................... 61
5.3 Reliability of the results and suggestions for future research .............................. 61
6 Conclusions .................................................................................................................. 62
References ............................................................................................................................ 64
Appendices
Appendix 1. References
1 Introduction
1.1 Background of the study
Background of the study lies in understanding the funding models of the electric vehicle
manufacturing business. For the past century, internal combustion engine (ICE) powered
vehicles have dominated the automotive industry, but this tradition is now rapidly changing
and completely or partially electrical motor-powered vehicles are increasing their share of
vehicle sales year after year. The main cause in accelerating change towards electric vehicle
(EV) technology in Europe comes from Paris Agreement, led by European Union. Paris
agreement follows earlier agreed and adapted Kyoto Protocol, aiming to reduction of
greenhouse gas emissions on NDC level by minimum of 40% by the year 2030, when
comparing to the greenhouse gas emission levels of 1990 (European Commission).
Electric vehicles have been a limited segment in car manufacturers’ research and
development since the 1970s. It wasn’t until 2006 when EV technology and EV
manufacturing started to take a giant leap forward when a start-up company titled as Tesla
Motors started to produce high-end electric vehicles in the United States. This was a turning
point in the automotive industry and other car manufacturers started to accelerate their work
with research and development of electric vehicles (U.S. Department of Energy). Nowadays,
nearly all the major car manufacturers either have a fleet of electric vehicles already on the
market or in planning. The automotive industry is however in a change regards to
manufacturers, as the availability to the electric drivetrain technology has significantly
increased. During the past 15 years, only two new original equipment manufacturers (OEM)
were registered in the automotive industry, but the amount of specialty OEM companies in
the EV segment is on arise (Gao, Kaas, Mohr & Wee 2016). These specialty OEM start-up
companies aim to severely disturb the automotive industry and are seen as a high-potential
investment opportunity for several reasons. Many of the most promising start-up companies
in this sector are filled with management staff from large legacy OEMs. These start-up
companies also lack the heavy payload of ICE technology-based engineering and
manufacturing infrastructure, making these companies more agile to bring their innovations
to the market.
The funding to the over 50 existing EV manufacturers is received from multiple sources.
These multiple sources include institutions such as Venture Capital (VC) investment
companies, who are looking for high-return investments, large automotive legacy OEMs
such as Ford and GM, who are looking for high EV technology availability without starting
the development of technology from the beginning, e-commerce and digitalization
companies such as Amazon, who are looking for high-return investment and broadening
their own future product portfolio and of course group funding (Lienert 2019).
A major part of EV start-up companies are founded to the United States or to China. When
considering 40% of the largest vehicle producing companies being European, 20%
American, 30% Japanese and 10% Korean, the mismatch between areas is obvious (Maps
of World). The mismatch may have various reasons such as lack of education in some areas,
lack of capable work force or infrastructure in some areas, or lack of available funding in
some areas. The future of mobility is tied together with renewable energy, and understanding
the limiting financial factors in starting and growing electrical vehicle businesses can be
argued to be important, in order to keep Europe as a competitive area for establishing EV
businesses.
1.2 Theoretical framework and focus of the study
Focus of the study is in determining competitive advantages of different areas globally,
describing and analyzing the common funding models used to finance green technology
driven industry start-up companies, and understanding the effects these have in start-up
company foundation country. Competitive advantages of different nations and areas are
analyzed through theoretical background research studies, whereas the economic theory
describes more the modern funding models of growth companies. The theoretical framework
is collectively utilized to combine the common theoretical models of growth companies.
This research aims to enhance the understanding of different funding models used and the
funding’s importance for business growth. Aim of the research is also to increase
understanding on how funding and public sector incentives could have significant long-term
effects to local economies and business ecosystems and to understand whether different
funding models could have an effect to grow EV start-up companies more swiftly also in
Europe.
This research aims to find answers to following questions: “How do the funding models for
start-ups differ between China, North America, and Europe?”, “How do different funding
models influence the decision of where to establish a start-up?”, “What role do government
grants and subsidies play in the location choice of start-ups?” and “How have the selected
funding models contributed to the growth and sustainability of case start-up companies?”.
Research methods used are segmented to several different areas, which are theory collection,
empirical data collection, data analysis, model creation based on analysis, testing model
versus theoretical framework and final conclusions.
Theory is collected from previous studies, referred research articles and also from sovereign
parties’ studies. Access to the sovereign parties’ studies is maintained through publicly
available databases, and also by individually received studies from interviewed persons.
Empirical data consists of history data of selected case study companies. The case study
companies were selected from different areas to ensure the most objective research approach
as possible. After determining and selecting the case study companies, these companies were
contacted and a part of them interviewed with a pre-set question frame. Addition to the
questionnaire, the data validation of the companies’ growth and funding was requested to be
provided to ensure a fact-based data set.
Empirically collected data was compiled to a format which enabled an effective analysis to
be prepared and areal, as well as company-level differences to be understood.
The case study interviews consist as detailed information as possible about the funding
models used by the start-up companies, the funding raised by the companies and also some
qualitative questions about the selection of country where company has been founded.
Objective for the case study interviews is to understand the full picture about company
funding and ensure sufficient and thorough data, which enables objective analysis to
determine the effect it has for company foundation area.
To ensure the validity of this research, multiple case study companies were selected and
researched from different geographical areas. The collected data included quantitative data,
as well as qualitative data from interviews, which were thoroughly analyzed. Based on the
results and conclusions of this research, the importance of utilizing incentives and other
funding instruments in different stages of the company age can be reliably determined.
2 Literature review (theory)
This chapter includes the theoretical framework of the research. Included theory consists
mostly of corporate investment and growth-related literature, but also includes extensive
theory of innovation management.
2.1 EV start-up companies as a part of automotive industry
The mobility system globally can be considered unsustainable, bringing possibilities to
introduce new technologies, such as electric vehicles. EVs are not a new innovation but
rather an innovation that has finally found its correct era. The radical innovation and
utilization of EV is currently shaping the transport segment and completely differing from
the established Internal Combustion Engine Vehicles (ICEV). As the technical design of
EVs is largely differing from ICEVs, the requirement for new skills and new manufacturing
technologies are required and emerging constantly (Wesseling, Niesten, Faber & Hekkert
2013).
In many business segments, alongside automotive industry and car manufacturing, strategies
of businesses can be split into three main categories; first movers, quick followers and
laggards. All of these strategies are comprehensive, including innovative, financial and
resource capabilities to reach success and wished outcome (Wesseling, Niesten, Faber &
Hekkert 2013).
Companies, which are able to innovate new technologies radically and swiftly, are
commonly others than companies, which already have existing and strong market positions
and established technology to keep a solid competitive market share in their business area.
Profitable companies with solid technologies are not as radical in innovations as start-up
companies, as radical innovations might endanger the already set up competitive positions
in established markets. Based on research by Wesseling et al, it has been expected by less
profitable companies to introduce more electric vehicles to the market than by OEM car
manufacturers (Wesseling, Niesten, Faber & Hekkert 2013).
Swann (2009) has argued that company’s opportunity to innovation is depending on the
financial possibilities available, which can also be measured against a company’s capital
available for research and development activities, which in automotive industry is extremely
capital consuming. Indirectly linked to the financial possibilities available, research and
development activities require also other assets, such as technological, infrastructural,
reputational and complementary assets. These can be broken down to specific personnel
knowledge required, manufacturing infrastructure required, supply chain readiness required
and also the brand, which is directly linked to how the consumers see the manufacturer. In
case the company does not have asset readiness in these four fields, this in minimum requires
additional financial investments to prepare company in new technology innovation;
recruitment of new knowledge, acquiring new manufacturing premises, building competitive
supply chain network and re-branding the company through intensive marketing campaigns
(Swann 2009).
OEM car manufacturers, such as Volkswagen, BMW, Mercedes-Benz, Nissan, Toyota and
GM are prime examples of companies possessing ready technologies, manufacturing
facilities, supply chains, customer base and brands in passenger car industry. Overall annual
research and development spending in these OEM companies have raised highly after EV
revolution has started with Tesla guiding the way to electric mobility. The transition from
ICE powered car manufacturing to electric vehicle manufacturing can however be seen as a
task requiring major spending, which the EV start-up companies can avoid by not having
the historical legacy of ICE-based technology and brand (The top 20 global OEMs are going
big on EV R&D).
2.2 Business strategies
Business strategies play a major role in determining how well companies are able to exploit
new and technology breaking innovations. Commonly the business strategies are split into
three main three types of strategies: first movers, quick followers and laggards. These three
strategies determine the pace and ability to drive business towards renewal, ability to ensure
new emerging technologies to be utilized in the core business and ability to avoid trapping
in legacy elements which always are built into the companies’ operating models (Wesseling,
Niesten, Faber & Hekkert 2013).
First movers are the companies which are first to develop and utilize ground breaking
technological innovations and harnessing these innovations to develop pioneers of mass
markets in their segment. These first mover companies always aim to stay ahead of potential
competition by ensuring solid investment in research and development functions to ensure
their technological advantages are not compromised by competitors (Lieberman &
Montgomery 1988). In EV manufacturing segment, Tesla can be considered as the first
mover and in public eyes as even the synonym for an electric vehicle.
Quick followers are the start-up companies which see the market potential revealed by first
movers, but intend to only copy the functional portions of their operations. These companies
with a quick follower strategy do not want to make the costly errors which first mover
companies always face when bringing new and unregulated technologies to mass markets.
Quick followers do however have a challenge which first movers hardly have; they have
more competition. In the EV manufacturing segment, companies such as NIO, Xpeng
Motors and Lucid Motors can be considered as the quick followers, utilizing the public mass
market opened by Tesla but making market penetration with less risky technology and less
regulatory resistance. In EV segment, quick followers also benefit from the public funding
incentives created by nations globally for green mobility. Some of the OEM car
manufacturers have adapted quick follower strategy and are following closely the created
start-up companies in EV segment (Lieberman & Montgomery 1988).
Laggards are companies which tend to avoid radical renewal and usage of new technologies.
These companies are the ones avoiding increase of R&D spending and see first movers and
quick followers to acquire the new market shares first. EV manufacturing segment includes
large amounts of laggard companies, including many of the OEM car manufacturers
possessing large legacy components in their businesses. Investments to R&D activities in
these companies have been standardized during last decades and the major leap from ICE
powered cars to electric vehicles is not promptly adapted (Lieberman & Montgomery 1988).
Companies with solid funding channels or with a strong balance sheet can be considered
more enabled to use resources in research and development of new technologies and become
the quick followers. Especially in the case of being a major OEM, it is unlikely to begin
development of completely new technology with large possible monetary upside but also
with a huge potential downside regards to risks and quality, related to first move strategy.
Furthermore, companies with solid funding are able to not only innovate products, but also
ensure these products are effectively brought to the market (Bohnsack, Pinkse & Kolk 2014).
Based on Bohnsack, Pinkse and Kolk (2014), earlier studies have lightly analyzed the path-
dependent behavior of companies and how this affects the formation of the companies’
strategies and possible strategy renewal.
“Path-dependent behavior might cognitively constrain incumbents in finding
new ways for value creation, as they prefer to stay close to what they are
familiar with and to rely on a continuation of past successes. Nevertheless,
these firms do have “a stable source of income from old business models that
can cross-subsidize new business models” (Sosna et al., 2010: 403).
