More deals, fewer dollars in the first half of 2022
Welcome to our first edition of the Thursday feature, which just so happens to fall on Earth Day (coincidence? 👀).
We’re going 0 to 60 with our first Thursday standalone feature issue, interviewing Reilly Brennan from Truck VC. Michigan-born Reilly has tendered a lifelong obsession with cars, which matured into fascination with the complexities of broader transportation. At Trucks, the team takes a moving definition to “transportation” as the edge of the map continues to evolve, though investments must make mobility safer, cleaner, or more accessible. Increasingly, the Venn Diagram also overlaps with climate tech.
We chat overlooked investable opportunity areas, Reilly’s class at Stanford, and what SPACs have to do with popcorn and feet.
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What roads led to your passion for transportation? What auto jobs have you had?
It's funny – I receive a lot of pun jokes. So many analogies are transportation related and, since I'm a dad, I'm happy to hear them.
I grew up in Michigan and was in love with the car industry even as a kid. I was obsessed with racing cars, and always knew that I wanted to work in the car industry. When I was an undergrad at the University of Michigan, I worked at a car magazine - back when print magazines actually made money and had staffs of 30 to 40 people. My official title was the Motor Gopher. I washed, gassed, and prepped photoshoots for the cars that product reviewers tried.
I've spent my entire career in transportation; though for the first 30 years it was as a car person, and over the last decade or so I've expanded my thinking to be more of a transportation person. Transportation is a dialectic - it has the potential to do a lot for us, but also a lot to us. Like a knife, you have to be very careful in the way you use the tool. Now I understand and respect the complicated nature of transportation, and I enjoy the fact that it requires a lot of thinking to wield it effectively. It’s a wonderful place to invest, and also a wonderful place to spend my life’s work.
At what point did you start honing in on the environmental aspect of transportation?
Trucks VC is made up of myself and my two fellow general partners, Jeff and Kate, and our colleagues Puneeth and Jason. Our first fund was the first time any of us had put together a venture fund, and we realized we needed a qualification step for evaluating companies. This was particularly important for us especially given our small team and the scope of companies that cross our path. To put it into context, we see ~1,000 companies a year in transportation. In order to properly filter for evaluation, my partner Kate developed our criteria: make transportation safer, cleaner, and more accessible. If one of these three things is true and it’s a seed-stage company, we will evaluate it. Now out of that initial 1,000, only ~300 make it past that initial filter.
Transportation encompasses a lot of things. How do you define “investing in transportation” at Trucks?
We are constantly asking ourselves that same question because transportation has so many arms and legs. Transportation investing can cover anything that moves a vehicle, to logistics, and even to space. The harder part for us is constantly redefining the edge of the map - what’s one hop or two hops away - which we’re now doing almost at least every month. We’ve done a lot of things in the last year that touch energy or logistics directly.
It’s a moving definition for us. We’ve done a little bit of everything, which is the benefit of picking a category like transportation. When we started our fund, people said to us “I’ve seen those single purpose funds before and you eventually run out of ideas or startups in that space”. In our perspective, transportation is actually like 15 markets together. At a certain point in time, perhaps one segment of transportation is overcooked or oversaturated, while other parts are just sitting ducks for improvement. So therefore, we intentionally keep the definition of transportation open so that we can always find interesting stuff going on. We have this liberal arts approach where we’ll look at just about everything if it’s moving people or goods.
How is investing in transportation different from other sectors? What do other people get wrong about investing in this space?
If you take autonomous vehicles as an example, a lot of generalist investors poured into AVs in the mid to late 2010s. Unfortunately AV technology roadmaps take a lot longer than what venture investors are used to, so they ended up getting the timeline really wrong.
Some of the biggest risks are the biggest opportunities in this space. There isn’t too much historical precedent of governments or transportation companies buying from startups and it’s typically a long sales cycle. Although we believe that’s changing and that there will be a lot more innovation sold into cities and carmakers going forward.
The other part is that there’s been a lack of domain expertise involved in building early-stage transportation companies, especially if you look at trucking, trains, or maritime. A young computer science talent will look at half empty trucks, do the math, and estimate if they fill it up with crates of oranges, they’d have a $20B business. When we started Trucks, we would see an ‘Uber for trucking’ idea every week. That was the first wave of transportation entrepreneurship. The difference now, like in the logistics space, is that you have a combination of startup founders as well as industry people. It’s not as unusual in 2021 for a person working in trucking and logistics for the last 20 years to leave and join a startup. It was unusual in 2015, however.
What do you think has driven that talent shift into transportation startups?
I teach a class at Stanford, which has been an interesting barometer to track the transportation interests of students. In the beginning, maybe 5 out of my 20 students really wanted to work in this field. And now 40 of them want to work in transportation. There’s been huge growth over the years, driven by some combination of there being real, big markets with exemplar companies like Uber or Waze, coupled with the fact that zero emission transportation is the work of this decade - if not our lives.