Conversely, entrepreneurial firms are less constrained by path dependencies
which makes them more flexible in designing more radical business models
from scratch, but lack the resources to sustain a process of experimentation
for a longer period of time (Sosna et al., 2010). It is therefore not clear upfront
how the extent to which incumbent and entrepreneurial firms are driven by
path-dependent behavior will affect business model evolution in an emerging
industry.” (Bohnsack, Pinkse & Kolk 2014, 3-4).
It can thus be argued, that the swiftly developing automotive industry will be facing
adaptation to the changing technological environment, which requires well controlled and
managed hybrid business strategies for large car manufacturing corporations (Bohnsack,
Pinkse & Kolk 2014).
2.3 Funding strategies for start-up companies
During the past decades, there have been numerous studies (e.g. Correa et al 2010; Hyytinen
& Toivanen 2005) made about companies’ innovation activities, what are the factors driving
these activities and what is the role of funding in driving innovation further. There have been
many factors identified which affect to this, such as the segment of the industry and region
of the activity. Also, company size and age do have relations to the effect. Combined, all the
determined factors have been used to identify and determine most reliable theoretical
framework which can be utilized (Hoff 2012).
Innovation is seen as the basis of a company’s development, being strongly connected to
growth potential and pace. During his career, Schumpeter studied the relation between
innovation process and resource allocation, of which he derived three main bullet points.
Innovation always depending on investment, innovation being strongly embedded in
companies and financing being required in order to release resources from their current usage
to achieve new combinations. In most other studies relating to innovation, financing is seen
as a required resource and there is a positive relationship found between financing and
innovation. Importance of financing is found especially significant in smaller companies.
Internal financing, finances generated within a company by retained earnings and
depreciation, is considered as the key enabler for innovation activities, as any constraints
related to financing correlates directly to reduced research and development spending,
causing also reduced interest in utilizing new technologies. This also leads to reduced growth
of the company (Hoff 2012).
Internal finance is only one way to fund company’s innovation activities and in case of start-
up companies, the first revenue from the operations is available for further utilization only
after a period where the operations have been stabilized and gaining net income enabling
revenue. Differences between debt and equity financing have been studied in order to
understand how the different forms of financing relate to companies’ innovation activities.
Debt financing is available for nearly all companies, however seldom utilized for high risk
innovation development as it introduces the liability to repay the investment with interest.
Equity financing, when compared, does bring the required financial resources available to
the start-up companies, without the payback liability. Equity financing also often brings
more to the company than financial abundance; this form of financing also brings intellectual
and competence resources in to the company board, which on its part assists in leading the
innovative start-up company into success (Hoff 2012).
Hyytinen and Toivanen (2005) have concluded in their studies that government funding is
one of the methods boosting innovation activities. Commonly this form of funding relates to
certain innovation project, rather than a common funding of the company. Innovation
projects are giving start-up companies a way forward to invest in innovation activities,
without adding short- or long-term liabilities in their financial portfolio. The value of
government funded projects is however challenging to assess, as they are managed in a way
to follow strict regulations and guidelines of the financial instruments selected. The projects
are directed and finalized to mainly ensure compatibility with the investment guidelines,
rather than to maximize the value addition to the company itself. It can be challenged
whether the government funding of innovation projects is indeed value adding for the
companies or if there would be room for improvement. Researcher of this thesis recommends
a further study on this topic and on how the value of government funding could be
maximized for the companies seeking such investment. Based on studies, government
funded projects do still have a positive effect to the companies’ growth, whereas long-term
debt and other financial constraints turn the effect on negative (Hyytinen & Toivanen 2005).
Illustration of a company’s or innovation’s evolvement during different periods of evolution
is shown in figure below. The found opportunity or idea requires formation and conception
in a so-called start-up phase, which is the first capital-intensive period. In the start-up phase,
it is critical to ensure that the idea will be conceptualized with sufficient detail and sufficient
financial resources. As the idea or concept does not have any revenue creating value at this
point, it will be heavily depending on external financing or internal funding allocated to
R&D activities. Sales activities are lightly initiated in the start-up phase and fully activated
during the next evolution phase, early growth or commercialization. Though sales activities
are activated, cash flow from the innovation is estimated to turn positive only during the late
phase of the commercialization period. Dependence to external financing declines linearly
once cash flow turns into actual revenue, which can be utilized to finance the expansion and
growth phase of the innovation. Lack of financial resources accrues a barrier for the
development of new innovations and technologies, as the first phases of the development are
most capital intensive. In EV manufacturing segment, this includes major items such as
development of the technologies, products, company structures, marketing, sales,
manufacturing and supply chain capabilities. The model is compared and analyzed with
regards to EV manufacturing segment in more detail in section 4 of this research (Hoff 2012).
Figure 1: The one-firm, one-technology case – A financial perspective (Hoff 2012).
2.4 Funding green technology companies
Hoff’s study titled “Green tech Innovation and Diffusion – A Financial Economics and Firm-
Level Perspective” was published in 2012, having broad research on green technology
companies’ funding, public incentives and policy instruments utilized. Research (Hoff,
2012) conducted it being argued that the determined policies, in order to be successful, are
required to support innovation processes. Policies do come with cost, but are one of the
drivers to enable market reach readiness faster. Free market mechanisms are alone not
sufficient to give strong enough support for new technologies to develop and mature the
markets, as the demand, supply and cost levels are not readily aligned.
Effective commercialization is challenging and collaboration between all stakeholders and
counterparties is required to ensure good commercialization of new technologies. It is also
required to include new counterparties to the collaboration and try to detach from the
traditional stakeholders. Aim of including non-traditional stakeholders is to minimize the
effect of historically rooted social and institutional practices and ensure open-minded
development. According to Hoff (2012), the sociotechnical system, which needs to be
included into development of new technologies’ market entrance, includes all direct
stakeholders such as governments, educational institutions and distribution channels. This
sociotechnical system is also influenced by the public opinions and perceptions of developed
technologies, perception of economy and perception of the environment. As a whole, firstly
governments address the guiding regulations and policies, secondly public people address
the view and standpoint of average consumers towards new technologies and also whether
people are willing to pay premium for the newly implemented green technologies, and
thirdly insufficient market signals of research and development as well as insufficient
incentives for green tech companies do create significant barriers to technology innovation.
Policy initiatives directed towards green tech transformation, and also politically directed
incentives, can thus have a significant impact on the new technology innovation
development and market creation. Below figure provides an overview of the main
instruments used in the green tech context worldwide.
Figure 2: Policy instruments and actions (Hoff 2012).
There are several different ways to incentivize new technologies entering markets and also
already developed technologies which are seeking to increase the segment’s market size. In
earlier studies, three key terms have been used for these; polluter-pays principle and
instruments, demand-pull instruments and supply-push instruments. Whilst it may not seem
significantly important at first glance, it is crucial to understand the different incentive
elements, how they really function and which market stage is each of those actually suited
for and best supporting. Studies have also pointed out that it is important to understand how
other investment instruments operate, in order to avoid the subsidies to cut out possibilities
of other financing for the companies. This relates to ensure that companies have availability
not only to subsidies (e.g. direct grants) but also simultaneously to other investment
instruments (e.g. venture capital or crowdfunding).
Polluter-pays principle focuses to ensure that each company and product that causes
pollution is held ultimately responsible to cover higher pollution with higher compensation;
and vice versa. According to Hoff (2012), though early studies suggested this approach to
best support green technology’s innovations and expansion, the debate has since increased
to understand more thoroughly whether this is a correct policy measure to best support
adaptation of green technologies. The innovation and diffusion theory find that demand-pull
instruments would be ideally used with more mature technologies. Whereas new
technologies are best supported by supply-push instruments.
Incentives in green technology have a possibility to be effective and boost innovation,
however many details behind need to be understood. First, effectiveness and efficiency of
the policies behind incentives cannot be assessed in a proper manner. Second, it is
increasingly evident that no one policy would be better than another one and lastly, the
parties addressing and designing the policies should understand and consider the bigger
effects of the made policies to the financial markets.
Green tech-relevant financial research literature includes two main financial streams. These
streams are corporate finance, consisting mostly of venture capital funding, and project
finance. The approach and effect of these two financing streams is very different. Where
project financing focuses in financing green tech projects, in EV world this could be e.g. a
project for developing a new battery technology for a certain car model, corporate financing
focuses to fund the company funding as a whole. Corporate financing thus allows the firm
to grow and also make internal decisions to invest in research and development activities.
Project financing aims to more directly develop exact technologies and taking the developed
technologies to market.
VC investments have proved to be effective in many business segments, such as internet and
biotechnology. VC investments have not only boosted the innovation and growth, but also
driven the professionalization of invested companies. This is thus also considered as a
potential financing method for green tech companies, including EV manufacturer start-up
companies. In 2007, the early years of green tech adaptation, VC investments did rise from
previous year for about 50 times, but still calculated only up to 4% of overall investments in
the segment. One of the main reasoning behind this was found to be the mismatch between
applying companies’ characteristics and the VC investor’s requirements and criteria for
acceptance. Lack of experience in making deals among Green tech firms and also lack of
successful exit stories effected level of VC investments. Biggest challenge in VC
investments to the segment was the fact that green tech investments seemed not to provide
the same level of return on investment as other segments, thus making it unattractive for
investors (Hoff 2012).
Green tech segment has been one of the industries, where government support and incentives
were an important source of funding already in the beginning of major green tech
innovations. Study (Diefendorf 2000) has shown that VC investors possess a tendency to
avoid industries with a high dependence in governmental funding. In one hand this seems to
make VC investors more reserved, on the other hand it is suggested by some authors that
both private and governmental funding are required to support any investment gaps in
innovation-to-market chain.
Sociotechnical systems are in favour of conventional technologies, thus not boosting green
tech innovations. This does make policy actions important and also makes the policies play
a significant role in bringing innovations to the market. Governmental policies also support
the innovations without causing harm to economic welfare overall, though designing correct
mix of policies is seen very challenging. Importance to connect the governmental policies
and incentives into private finance and investment markets cannot be highlighted enough as
the policies largely support availability of company and innovation financing (Hoff 2012).
Therefore, it can be argued that governmental subsidies play especially important role in
new technology areas, such as green technology. As the business cases for these new areas
may not yet be validated by competitors, there is a considerable loss of capital risk, which
the financing party must be able to absorb. When governmental subsidies are correctly
positioned, these may offer private funding parties additional security and thus lead to
increased levels of private funding. As a result, new technology area innovations may not be
considered as such a big risk element, but rather as a medium risk and high return possibility.
Availability of financing is seen as the mandatory item to enable research and development
activities of green tech companies. Without sufficient access to financing, green technology
innovations are more vulnerable to stay in phases of prototyping, without proper
commercialization phase. Thus, also the level of funding is absolutely critical to be on
sufficient level and enable the full innovation and implementation of innovations.
2.5 Financing instruments
The selection of different available financing instruments is broad. Selection of instruments
into the financing basket of the company determines the capital structure of the company.
This structure determines the cash inflow side and how the different company assets are
funded and improved, as well as how the costs associated to liabilities are fulfilled. In case
a firm does not have sufficient access to required funds to support new innovations or growth
strategies, this can be described as company having financial constraints.
In basic terms, the different funding sources can be split into three different classes; equity
instruments, debt instruments and hybrid instruments and these combined are split into two
different categories, inside and outside financing.
“Equity instruments are composed of retained earnings, the principal owner's
equity, angel finance and venture capital. Debt instruments are comprised of
commercial bank instruments, borrowings from other financial institutions,
trade credit, government funding, credit cards and borrowings from
individuals. Hybrid instruments combine aspects of equity and debt capital
forms, e.g. government grants with subsidized loan elements.” (Hoff 2012, 84-
85).
“Inside finance embraces all capital sources that are either directly connected
to the firm or are closely related to it, e.g. friends and family. Outside financing
is received from banks, private investors, government institutions, institutional
investors and stock- and bondholders.” (Hoff 2012, 84-85).
Corporate finance, capital structures and funding instruments are terms tied tightly together.
Corporate finance as such determines how a company is financed and how its investments
are organized and financed. Commonly the theory behind corporate finance has assumption
of solid and flawless capital markets, where no constraints are present, e.g. effect of taxes or
any transaction costs are not considered. When considering capital structures, this way of
thinking values each way of financing at the same level and thus devalues the importance of
the planning a firm’s capital structure. Debt financing does however have one benefit over
other ways of financing, which is related to tax benefits and may lead to corporation
valuation to reach higher level (Hoff 2012).
In corporate finance, it is also considerable that in existing and long-term operating
companies, the level of understanding of the business, the business segment and markets
overall is commonly better than which the banks for example may have. Whereas in the
fresher companies, and especially in new market segments, the banks may actually have a
better understanding of the markets and realistic business capabilities than the company’s
owners and founders. This is one of the reasons why start-up companies do not have an equal
access to debt financing as the bigger, existing companies have. Commonly start-up
companies are seen riskier to fund, which usually also requires entrepreneurs and managers
to act as the agents for the corporate debt to reduce risk elements for the bank.
The capital structure of a company may initially be developed through two ways, either by
a static trade-off theory or a financial pecking order. In trade-off theory, the company
assesses financing possibilities by weighing up advantages and disadvantages of each
financing instrument and possibility. Following the assessment, the capital structure is
optimized based on results. The pecking order theory aims to keep company equity in
company’s own hands for as long as possible, utilizing firstly internal funding, secondly debt
financing and only use equity financing as the last resort (Myers, 1984).
Myers (1984) has modelled that when companies are undervalued, as start-up companies
usually are, they are offered financing with higher rates than already settled companies. This
high cost of debt will increase possibility of a company to go and utilize all other possible
financing possibilities first, as the repayment of overpriced capital would also start to
immediately strain the capital of the start-up company, whereas non-existing revenue
streams would not support the debt repayment. This would additionally undervalue the
company and can also cause an underinvestment problem. As start-up companies are riskier
than larger and older companies, the funding also has to be organized in a different way.
Inside capital supports the start-up phase with need for it declining after company growth.
2.5.1 Start-up companies and funding cycle development
Following figure visualizes a model, proposed by Berger and Udell (1998), of small and
medium sized companies’ financing. The model is well in line with the financial pecking
order theory, and including elements from the trade-off theory by Myers (1984). However,
the financing constraints of e.g. debt financing unavailability for start-up companies are also
present in the model.
Figure 3: Firm continuum and sources of finance (adopted from Berger & Udell 1998).
Upon the starting of a company, it commonly does not have a sufficient network and
customer base, which are required to make an impression to potential investors. Especially
with debt financing, lenders do require certain track record and order book in order to grant
debt financing with efficient terms. After time has elapsed and business experience had been
gained, companies gain more focus on their business idea and operating model, including
finding revenue streams and potential customers, which then turns the business’ original
concept into actual sales and revenue. This is commonly the phase, when companies are
ready to seek for debt financing.
Companies often initiate their business funding by insider financing, where investments are
done directly to the company by e.g. the founders, their friends or their relatives. Insider
finance does cause a high risk of capital loss with the investor, but causes no additional
financial strains for the company itself. This allows the company to use invested capital fully
into development and operations, without having the burden of simultaneous lent capital
repayment. Additionally, insider financing does not require the owners to lose any of the
company’s equity, which can be seen as an advantage on all aspects.
When a starting company and its products evidence considerable growth and market
potential, they are also able to seek for initial external funding, such as angel finance and
venture capital. These two funding instruments act similarly on the side of company being
funded, but are differing on the investor’s side. Company being funded gains capital in
exchange of an equity stake of the company, a stake which is based on the capital need,
market prospects and pre-post valuation. Angel investors are wealthy individuals who act as
direct investors, whereas venture capital is offered through separate investment funds, which
have collected the investment capital from various sources. Government support funding is
often an additional, supportive form of investing, which acts as benefit for both the company
and its external investors. Successful VC backed start-up companies often aim to reach
public equity funding, also called Initial Public Offering (IPO), which can be considered as
the final stage of available funding. Once the company has agreed to arrange IPO, it will
mean the company’s public stocks will be traded in public stock exchange.
Short-term and mid-term financial institution loans are ways to gain more operative capital
for a short period of time. These short- and mid-term loans do possess lender’s risk
mitigation terms, making them quite expensive for the company utilizing the funding. Long-
term debt obligations from banks are commonly agreed to in a later, less risky phase of the
company’s growth, when debt terms and collateral requirements can be met more easily. In
this phase, the cost of debt is also less straining, making it possible to be considered as a way
of leverage with major benefits. In case the company has been able to create solid and
reliable relations to a bank in early phases of its journey, it may assist in receiving better
terms for debt obligations earlier in its funding journey. Gaining access more easily, and
with better contractual terms, to early stage loans through well maintained relations with
financial institutions is in literature also referred as relationship lending.
As a conclusion, it is more difficult for young companies to raise capital to support daily
operations and growth, with growth always requiring additional capital to be successful.
Creating and industrializing technical innovations consume time, effort and materials, which
can be seen as a challenging task. Creating a realistic corporate finance strategy can be found
as a key to achieve success especially in company’s early years. When status of the company
and cash flow has been stabilized, access to debt financing becomes increasingly easier and
has less contractual constraints. The usage of financial intermediaries offering complex and
structured products will also be not required, which makes financing cheaper and enhances
growth possibilities further (Hoff 2012).
2.5.2 Studied effects of government subsidies
Government subsidies and incentives are utilized globally, with each region and country
having their own regulations and guidelines. The subsidies are commonly granted through
national or regional incubators or companies, and can origin from unions, such as European
Union, from regional central banks and the banking sector overall, or from regional
government budgets aimed to increase attractiveness of each region. Subsidies and
incentives can be issued in several forms, which each have their own purpose to boost
especially small and mid-sized enterprises’ (later referred as SME) innovation and
commercial capabilities (Tamminen, Haanperä & Hietaniemi 2018).
Incentives in the form of tax benefits are commonly utilized with growth investments. In
electric vehicle start-up segment, tax benefits may be e.g. given to companies based on where
their manufacturing and headquarters are being located, as the location is very important to
governments and regions aiming to increase their rates of employment. Also, regional
country and city planning politics play a role, as politic regulations aim to guide how urban
habitant will be built in short- and long-term future. Planning the environment and eco-
system in a way, which supports sustainability, public transportation, overall quality of life,
and yet enabling production to meet demand is a challenging task and requires incentives to
support functional realization (Tamminen, Haanperä & Hietaniemi 2018).
Tax benefits are also utilized to enable a swift major increase in market share of new
technologies, such as electric vehicles and other green energy transition related products,
when provided directly to consumers. Increasing the market share of the new technology
directly begins to create increased demand, which requires to be balanced by a robust level
of supply. It can be argued, that consumer tax benefits and EV start-up company investments
are indirectly interlinked with each other and in order to support each other properly, they
would need to be managed within the same political and economic frame (Tamminen,
Haanperä & Hietaniemi 2018).
Enabling innovation development and boosting introduction of new innovations and
businesses to export markets are considered as major enablers of economic growth. Direct
grants to businesses for both, developing innovations and trying to create export markets for
new innovations, are easily usable and nearly risk-free financing instruments, which are very
interesting for start-up companies. Utilizing direct grants do not often require large amount
of own investment capital and are thus also very popular within the start-up segment. On
regional level, e.g. in Finland, the direct grants are levelled from smaller grants, to test the
ideas and products, to larger ones, which are meant to enable larger export market surveys
and activities to ensure that developed innovation is commercially viable. Regarding
innovation development, aim is to enable innovation development and testing with keeping
the bar to apply for grant financing low (Tamminen, Haanperä & Hietaniemi 2018).
Lending programs, including the possibilities for convertible loans, are commonly granted
to finance larger innovations or growth. Companies which are in the early phases of their
journey and having limited access to sufficient collateral to enable seeking of external debt
financing, may be eligible to utilize government backed-up lending programs. Government-
backed lending programs utilize the same institutional banking system, with the exception
that government guarantees the issued loans. This enables smaller innovation or growth
companies to seek for larger capital to boost their growth or fulfil their innovation’s capital
requirements. Commonly these lending programs require the funded companies to pay back
the loans, however it is possible to also have the loans, either partially or fully, converted
into a grant with no pay-back requirements (Tamminen, Haanperä & Hietaniemi 2018).
The effect of subsidies to companies, in terms of growth and boosting innovation, has not
been widely studied in global context. In 2015, Rauhanen et al. made an analysis regarding
company subsidies mainly on national level, concluding also that lack of research
availability relates to difficulties in finding suitable research cases, which would include
robust data with controlled settings. Nationally, in Finland, the issued grants and their
impacts are mainly monitored through set simple KPIs, increase in investments and increase
in employment (Tamminen, Haanperä & Hietaniemi 2018).
Einiö (2015) found in his research that subsidies increased research and development
investments by 40 percent in general, meaning one euro in subsidies increasing general R&D
investments by 1,40 euros. Rauhanen et al. (2015) analysed effects of subsidies also on
global level, but found very limited results for this topic. Certain studies find subsidies
having some positive impacts, whereas other studies do suggest subsidies being merely a
substitute to other investment vehicles, which would have been used in case subsidies has
not been available. In research, there hasn’t been found evidence that subsidies had increased
overall general productivity of the companies (Tamminen, Haanperä & Hietaniemi 2018).
2.5.3 Foreign Direct Investment (FDI)
Foreign direct investment is a term used for investments made to companies abroad, with
becoming a major shareholder and having an affective voice in the management of the
foreign company. Investment companies, as well as other institutions, are commonly able to
invest to domestic and foreign companies. Investments can however be made with many
angles of interest; receiving a good monetary return in investment, enabling a strategic
partnership or acquiring a larger share of the company through an FDI investment (Pugel
2006).
An investment to a foreign company becomes officially an FDI when the investment,
meaning any flow of lending or exchange to ownership, leads to the company, individual or
country making the investment owning or gaining 10 percent or more of the foreign
company’s ownership. Foreign direct investments are monitored closely, as trade politics are
heavily involved due to foreign parties having an effective voice in companies (Pugel 2006).
Foreign direct investments in electric vehicle segment have increased significantly during
past years, as governments aim to reduce the global supply shock effects and protect home
markets, as well as increase domestic employment with conditional tax credits (US chases
plans of domestic EV supply chain).
2.5.4 Venture Capital equity investing
Venture capital, also known in young businesses as equity capital, is a form of investment
provided by investment institutions such as mutual funds, specialist venture capital firms or
even wealthy individuals with commonly a large portfolio. The investment is provided by
these investors in a way, where they take a risk and buy a stake of the company with a pre-
agreed sum of investment. Venture capital can be raised in different phases of the company’s
maturity, and commonly the first series investments gain largest stakes of the company
(Brealey, Myers, Marcus 2007).
Venture capital investing is often considered when a company is seeking ways to finance its
swift growth. Venture capitalist funding is usually used to support building the required
growth infrastructure, such as sales, marketing and manufacturing capabilities. Venture
capital is not a long-term funding, and is usually requiring a fast exit in a form of corporation
sale or IPO. The large investment portfolio allows these institutions to make high-risk
investments in the form of venture capital. Venture capital firms often manage the high risks
and high levels of capital requirements by combining a group of venture capital investors
together, which can also benefit the funded company in a form of broader visibility and
publicity (How Venture Capital Works). Risks are also managed by placing the investors to
the board of directors in the invested company (Brealey, Myers, Marcus 2007).
2.5.5 Crowdfunding
Start-up companies and growing businesses are also able to seek funding via crowdfunding
campaigns. This is a possibility to raise money in a flexible way, by using crowdfunding
online platforms. Simultaneously, once money is lent by individual persons, this will
enhance the possibility to cultivate a proper community already from the start of the idea or
business. The power of a community is a non-tangible asset for marketing the business idea
forward (Crowdfunding explained). Crowdfunding is often utilized as a way to collect a
relatively small value investment from multiple investors, and not common for gathering
large investments. The United States and Europe have been the forerunners in utilizing
crowdfunding, with Asian businesses rapidly growing to be the biggest area to utilize
crowdfunding. (Kallio, Vuola 2018).
The platforms created for crowdfunding are websites enabling interaction between
individual people and the company raising money. Commonly investing in crowdfunding
campaigns is requiring a pre-set target to be reached, or investors are given their investment
back. Crowdfunding’s return on investment can be organized in many ways, as per below
table (Crowdfunding explained). Some of the identified risks related to crowdfunding have
been related to the regulatory side of the funding model. In example in European Union, one
common legislative regulation package hasn’t been able to be created for crowdfunding,
causing national regulations being created (Kallio, Vuola 2018).
Peer-to-peer lending
The crowd lends money to a company with the understanding that
the money will be repaid with interest. It is very similar to
traditional borrowing from a bank, except that you borrow from
lots of investors.
Equity crowdfunding
Sale of a stake in a business to a number of investors in return for
investment. The idea is similar to how common stock is bought or
sold on a stock exchange, or to a venture capital.
Rewards-based
crowdfunding
Individuals donate to a project or business with expectations of
receiving in return a non-financial reward, such as goods or
services, at a later stage in exchange of their contribution.
Donation-based
crowdfunding
Individuals donate small amounts to meet the larger funding aim
of a specific charitable project while receiving no financial or
material return.
Profit-sharing /
revenue-sharing
Businesses can share future profits or revenues with the crowd in
return for funding now.
Debt-securities
crowdfunding
Individuals invest in a debt security issued by the company, such
as a bond.
Hybrid models
Offer businesses the opportunity to combine elements of more
than one crowdfunding type.
Table 1: Main types of crowdfunding (adopted from Crowdfunding explained).
2.5.6 Angel investing
Angel investors are wealthy individuals, using their own money to make high-risk high-
return investments in early stage companies. Although the angel investors make their own
investment decisions, it is common that angel investors work together in groups or as a part
of an angel investor network (Edelman, Manolova, Brush 2017). Angel investors offer
funding in return for an equity stake of the company or royalties. As angel investors are
usually former business leaders or entrepreneurs, they usually keep the requested equity
stake below 25% of the company, as there is understanding to ensure keeping most of the
company in the ownership of the entrepreneur (What are angel investors?). The investments
of business angels can be one-time investments, or recurring smaller investments (Edelman,
Manolova, Brush 2017).
Angel investors prefer to act as investors in the early stage of the company. This stage can
be anything from the innovation being just as idea, or until the companies have had their
initial round of funding completed. Commonly angel investments are followed by VC
funding, which then enables the company a larger possibility to grow (What are angel
investors?).
2.5.7 Initial Public Offering (IPO)
IPO refers to a privately-owned company listing its shares on a stock exchange, which
enables share purchasing and selling for everyone, including general public. IPO is a time-
consuming process requiring a large support from other parties, such as consultants and
investment banks. An invest bank commonly acts as the underwriter, and is responsible for
creating all necessary paperwork, scheduling all required meetings with potential investors,
setting the share price for the moment of listing and also issuing the actual shares to
investors. After the listing activities have been successfully completed, listed company’s
shares are accessible to be traded for everyone (What is an IPO?).
IPO is also called as a primary offering, or secondary offering. In primary offering, the raised
capital from selling shares to public is used to raise cash for the company. One of the leading
reasons to arrange IPO for a privately-held company is to enable original investors to cash
out their investments, which is called a secondary offering. In a secondary offering, the
shares sold to public are shares from the early investors. Secondary offering can also be
governments selling their share of a state-owned companies, and this type of secondary
offerings might be some of the biggest ones due to the large scale of the ownership (Brealey,
Myers, Marcus 2007).
Other reasons to arrange IPO may include: raise of additional operating capital by selling
shares to the public, other avenues to raise capital have been disabled or are too expensive
or creating more visibility for the company and its products.
3 Empirical and quantitative study
Electric vehicle segment is currently a very active area of industry and alluring a large
amount of start-up companies to compete with the OEM manufacturers of traditional
automotive industry. As automotive industry is a very capital-intensive one, the funding
requirements for these Start-up companies grow higher than with some other industries.
Thus, possibilities to arrange and receive major funding for an EV Start-up is in a very
critical role when thinking of mid-term planning of the business. These funding possibilities
can be split into multiple ones and require a personalized strategy for each company. As
such, EV Start-up companies’ funding possibilities do not differ from normal funding
possibilities in the market (International Energy Agency, Global EV Outlook 2019).
The current and future EV market share is driven largely by areal and global politics, agreed
emission cut targets and also consumers’ behavioral change. These market creating forces
indirectly effect also to the funding possibilities and capabilities in each geographical area.
When a market is created through governmental policies, it creates a funnel of activities
required to effectively deploy the actual supply channels and infrastructure to meet created
demand. Firstly, the end users of products, in this case electric vehicles, need assurance of
the product’s benefits as well as assurance that their total cost of ownership does not become
notably higher. This does require reliable supply channels but also government subsidies e.g.
in form of EV usage tax reduction. Norway and China are examples of effective market
creators, with government-lead governance. In China the users of EVs are given government
subsidies and the EV sales nearly doubled between 2017 and 2018. At the same time, China
indirectly offers significant incentives for EV manufacturers through governmental funds,
in order to keep supply and demand somewhat in balance. As China does not have a solid
OEM manufacturer base but has gained a lot of expertise in past decades due to OEMs
outsourcing their car and parts production to China, a lot of these incentives are offered to
EV Start-ups of which there are many located in China. The government is also contributing
to create a charging network infrastructure to meet the usage requirements. In Norway, the
share of EVs from newly sold cars was around 73% by end of year 2018, which means an
annual 20% growth in share from 2017 to 2018. Norway has a strong subsidy system in place
for EV drivers, which has influenced largely with EV deployment in the country. Opposite
to China, Norway as an economy is however lacking the manufacturing of EVs and relying
in import of electric vehicles (International Energy Agency, Global EV Outlook 2019).
Many of current EV Start-up companies are privately held and all of the funding data is not
publicly available. Based on 3 example cases’ average, the public information does cover
approximately minimum 70 percent of the funding data. For this research, publicly available
quantitative funding data of following EV Start-up companies were investigated.
• Europe
o Sono Motors, Germany
o Rimac Automobili, Croatia
o Lightyear One, Netherlands
o Toroidion, Finland
• China
o NIO
o WM Motor Technology Co.
o Byton
• United States
o Faraday Future, California
o Lucid Motors, California
o Rivian, Michigan
Additionally, two EV start-up companies, having a funding strategy combining public and
private funding, were interviewed for data validation and qualitative data research purposes.
From local and European level, following institutions and industry analysts were interviewed
to understand details of available public funding possibilities and how the public funding
sector is expected to develop in the future.
• European Comission, DG Mobility and Transport Unit, Belgium
• Ministry of Transport and Communications, Finland
• Sitra, Finland
• Automotive business analyst, Germany
• Automotive consultant, Italy
3.1 Quantitative data of EV start-up company funding
Quantitative data of funding is mostly available for public and collected to service platforms
such as Pitchbook and Crunchbase. The unavailable data are commonly funding amounts of
angel investors and funding amounts of strategic equity investors. These investment amounts
are handled in this research as estimates or left out of the study, in case reliable estimates
cannot be built.
In European EV manufacturer market, Start-up companies have received variable types and
amounts of funding. These are presented below in detail as case studies.
3.2 Case study companies
In this section, the case study companies are presented to give the reader an overview of the
company backgrounds.
3.2.1 Toroidion, Finland
Toroidion was an innovative EV start-up company, headquartered in Raasepori Finland. The
company was established in 2010 with an intention to develop an electric vehicle that would
be capable to compete and win Le Mans 24-hour endurance race and have entirely new
technology used in its electric powertrain. Founder of the company, Pasi Pennanen, has a
long background in developing concept cars and building production models in automotive
industry. Toroidion’s first concept car, 1MW, was globally launched in 2015 in Monaco and
this was followed in 2016 by the first equity funding round. The goal of Toroidion was to
reach production phase of its small manufacturing series vehicle around 2021.
Initial funding of Toroidion was based on the founders’ own investments. In 2011, the
company received equity funding of 400 000 euros from its founders as a base equity to start
product development. Equity funding was followed by a 250 000 eur research and
development loan from Tekes, a public investment institution currently known as Business
Finland. Altough this funding is titled as a loan, it is possible to be converted partly or
completely as a subsidy, according to Business Finland.
In 2016, after the global launch of the 1MW concept car, Toroidion launched its first equity
funding round as a crowdfunding campaign through Greenspeedfund. In this series A
funding round, Toroidion received a total funding of 1 million euros. The amount of equity
released to investors in this funding round has not been published.
In 2019 Toroidion started to seek possibilities to start its Series B funding round and include
Business Finland’s research & development (R&D) loan as a part funding. Total funding
that Toroidion was planning to seek in 2019 totaled up to 4 million euros. This funding
would have been used to start small series production of the company’s EV, with production
capacity of 75 vehicles per year.
The company developing Toroidion never reached the mass production phase, as the
company was bankrupted early 2022.
3.2.2 Lightyear One, Netherlands
Lightyear One was created as a spin-off from a group called Solar Team Eindhoven,
consisting of engineering students of Technical University of Eindhoven. Solar Team
Eindhoven is a group which has participated many times to World Solar Challenge
competition with their designed vehicles. Aim of Solar Team has been to design, engineer
and manufacture a long-range electric vehicle, which utilizes maximum of the capturable
solar power by solar panels systems integrated onto the car body, is extremely aerodynamic
and uses lightweight materials. Lightyear One was founded in 2016 to commercialize this
innovative product.
First significant funding for the company was received in 2017, when Lightyear One was
granted a 1 million euros convertible loan. A convertible loan is considered as a loan for the
company in the start-up phase but will be converted into equity during the next series of
funding. In Lightyear One’s case, this convertible loan granted as seed funding was turned
into equity in 2018, when series A funding was granted.
Lightyear One made innovative efforts to raise this series A funding by arranging events
during 2017 and 2018, which it titled as “investor café” events. These events played a role
and made investors familiarize the company well before series A funding round. Lightyear
One completed their series A investment round in 2018 with total funding of 5 million euros
from over 60 venture capital investors. Granted funding was used to develop the company’s
first solar car towards production stage.
Unfortunately, the amount of funding was insufficient and Lightyear One never reached the
mass production phase, as the company was bankrupted early 2023.
3.2.3 Sono Motors, Germany
Sono Motors as an idea was initially started in 2012, when the 3 founders of the company
decided to begin making a change in mobility. At the end of 2015, the founders had
completed its first prototype with solar cells integrated and plugged in to their prototype
vehicle. Around a month later, at beginning of 2016, a company called Sono Motors was
founded.
Nine months after the company was founded, Sono Motors managed to raise its seed funding
through a successful crowdfunding campaign. By end of September 2016, company had
raised over 820 000 euros.
In 2017, funding amount was increased with over 1,8 million euros with an another
growdfunding campaign and later on with 1 million euros angel investment. In 2018, Sono
Motors managed to complete a venture capital round with total value of 5 million euros, a
crowdfunding campaign with total value almost 5,8 million euros. These investments were
topped with a 2-year payment free loan of 1,6 million euros.
In April 2019, a manufacturing contract was signed with NEVS, which is a growing electric
vehicle manufacturing producer located in Sweden and is making EV production at former
SAAB plant in Trollhättan. In May 2019, already 10 000 reservations had been received for
Sono Motors’ EV, titled as Sion.
Unfortunately, the amount of funding was insufficient and Sono Motors’s car titled as Sion
never reached the mass production phase. Sono Motors suffered from serious financial
challenges and pivoted its business from a car manufacturing company to a solar panel
manufacturing company.
3.2.4 Rimac Automobili, Croatia
Rimac Automobili is a Croatian company, founded in 2009. Main owner and CEO of the
company is still the founder Mate Rimac, who was only 20-years old when founding the
company. In 2010, the company tested it’s technology and was the first EV to win official
races against petrol powered cars. 2011, Rimac made it’s development visual and arranged
a world premiere for a fully electric supercar, Rimac Concept_One, at Frankfurt Motor
Show. 2013, Rimac delivered first prototype car to one of its B2B customers. Due to
confidentiality agreements, no details of this project have been revealed to public.
In 2014, the future of Rimac Automobili started to actualize. Rimac Concept_One was
nominated to the FIA Formula E as official race director car, which brought the company a
large amount of publicity. The same year, Rimac closed its series A funding round, with
total VC funding reaching 10 million euros against a 18% equity. Notable is that this series
A funding round included 3 investors, of which 2 were from Asia. The series A funding was
critical and required in order to set up a proper production and testing facilities for the
company’s products. During 2015, the company grew to employ more than 100 employees
and was granted 50 000 euros grant (EASME) from EU. This phase 1 EASME grant was not
directly aimed to enhance production, but consisted of development of a hybrid battery pack.
In 2016 Rimac’s first vehicle, Comcept_One, had its production version published and the
next year, dealer network expanded in three continents, North America, Europe and Asia.
2016 was also a significant year for Rimac from funding point of view, as the company
closed a 30 million euros investment for a 14% equity with China’s largest battery
manufacturer Camel Group, to be used for R&D, production capacity addition and global
expansion of the company.
Rimac Automobili entered the phase of receiving its largest funding during 2018 and 2019.
In 2018, Porsche made its first equity investment into the company against a 10% share. The
funding amount has not been published, but based on other equity investments and the
valuation, estimation of Porsche’s funding is around 30 million euros. 2019, Hyundai Motor
Co. made a strategic investment of 64 million euros against 11% equity and Kia Motors an
investment of 16 Million euros against 2,7% equity. Additionally, Porsche added its share
of Rimac with additional 5,5%, exact funding amount for this investment remained
classified. Based on other equity investments and valuations, estimation of funding is around
30 million euros.
In 2023, Rimac Automobili agreed to a joint venture with Porsche AG to reorganize
ownership of a legendary car manufacturer Bugatti. Rimac is currently valued around 3
billion euros and also owns 55% of Bugatti.
3.2.5 Byton, China
Founded in 2017, Byton was one of the fastest growing and most funded Chinese EV start-
ups. Company is originally named as Future Mobility Corporation, but named its brand as
Byton soon after founding. Founders of the company are former executives from BMW and
Nissan Motor, thus the company has been well connected to the larger automotive network
already from the beginning. Byton revealed the first prototype of current M-Byte model in
January 2018 and the final production version of the car was introduced in 2019.
Byton raised its first major funding already in 2017, over 212 million euros from Asia-based
venture capital investment companies. In 2018, total funding reached over 600 million euros,
when company closed its series B funding round with over 420 million euros. In 2019, Byton
closed yet another funding round with total value of over 440 million euros from multiple
investor sources.
Byton never reached the volume production phase, as the company was bankrupted early
2021.
3.2.6 NIO, China
NIO was founded in 2014 by William Li, who is also the Chairman in an investing company
Bitauto and in a Formula-E racing company NextEV. Company started soon after the
production of its first model EP9, which is an electric supercar. In 2019, production of NIO’s
mass market EV models ES6 and ES8 began.
NIO’s major funding started in 2015, when the company raised over 300 million euros in its
series A funding round from total 6 investors. This was followed by a nearly 300 million-
euro funding in 2016, with series B funding round including in total 9 investors. In 2017,
NIO organized two rounds of funding, series C and D. In total these two rounds brought the
company over 1,5 billion euros of capital and ensured that the company would have enough
capital to enable its mass market models’ production.
in 2018, NIO made an IPO (Initial Public Offering) and was listed in the New York stock
exchange, raising 850 million euros. Since then, the company raised 440 million-euro POST-
IPO equity funding from a private asset management and investment company located in the
UK and a 180 million-euro POST-IPO debt financing from an Asian investment company
and from the founder and CEO of NIO. In 2019, a Chinese state-owned investment company
made an equity investment of 1,3 billion euros to fund NIO’s new EV component factory
which will be located near Beijing.
In 2024, the company is mass producing vehicles to global markets, and having a valuation
of 7,5 billion euros.
3.2.7 WM Motor Technology Co., China
WM Motor Technology Co. was a Chinese, Shanghai-based electric vehicle manufacturer
founded in 2015 by Freeman Shen, a former executive of Geely Automobile and Volvo. The
company launched its first production vehicle in 2018 and had already two production plants
in 2020 producing vehicles to mass-market.
WM Motor had its first successful series A funding in 2016, when the company collected
nearly 1 billion euros as VC investment. This was followed briefly in 2017 by series B
funding round, which lead to further investments of 2,55 billion euros.
By 2018, WM Motor had opened its first production factory and in 2019 the company
collected additional 400 million euros in series C funding round. Unfortunately, due to the
Covid-19 pandemic, WM Motor began facing financial challenges and by the end of 2022,
the company had stopped all production activities. In late 2023, the company filed for
bankruptcy.
3.2.8 Lucid Motors, United States
Lucid Motors is a California-based electric vehicle manufacturer founded in 2007 by
Bernard Tse, a former executive of Tesla Motors. Lucid’s name was originally Atieva and
the company was focusing in building E batteries and powertrains for other manufacturers.
In 2016, Atieva was rebranded as Lucid Motors and also announced intentions to develop
and start manufacturing of a high-performance luxury EV.
Lucid began building up its manufacturing plant in 2019 and the plant was completed during
2020, enabling the mass production of Lucid’s first production model Lucid Air during Q4
of 2021.
The company received significant funding from Saudi-Arabian sovereign investment fund
in 2018, totaling over 850 million euros. In 2021, Lucid gathered public equity of over 10
billion euros. Company is listed in Nasdaq stock exchange and aiming to launch its second
mass production model during 2025.
3.2.9 Rivian, United States
Rivian is a Michigan-based electric vehicle manufacturer founded in 2009 by Robert
Scaringe. The company’s first prototype model was a sportscar introduced in 2011, which
was never released for production. In 2011, the company refocused its business and began
looking more towards autonomous vehicles. In 2024, Rivian has three mass production
models and annual sales of the company reached to over 50 000 vehicles in 2023.
Rivian received only 950 thousand euros of funding from undisclosed individual investors,
prior to its major funding rounds. From 2016 to 2018, Rivian had already acquired its first
manufacturing plant from Illinois, and received its first major funding valued up to nearly
500 million euros. In 2019 Rivian received additional funding of around 1,4 billion euros,
which enabled the company to fully ramp up their production and launch of new models.
In 2021, Rivian gathered public equity of over 10 billion euros and is listed in Nasdaq stock
exchange.
3.2.10 Faraday Future, United States
Faraday Future is a California-based electric vehicle manufacturer founded in 2014. The
company’s first production concept prototype model FF91 was revealed in 2017. Since 2017,
the company has been under severe financial challenges and was finally able to begin
production of the FF91 model in 2023, with the total production amounting to only 11
vehicles.
Although Faraday Future has received notable investments during 2017-2019, with received
funding totaling up to nearly 2 billion euros and additional nearly 1 billion euros from public
equity offering in 2021, the company has not been able to turn itself into a profitable car
manufacturer till 2024.
3.3 EV start-up funding geographically
Case companies for this research were selected among the most known EV start-up
companies in each area. These companies represent the major portion of EV start-ups trying
to reach production phase during 2017-2022. The funding amounts and models were
researched uniquely per company and the gathered data was validated with the companies
in the case it was possible. Based on the validation discussions, the data collected from public
sources was found very accurate and no deviation was needed to be made to the publicly
available figures.
Company amounts included in this research are as follows: from European Union 4
companies, from China 3 companies, from U.S.A. 3 companies. Most well-known EV
manufacturer Tesla Motors, from United States, was left out of the research scope due to
company size and it being considered from its maturity level already more as an Original
Equipment Manufacturer (OEM) than a start-up company.
The share of the total funding received by these companies during the company lifetime is
shown as percentage in below figure. Chinese companies represent 66% of the funding,
American companies 32% and European companies only 2%.
Figure 4: Share of total funding of EV start-up companies geographically.
In monetary value, the scale in difference can be seen clearly. During the entire company
lifetimes, the researched 4 European EV start-up companies have collected in total nearly
210 million euros, whereas American companies collected 4,8 billion euros. Researched
Chinese EV start-ups collected in total nearly 10 billion euros.
Figure 5: Investment income of EV start-up companies geographically.
When converted into average annual investments, the difference is clearly visible. European
EV start-ups were awarded in average 6,8 million euros of funding annually, American EV
start-ups 191 million euros and Chinese EV start-ups 618 million euros.
Figure 6: Annual investment income of EV start-up companies geographically.
Partially this big difference between areas can be explained by the age of the companies
researched, average company age being in researched European companies 7,25 years, in
Chinese companies 5 years and in American companies 10 years. However, the biggest
finding these figures reveal is that China can be considered as an area and a nation where
fast paced development is enabled not only through resource availability but also through
funding funnels.
Swann (2009) stated that the opportunity of a company to innovate is depending on the
financial possibilities it has available to invest in research and development activities.
However, the ability to bring these innovations to the market are requiring more in form of
assets and investing capital into these assets, which are mandatory for executing the
innovation into an idea. These assets can be categorized into 4 main ones: technological
assets, infrastructural assets, complementary assets and reputational assets.
In case the average age of the companies and cumulatively the granted funding amounts per
year are compared against these 4 main assets, Chinese EV start-ups create the best ability
to reach production phase through these enablers. In a very crucial role are the
complementary assets, which include distribution channels and manufacturing facilities. As
EV industry is extremely capital intensive, the required funding enabling the possession of
these assets is very high.
When viewing the average investments to EV start-up companies in each area and comparing
the investments cumulatively to start-up company age, it can be seen that China offers
funding-wise the best growth opportunity for EV start-up companies. American EV start-
ups have also solid funding channels and these enable production activities when the
products are ready for it. Funding of European EV start-ups are clearly behind, which is a
clear indicator of the manufacturing phase actualizing later than in other areas.
Business strategies can be categorized, according to Robinson and Chiang (2002), in three
different types of strategies: first movers, quick followers and laggards. In EV technology
space, Tesla can be considered as the technological and market first mover. The case
companies analyzed in this research however cannot be considered as the first movers,
except in their own geographical area, but as the quick followers and laggards.
Comparing the cumulative investment incomes per geographical area, it can be seen that
China as an area is trying to catch the quick follower positions in the EV start-up space and
with high amount of investments, it has also been able to secure this position in global
competition. Tesla rivals from the United States and EV start-up companies from Europe
can in this sense be seen as the laggards. This is however quite black and white statement,
based on the graphs alone and does not include possible technology details which have their
own effect to the big picture. European EV start-ups are creating EV products, but with such
technology innovations, which have not yet been utilized in the market. Though businesses
can be considered as laggards in the overall picture, some of these companies are acting as
technology pioneers with applied valued adding EV technology concepts. It can be
concluded that the European EV start-up companies are trying to differentiate to their own
niche segment inside the market. Though the niche segments can be considered as lower
volume, lower revenue and thus lower funding areas, it does create the question, whether
higher levels of investment could improve these companies’ go-to-market times significantly
and ensure pioneer positions in their selected niche. In the current globally available
engineering, manufacturing and supply chain infrastructures, the business and product
models are possible to be copied, with some required changes of course. Considering this,
the companies which have earlier referred four main assets available are the ones which have
the biggest chance to become pioneers in their own niche segment.
Figure 7: Cumulative investment income of EV start-up companies geographically,
compared to company age.
4 Research analysis
4.1 Comparative analysis of funding
The funding models used by EV start-up companies globally differ significantly when
comparing the funding models geographically. In Europe, a lot of focus in placed on
crowdfunding especially in the first five years of the company lifetime. In Asia, direct and
indirect government incentives play a big role in improving sales, locating manufacturing
and attracting investors. In Asia, venture capital investments are the most significant way to
fund EV start-ups in the first operating years. In the United States, government grants and
tax benefit schemes are utilized in collaboration with VC equity funding.
It is notable that outside EU limits the EV start-up companies are not commonly utilizing
crowdfunding as a funding method. Within European EV start-up companies, crowdfunding
is a commonly used method of funding during early years of the company. Reasoning for
this is not clear but when comparing the first years’ total amount figures of funding, it is
clear that the funding amounts collected through crowdfunding are relatively quite small and
thus this is perhaps not considered as a suitable option of funding for fast-growth seeking
companies. Kallio and Vuola (2018) also addressed crowdfunding to be one of the newest
financing instruments created for smaller business funding needs, which does correlate with
the empirical findings. One interesting case regarding crowdfunding is European Sono
Motors, which rejected its possibility for VC funding in December 2019 and started a 50-
day crowdfunding campaign with aim to collect 50 million euros to enable start of
company’s EV production. This is one of the biggest crowdfunding campaigns ever
organized in Europe, and also the only major crowdfunding related to EV start-up
companies. In this case, the rejection of VC funding may have related to the founders of the
company wishing to keep full ownership of the company in their hands, as sharing an equity
of the company to the investors is a crucial part of VC financing, as indicated by Brealey,
Myers and Marcus (2007).
Government subsidies for EV start-up companies are available in each area researched. In
Europe these are not directly allocated to boosting e-mobility, but moreover allocated to
boost SME companies in their research and innovation and international growth plans. In
China, the subsidies are more directed to e-mobility segment, which is a focus area due to
the current high levels of pollution caused by traffic. China is the biggest and fastest growing
market for electric vehicles and the government has been investing a lot to this industry
through direct and in-direct government subsidies. In the United States, direct subsidies are
offered mainly through local cities’ given grants and are offered as a reward from allocating
the company’s headquarters or production facilities to a certain location. Additionally, it is
common that grants are issued also in form of tax credits, after the operations have started.
Above indicates that a commonly used share of investments is not globally present, but
companies in different areas are utilizing the funding channels most available for them.
Based on Himmelberg and Petersen (1994) and Scellato (2007), internal financing appears
to be the main important factor which impacts innovation and absence of financial
constraints leading to successful research and development activities. Vice versa, R&D
financial constraints lead to reduction of research and development activities and thus also
to reduced growth.
In previous studies (Hyytinen and Toivanen, 2005. Berger and Udell, 1998. Hoff, 2012),
several different options for early-phase financing have been addressed and determinations
made of which financing suits companies in each phase the best. Companies preparing
radical innovations are commonly not debt financed, as debt financed companies are seeking
to reduce risk and thus avoid radical innovations. Most commonly companies, which utilize
debt in R&D activities, are the ones already possessing a track record of successful business
operations and functionally secured products. Smaller start-up companies, which aim to
disrupt the markets with new innovative products, often do not utilize debt financing but
equity financing instead. As equity often brings and bootstraps to the company also social
equity, more than merely money, it is considered as a great enhancer of innovation.
Hyytinen and Toivanen (2005) have modeled the interaction and effects of government
funding and external capital-dependent industries and have found that public funding can
enhance and propel innovation, whilst external capital constraints work completely opposite.
All in all, studies show that external debt only enables funding of risk averse innovation
projects and harms company growth in longer run. Equity funding and government support
programs were found as sources of riskier and possibly more disruptive innovations’
funding. This correlates with the findings from empirical data, as most of the companies
(Rivian, Nio) with mixture of venture capital and government support schemes utilized are
mass producing electric vehicles even today.
The analysis can be performed by comparing the used funding methods based on company’s
founding year or by comparing funding methods per area on each actual year specifically.
Figure 8: Share of EV start-up companies’ funding methods annually in Europe.
In Europe, share of funding methods is compiled and shown in above diagram. Normally
used venture capital equity investments have been differentiated from automotive equity
investments, as those represent the level of OEM manufacturers’ involvement to the field of
EV start-ups and their financing. Convertible notes and crowdfunding can be seen as the
most commonly used methods for funding. In later phase, as start-up maturity rises, OEM
manufacturers are willing to buy equity shares of the companies, in case those are
strategically aligned with their future visions. Debt and angel investments are hardly used
among European EV start-ups. What is surprising, is that also public grants are not used in
large scale, but mainly only by one EV start-up.
Based on studies it has been also noted that government support systems assist in creating
better economic conditions for the companies and by that way also increasing possibilities
for private investments. This being the case, in long-term the government support systems
may actually help to improve overall market stability (Brer & Wstenhagen 2009; Brer
2008; Lewis & Wiser 2007; Dinica 2006; Hamilton 2009).
European Parliament’s research “Electric road vehicles in the European Union Trends,
impacts and policies” (2019) considers also EV-related public funding possibilities and
segments. From 2016 and 2017, European Parliament has been actively determining long-
term support initiatives for the important segments of next-generation batteries and the
development of necessary infrastructures to support EV adaptation. Mostly the European
grant system support in purchasing of electric vehicles, in battery research and development
and in charging infrastructure development and thus leaving limited public funding
possibilities of EV start-up companies. Based on research by Hoff (2012), clearly directed
incentives can have a significant impact on the new technology innovation and market
creation, and as in Europe the incentives are directed e.g. towards battery technology, it may
give a cause for limited grants being issued to EV manufacturers in the area. Is there an aim
in Europe to focus on the component manufacturing capabilities, which may have a lower
funding requirement and yet larger market potential, rather than car manufacturing?
When interviewed, the companies stated clearly that especially in EU, the grants were made
very hard to pursue and it is always seen unclear, what are the actual possibilities to gain
these grants. This does indicate that the utilization of grants is more or less based on
individuals, who do have a good understanding of the public funding mechanisms and are
thus able to utilize them. When interviewing the public functions, the challenge is the other
way around. Europe is lacking enough innovation funding and thus, actions are taken to
improve this situation during upcoming years. As an interview result this can be considered
surprising, especially in such high technology area where all capital, especially non-back
payable one would be considered as a major asset. A further study should be made on how
the link between public funding and start-up companies could be further developed to enable
further innovations in Europe and improve the area’s attractiveness.
Figure 9: Share of EV start-up companies’ funding methods annually in China.
In China area, equity funding can be considered as main driver for EV start-up companies.
The numbers presented in the graph also include the indirect equity investments from
China’s state-owned investment funds, but these represent in monetary value only a fraction
of the received VC investments. As can be seen, the Chinese EV start-ups do not utilize
crowdfunding and convertible notes as an investment method, though there are platforms
locally available for crowdfunding.
According to Green tech finance-related studies, the related financing can be derived to a
few implications, which can be also clearly noted in the EV start-up finance. The green tech
finance can be split into two different types: corporate finance and project finance, of which
the overall government supported financing model follows mostly project financing, where
monetary support is given to a certain project of a company. In Chinese EV start-ups, this
relates mostly to a project of creating a manufacturing facility which supports faster market
entry with volume production (Green tech Innovation and Diffusion – A Financial
Economics and Firm-Level Perspective).
A notable detail amongst Chinese EV start-ups is, that even though all the companies are
relatively young of age, the first IPO was already made in 2018. This is a clear indicator for
the fact that EV start-ups founded to China are looking for fast growth and fast access to
funding channels with large scale equity base.
As found by Kline & Rosenberg (1986) and Agarwal, Sarkar & Echambadi (2002), the
second movers or “fast second” movers are likely to avoid the largest technical obstacles of
the first movers and thus be able to find a possibility to reach great commercial success. In
EV start-up scene, many companies especially in China are aiming for this successful second
mover position. This is similar to earlier studies made in new technology companies, where
the second movers tend to be a larger number of firms rather than one individual company.
Even though start-up company investors are, based on earlier studies, looking mostly for the
high return potential from technological first mover companies, the EV segment is very high
in demand giving high return potential also for fast second movers. Chinese EV companies
each have different investors behind them ensuring financial resourcing, which indicates that
there the investment market is also active and competed in this sector, giving each second
mover entrant a potential for high growth.
In the United States, trend related to lack of utilizing crowdfunding is similar to China. None
of the researched companies had utilized crowdfunding or convertible notes as a funding
method. Venture capital from different sources has been the most used funding method for
American EV start-ups during 2017-2019. Investments from automotive OEM
manufacturers have been increasing as the start-ups are gaining more and more maturity and
their technology is reaching higher level.
The sufficient maturity level is possible to be determined from figure “3-13” (Green tech
Innovation and Diffusion – A Financial Economics and Firm-Level Perspective). In the
formation/conception/start-up phase, companies utilize equity funding from VC investors,
grant funding from public sources and equity from the founders. Early growth and
commercialization is the phase when automotive OEM companies begin equity funding of
their possible future collaborators. This phase enables best possible synergies for both
parties, as the start-up companies gain the huge support for market penetration and brand
benefits from OEMs, whilst OEMs gain the new technologies with flexible means to
influence the way of collaboration and ways to utilize the technology also in their own
product families.
Angel investments have been made in early phases of the companies, which differs from
other areas. Direct government, state and city issued grants are also actively utilized at the
point when production preparation activities are being initiated.
Figure 10: Share of EV start-up companies’ funding methods annually in the United States.
When compiling the received funding in segments per area, the trends can be seen more
clearly. In Europe and in The United States, OEM manufacturers are increasingly investing
to EV start-ups in the areas. China as an area is still lacking the OEM investments, even
though Asia has a large car manufacturer base. One explanation for this could be that OEMs
located in the area might already have a solid technology already in their use and do not see
the benefits yet to invest in the rivalling start-up companies. Some of the European and
American OEMs are left behind in the EV technology development and might see the direct
benefits to utilize technologies created by EV start-ups in their own technologies as well.
Venture capital investments from VC investment companies can also be directly seen as the
major funding method within Chinese EV start-ups and it can be argued that this has been
seen as one of the major benefits to locate an EV business to China. Availability of venture
capital has been present and has been also seen as a possibility to enable an established
company to grow fast.
Figure 11: Comparison of EV start-up companies’ funding methods annually in different
areas.
4.1.1 Equity investments, origins and availability of FDIs between areas
In previous sections, the size and availability of VC investments for this industry segment
were introduced and analyzed. Considering the fact that equity investments alone seems to
be the most significant funding method to grow an EV start-up company swiftly, it is worth
analyzing further if the successfully proven funding method is or could be further utilized
also in other areas outside Asia.
Currently the VC investments made to Chinese EV start-ups are mostly originating from
Asian sources. VC investments made to case companies between 2015 and 2019 were
approximately 93% from Asian sources and only one FDI.
Figure 12: Split between source of equity investment in China.
In the American EV start-ups, the figures were slightly different. From total 11 equity
investments made to the case companies, 37% were considered FDIs and rest 63% of the
equity investments came from investors originated in the US. Origins of the FDIs however
were split between Asian and Saudi-Arabian investors. No equity investments of European
origin were made to the case companies between 2009 and 2019.
Figure 13: Split between source of equity investment in the United States.
As described in earlier sections of the research, most European EV start-ups have not been
active in searching VC investments. From 2007 and 2019, only 8 VC equity investments
were made to the case companies, of which 50% were equity investments from OEM
automotive manufacturers. It is worth noting that from the studied 4 companies, one
company holds 75% of the equity investments.
The OEM equity investments originate 50% from local European manufacturers, but 50%
from Asian OEMs. The share between VC investments is the same, 50% of the investments
were FDIs and 50% from local investors. If compared by investments’ monetary value, only
16% of investments came from local investors and 84% were FDIs from Asia.
Figure 14: Split between source of equity investment in Europe.
Considering the successful VC funding campaigns in Asia, United States and also in Europe,
it can be argued that the possibilities to attract VC money to boost EV start-up growth already
exist, but not in an active mode. Most of the VCs investing in the industry originate from
Asia, but also investors from Middle-East are ready to invest heavily in the start-ups. Thirdly
largest equity investments in the case companies came from American investors.
During interviews of the case companies, it was clearly noted that European VCs usually
tend to find investment possibilities with less risks and lower returns, whereas foreign VCs
tend to look for the opposite – higher returns with possible higher risks. This can be one
major reason for European EV start-up companies lagging behind in company growth pace;
limited possibilities to reach and connect with international investors who would be willing
to invest.
4.2 Pace of funding compared to company maturity
4.2.1 Europe
As detailed in section 4.1, in Europe crowdfunding is one of the main funding methods of
EV start-up companies, combined with public funding possibilities, such as grants and loans
with the possibility to be converted into a grant. This is however only an average assumption
and there is variation between the companies and how the funding has been organized and
especially the pace in which the funding has been organized. On European level, these can
be found listed in more detail in table 1.
Finnish EV start-up Toroidion started operations with an equity funding from the founders
of the company, followed by a government supported convertible loan and a modest
crowdfunding campaign. Rimac Automobili, which is operating in a quite similar product
segment of electric hyper cars and accessories, began funding its operations in a similar way.
Founders funded the early days of the company until the first showable prototype was
completed and introduced. Rimac had the first VC funding from a group of 3 VC’s around
five years after the company was founded. This funding round included funding from Asian
asset management companies, which are linked also to Chinese government. The first VC
funding round can be considered as an enabler also for the second VC round three years
later, which included also a direct investment from the government of China and boosted
Rimac on to a new level. After this point, the company received growing interest and equity
investments from big OEM brands such as Porsche, Kia and Hyundai and is the only
European EV start-up which has taken in a foreign investment that can be considered as a
Foreign Direct Investment.
When comparing these two EVs and the companies behind the initial idea, there are a lot of
similarities which enable a holistic comparison to analyse the effect of selected funding
models, the pace these have been received and how it has affected the company growth rate
and product development.
Based on the qualitative data, interviews with selected companies and their publicly
available materials, the funding possibilities available have not had a major impact to the
selection of company establishment area in Europe. However, based on the comments and
other details, the selection of different area for the company might have had a huge advantage
for the business and enable the company to grow into a larger scale much faster than with
current operating model, operating area and selected funding.
When asking whether similar funding as applied by Rimac Automobili would be a possibility
for the other European EV start-ups, the companies arguably stated that this could be one
potential way ahead to grow the companies in a faster pace. Reluctance comes initially from
the fact that companies are rather tried to be kept in local hands and also due to certain lack
of trust in confidentiality, as usually in such large-scale investments the technical details and
IPR (intellectual Property Rights) of the companies’ products could be endangered. In
Europe, the utilization of public grants, so called soft money, is also a preferred way to go
ahead, instead of direct VC equity investments. Challenge has been found in the fact that
these public grants are relatively hard to receive and the offering of these grants is very
limited.
Table 2: Investment types annually per company in Europe.
The quantitative comparison and analysis between European EV start-up companies
provides a view on how the selected funding model and strategy affects to the funding
amount received to develop and grow the EV start-up company. The comparison has been
made by collecting all companies’ received funding converted into euros and by adding this
as an annually cumulative amount of funding, compared to company foundation year.
Figure 15: Cumulative investment income in Europe, compared to company’s foundation
year.
Comparing the growth in funding amount between different EV start-up companies located
in Europe indicates clearly that through both ways, crowdfunding and public incentives, the
company can develop its operation to a certain extent faster than mainly through founder
funding and public loan. Based on the data collected, the limitation actualizes when a
company aims to begin the production activities of the EV. Car industry is very capital-
intensive one, meaning it requires a large amount of capital to begin a full-scale production.
Often production is managed through own production lines, as also Rimac Automobili is
operating. Sono Motors’ manufacturing operating model differed from this and the
production of its EV, titled as Sion, was planned to be managed completely through a
subcontracting network already on the 4th year after foundation of the company. This
subcontracting operating model enables starting of production faster and with smaller
capital, but may also affect decreasingly to created gains in long-term.
Collected data does give a clear indication that for an EV start-up company, the leap in
growth does rely solely on VC investments. Based on Rimac Automobili’s funding history,
European-based VC capital is relatively modest in scale and might thus not be suitable for
capital-intensive EV start-up business. As can be indicated from the graph, the first equity
investment from Europe shown on the 7th operating year of Rimac does indicate that when
an EV start-up reaches a maturity tipping point, it acts as an enabler for e.g. OEM
manufacturers wanting to gain an equity and through that also gain utilization possibility of
developed technical solutions. Europe has a large portfolio of OEM vehicle manufacturers,
which together with findings forecasts that OEM equity investments to EV start-up
companies are likely to be seen increase in near future.
Notable detail is, that from the 4 European EV start-up companies, only one has currently a
production model available for delivery, whereas the other companies are only planning the
production activities for upcoming years.
4.2.2 China
Chinese EV market is the biggest of the world and increasing its share of EVs rapidly. One
main driver actualizing this growth is Chinese government, which has placed ambitious
goals and plans in order to decrease pollution and greenhouse gas amounts in China. This
is also the biggest reason why China also has attracted new EV manufacturers to its territory.
Chinese government has heavily used financial subsidies to assist reducing cost of EV
manufacturing, which has caused EVs to be sold below-market rates and even accrued a
situation where China has excessive amount of EV manufacturing capacity.
Chinese EV start-up scene is well funded and amounts invested in the fresh companies with
no ready production facilities, production vehicle models or even prototypes are very high.
Though these investments can be considered as risk investments, the returns may be swift as
the market is already ready to buy the products.
WM Motor Technology Co. was founded in 2015 and received a large investment already
on first operating year, which was used as a start to begin building production premises. On
the second year, company received even larger investment which was used to acquire a
licensed Chinese BEV manufacturer. In Q3 of the company’s 3rd operating year, it already
delivered its first production vehicle to a customer. NIO managed to produce its first
customer delivery on the 2nd operating year, but first mass-market vehicle was delivered on
the 4th operating year. When comparing these two delivery points from funding perspective,
the first mass-market vehicle deliveries were enabled when funding reached the point level
of 3,5 billion euros. Byton was planning the first production model to be delivered during its
4th operating year, with 1,1 billion-euro funding raised.
Figure 16: Cumulative investment income in China, compared to company’s foundation
year.
During the end of 2019, Chinese government has started to check in more detail which of
the EV start-ups are technically advanced, innovative and capable to compete in the market
which currently has a lot of new entrants. This however has potentially an effect also to the
investment attractivity, as possibilities for governments subsidies are in future limited, thus
giving an increased risk factor to the businesses.
4.2.3 United States
United States can be considered as the main driving market for 21st century EVs. After the
modern EV technology was launched by Tesla in 2007, other EV companies were founded
to follow in the footsteps of the company. Rivian was founded in 2009 and Lucid Motors in
2007. Though Tesla was successful with its first production models, competition did not
receive considerable funding until 2016, which are shown as peaks in figure 17. The total
funding received by these three EV start-ups before 2017 was only around 103 million euros
in total. In 2017 alone, these companies received in total funding of 2,1 billion euros,
followed by 1 billion euros in 2018 and 1,6 billion euros in 2019.
The US market and EV start-up company foundation is funding-wise different, when
comparing to EU and China. The innovative EV start-up companies were founded soon after
Tesla, but lacked the needed funding to start preparing for any production of their own EVs.
In 2016, Tesla unveiled their new mass-market model, Tesla model 3, which was the most
reserved passenger car in the history of automobiles with around half a million reservations
received in only 3 months. This success can be one of the main drivers when analysing the
causes in increased amount of received funding. Time-wise, 2017 was the best year also for
Chinese EV start-up companies.
The major difference in time-to-market can be clearly noted in the company age vs. received
funding. As of end of 2019, none of the researched companies had introduced a production
model of their EVs and Faraday Future only introduced its first prototype to public viewing
5 years after founding the company and 4 years after receiving its nearly 2 billion funding.
Figure 17: Cumulative investment income in the United States, compared to company’s
foundation year.
4.3 Funding models compared to theoretical model
Theoretical model of SME financing is presented in theoretical section of this thesis,
including characteristics related to firm size, firm age, information availability and how the
company’s internal funds and retained earnings are relating to these characteristics.
4.3.1 Funding model comparison
The initial starting phase of SMEs, with company age up to two years, utilize following
theoretical funding model represented in figure 3:
• Initial insider finance (owner financing)
• Angel finance (private angel investors issuing risk financing for start-up companies)
• Trade credit (enabling e.g. manufacturing or associated costs being covered, with
customer paying in a later phase)
• Short-term financial institution loans (debt finance with short payback time).
In further phases of company maturity, SMEs utilize
• Venture capital (private investors, investment companies)
• Medium-term financial institution loans (debt finance with longer payback time)
• Public equity (initial public offering, listing to public stock exchange).
Theoretical frame does not consider geographical differences of the funding models used for
SMEs, so the comparison is made without directly considering this aspect. The differences
in funding models between areas will be analysed separately.
Figure 18: Annual EV start-up companies’ funding split per funding type in Europe.
In EU area, the 0-2 years financing horizon does follow theoretical frame (figure 3) partially.
Founders’ equity funding and angel financing are the mostly used methods of financing the
SME in the initial phase, when the start-up companies are kicking off their operations. The
convertible notes are commonly not used in early stage companies, however also this
funding instrument was used by one start-up company already in its first operating year. This
however does raise the question, whether it is the most suitable timing to utilize the
instrument, as the creditworthiness of a start-up company in the starting phase is very limited
and thus the required share of equity through conversion might well be more than if utilized
in a later phase, where the volatility of repayment is lower.
The theoretical frame (see figure 3: Firm continuum and sources of finance) does not
consider all currently used funding models, such as public grants and crowdfunding. These
models of funding start-ups have raised to potential funding methods in a later phase and
thus not considered in the theoretical frame, dated to year 1998.
Public grants have been analysed further in the previous sections of this thesis and seen as
one potential way to enable sufficient funding to kick off the start-up company’s operations.
As stated earlier in the research, public grants are a good way to fund initial kick-off projects
inside the company and may even increase the creditworthiness of the start-up company
when applying for later stage financing.
Considering the amount of investment gathered through crowdfunding, it can however be
seen as a limiting factor when analysing the growth pace of the companies if utilized after
the initial kick-off phase of the company.
Trade credits are also utilized, however in the EV start-up segment the revenue collected is
very limited for a long period of time and invoicing of payables should be covered directly
from initial funding of the company.
Figure 19: Annual EV start-up companies’ funding split per funding type in China.
In China area, the 0-2 years financing horizon also follows theoretical frame partially. The
usage of venture capital clearly highlights already from the beginning phases of the
established companies, which can be also explained by the attractiveness of the business
segment also among investors and by the overall cost-efficiency of Chinese manufacturing,
compared to EU area. From the investor data it can be seen that Chinese EV start-up
companies have been invested into by large Chinese Holding companies, acting as equity
investors. Although venture capital is theoretically not the first form of funding a start-up
company, in China it has been one of the leading sources of early stage funding. It could be
argued, that the mass of available VC money in China market after the financial crisis in
2008-2010 grew significantly with China’s swift economic growth and enabled also the
easier funding for start-up companies. This argument is supported by data from Crunchbase
data in figure 20.
Figure 20: Chinese Venture Capital Deal and Dollar Volume (2014-2019). (VC Dollars For
China Take A Dip In 2019)
China has offered also public incentives for EV companies; however, these have been
relatively largely tied to enabling more cost-effective production and effects thus actualizing
at a later phase of start-up companies’ maturity. Similar approach as in EU, by issuing direct
capital grants to early phase start-up companies, has not been utilized as such. Chinese
government has however invested in EV start-up companies via dedicated investment funds,
which most likely is recorded in statistics as venture capital investments.
Figure 21: Annual EV start-up companies’ funding split per funding type in the United
States.
In the United States, a clear pattern can be found in selection of financing instruments, when
comparing practise and theory. Venture capital and angel financing have been the leading
instruments used in early years of the companies, followed by debt financing in later phases.
Final stage of start-up company financing is made by collecting public equity, in other words
by listing the company to public stock exchange through initial public offering. This has
been significantly visible regards to the companies included in this research.
EV start-up companies establishing their headquarters and manufacturing facilities in the
U.S. have also collected notable government subsidies. These subsidies have been issued in
the form of direct grants, but also in the form of tax cuts and subsidizing employment of
local workforce.
5 Summary of findings
5.1 Summary of the research
This research was conducted between January 2019 and June 2024. Study consists of
selected case start-up companies’ funding and growth research, in the industry of electric
vehicle manufacturing. Main focus areas of the research have been analysis of the used
funding models, with the aim to enhance understanding on how the selected funding models
have influenced the location of the companies’ area of establishment, shaped the companies’
pace to bring production vehicles to the market and also to increase knowledge on which are
the limiting factors when selecting the used funding models.
The differences between utilized financing instruments are also studied and effects of the
differences analysed, with focus on understanding how these have affected, or affect, with
the growth possibilities of start-up companies. The funding data utilized in this study is from
2009 to 2019. The final review to the current status of the researched companies is made in
June 2024. This review enables possibilities for possible further research, in order to
understand the most suitable funding models to support EV start-up company viability, and
to determine how the financing of an EV start-up company should be organized, in order to
ensure these companies entering to mass production phase.
Berger and Udell (1998) introduced a very good reference to understand the sources of
corporate finance, based on maturity of a company. This reference (figure 3) gives a good
understanding of the financial instruments, and also what instruments companies commonly
utilize in each phase of growth. Analysis of the collected actual data of case study
companies’ funding, when compared to theory, gives clear indication on whether EV start-
up companies actually follow the same framework for funding.
As a summary, it was found that successful companies, which stay in business and grow,
have mostly utilized the funding methods defined in the framework. It was also found that
companies which have bankrupted, since this thesis was started in 2019, have utilized
funding methods of the framework only in a limited way. Another finding is that the amount
of capital invested in the EV start-up companies significantly differs between different
geographical areas. As the car manufacturing industry is very capital-intensive, the amount
of capital needed to ensure continuum of and EV start-up is significant. Although European
manufacturers have received less investment capital compared to other manufacturers, there
have been also cases of foreign direct investments issued to a European EV manufacturer.
This signals availability of FDI funding in case the business is suitable for such investment
and funding of the company is planned wisely. Creating a realistic corporate finance strategy
has also been identified by Hoff (2012) to be a key to achieve success, with importance being
even bigger during early years of the company. Access to significant funding, such as VC
and FDI is an important enabler to company growth as well.
5.2 Research questions and findings
The analysis and comparison of funding models utilized by EV start-up companies in North
America, China and Europe was prepared by using funding data of case companies
established in each area. By analyzing the funding data, timing of the funding and
companies’ maturity in each phase of the funding, the analysis clearly assisted to identify
the funding model differences in each geographical area. These differences were thoroughly
reviewed and analyzed and answer to questions “How do the funding models for start-ups
differ between China, North America, and Europe?”, “How do different funding models
influence the decision of where to establish a start-up?” and “What role do government
grants and subsidies play in the location choice of start-ups?” could be clearly identified.
Research also answered to “How have these funding models contributed to the growth and
sustainability of these start-ups?”, with high emphasis on relation to the differences in the
used funding models and their effect to company growth and sustainability between
geographical areas. In the research, the weaknesses of commonly used and available funding
models in Europe were identified. This was also identified as an area, which would be
feasible for future financing research in European area and would possibly have an
opportunity to further boost in getting European companies’ innovations to the mass
markets.
5.3 Reliability of the results and suggestions for future research
The research is based mostly on quantitative data, supported by qualitative data. The
quantitative data was collected both from open sources and from case study companies, and
analyzed thoroughly with also a comparison to the theoretical framework. For the research,
multiple case study companies were selected from each geographical area, which enabled
the sample size being sufficiently extensive. An analysis to compare the trends of the
collected empirical data and findings with previous research was not prepared, as another
research for this specific topic could not be identified. The results can yet be argued to be
valid and reliable, as the findings correlate with theory on business strategies and financing.
Data from reliable open sources was partially validated by case study companies and after
analyzing the data, a correlation between findings from collected data and theoretical
framework was found well aligned. In case the funding models used by the companies was
organized according to the theoretical framework, the possibility of a company being
sustainably able to mass produce electric vehicles could be found higher than by companies,
whose funding models differed from the theoretical framework.
This research enables a good background to further analyze following topics, which the
author recommends as highlight areas for future research.
• How do selected funding models influence company’s valuation in each phase of
company maturity?
• A further study should be made on how the link between selected funding models,
and especially governmental funding and start-up companies could be further
developed, in order to enable further innovations to reach mass production phase in
Europe.
6 Conclusions
When comparing the EV start-up companies located in different geographical areas, it can
be clearly noted that the companies are utilizing partially same, but partially differing
funding methods.
European companies are heavily utilizing public funding and loans. European EV start-up
companies have also utilized crowdfunding, which is a rising way of collecting a medium-
and even a large-scale investment. Based on the research, it is notable that European EV
start-up companies are utilizing less VC financing than companies in other regions. Also,
the monetary value of the investments received by researched European companies are far
less than their competitors located in other regions. Direct governmental subsidies in the
form of direct grants are issued extensively in Europe, however it seemingly appears that the
monetary values of these subsidies are often not sufficient to ensure viability of the EV start-
up companies after early years of maturity.
In China, many EV start-ups are supported by private VC investment companies from
different technology areas but also by government-backed investment funds. The abilities to
create manufacturing readiness is well subsidised in China. Based on the overall global
economic outlook, it can be estimated that in China the higher volumes and lower costs of
materials and workforce also enable more cost-effective possibility to start production of
electric vehicles. Alongside of good access to financing, these other enablers cannot be
overlooked as possible reasons for establishing an EV start-up company in China.
North America has broad possibilities of investment available for start-up companies,
especially for the companies operating in the field of green energy. Broad availability to
venture capital and availability of public incentives in the United States are very feasible and
support to establish an EV start-up company to this area. The public stock exchange in the
U.S. is an attractive possibility for companies to collect public equity, and many of the EV
start-up companies established in China and Europe have also collected public equity from
U.S. stock exchange in later phases of company age.
As a summary, the availability of funding might relate to where the companies are founded,
however this is only one portion of the selections behind decision making. Having the
company founded near main market area and availability of technical & physical resources
are main drivers for the selection of founding location. Main benefits of founding area from
funding perspective appears to be when the company begins to change from innovation and
conception phase to manufacturing and volume market phase. This is the main timeline,
from funding perspective, where start-up companies gain most benefit from external funding
and public incentives, as the requirement for working capital heavily increases. In the current
environment, it would appear that the availability and monetary value of funding instruments
do not support EV start-up companies sufficiently, in order for the companies to grow into
large scale automotive manufacturers.
The author finds this research acting as an enabler for further discussion in developing start-
up funding instruments in Europe, especially in the automotive industry or other capital-
intensive industries. Majority of government-issued subsidies in Europe seem to be aimed
to boost innovation and early-phase activities related to innovation, with less focus being put
to ensure that the innovations can be sustainably supported to reach mass production and
mass markets.
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