They see this big potential market opportunity, which also aligns really well with what they feel they need to be doing. It’s a totally different set of founders compared to the early 2000s when it was mostly mechanical engineers trying to build new suspension systems or powertrains. Now it’s less about the mechanical fascination and more about the impact. That’s what is so different about this era, which is wonderful.
As the saying these days goes, the future of transportation is electric. What do you believe is the electrification opportunity in transportation? What will/ will not be able to be electrified?
One of the complicated parts of transportation going forward is that there are many different energy sources and powertrains required, that are all different depending on the type of trip you’re taking. Looking back over the last 100 years, so many of the things we need to move around (beyond pedal bikes) have generally funneled up to the same petrochemical sources - gasoline or diesel.
The more complicated and expensive part of this era is that you probably won’t be able to power everything through batteries. I don’t think electrification will be a great solution for many different transportation segments, like long-haul trucking, maritime, or aviation, whereas it makes more sense for passenger trips or intercity commercial driving. In aviation, we’re big believers in hydrogen and are invested in Universal Hydrogen, which is developing a Nespresso pod model for moving hydrogen around. But all transportation will need to get to zero emission, given the regulatory push. And now, because of companies like Tesla and Rivian, there’s consumer demand superseding that regulatory angle.
This shift in distribution of energy sources also makes it challenging for multi-transport OEMs like Daimler, who not only owns Mercedes Benz but also makes trucks and school buses. Historically the powertrain division would be focused on making engines more efficient and durable. Now the powertrain is also inclusive of the energy supply and generation, and will be deployed into trucks a lot differently than a Mercedes. These types of investments are multi-billion dollar types of capital allocation decisions, and if they get it wrong, they’re going to have to live with it for the next 10 years.
How are Auto OEMs or other corporates thinking about partaking in this shift to zero emissions?
In this space historically, technological improvements have been slow and incremental. Now there’s all of a sudden this electrification push. Up until two years ago, I remember auto executives would talk about Tesla like they’re looking down at something in the bottom of their wastebasket. It’s totally shifted. In the first 10 minutes of every conversation I have with an auto executive, we start talking about Tesla.
Companies are working on things that go directly into the vehicle, like battery technology, but there’s also external things like charging or battery management. Charging is as much a part of the electric vehicle experience as the vehicle itself. If you’ve driven a Tesla and charged it on the Tesla network vs a Volkswagen within their network, it’s a very different experience today - and companies are waking up to that. These are things automakers would never have thought they would have to do themselves. From our portfolio perspective over the last year, all the suppliers and automakers are touching anything related to EV charging.
To your point, what are exciting investment opportunities within electrifying transportation outside of the vehicles themselves?
The incumbents are still trying to figure out where the edge of the map is and what they should even be allocating capital against. For the last 100 years, the car industry basically all did the same thing. The only real differentiation came from the price of the vehicle and commercials. Now automakers are asking themselves - What kind of cars should we be making? Are we doing charging? Should we own the battery plant ourselves? This phase of electrification will create a lot of winners and losers, depending on how they answer these questions.
Even though I’ve been investing in this space for 5 years, I’m constantly amazed at how much I’m learning about the ecosystem. For example, the investment we have in ChargerHelp. I didn’t even think about chargers going down. But after talking to fleet owners and operators, I realized there’s a ton of issues with charging downtime. There’s going to be hundreds of thousands more chargers built in the US over the next couple years, and they’re all going to need charger maintenance services to keep them working - so that got me really excited about ChargerHelp. I’m sure there’s going to be something else in a few weeks that I also didn’t realize. I think of it like a seven layer Taco Bell burrito. There’ll be an eight layer that comes out in a month.
For the transportation sectors that can’t be electrified, how does hydrogen play a role?
A lot of auto companies have had hydrogen projects for long periods of time. Toyota, Honda, and General Motors actually did a lot with hydrogen fuel cells going back even 20 years. They were always looked at as this unusual R&D part of these companies. Then last summer, I winced with all the stuff going on with Nikola because I thought it would sour everyone’s view on hydrogen in trucking. I think of Nikola as the Pets.com of this era, where the Pets.com going sideways was just because it was a bad business and not because the internet itself didn’t have any value. Now look at all this other amazing value that the internet has created. Nikola will be its own case study on what went wrong, but hydrogen in trucking and other transportation forms has great promise.
The challenge with hydrogen right now is that its value chain is incomplete. There’s not necessarily a lot of great fuel cell options for the commercial space. It’s an ecosystem that isn’t fully formed. So you have early-stage companies like Plug Power or Universal Hydrogen which are trying to fill in the gaps around the storage or logistics pieces. There’s a lot more that needs to happen, but hydrogen could be potentially even more valuable than electrifying passenger vehicles because it will live on top of these large, long distance commercial segments (trucking, aviation, marine, trains) where there’s a ton of business value.
What are segments of transportation that you think are being undervalued today?
Micromobility is a great example. Two years ago, there were scooters in lakes and over fences. Like Chris Dixon posted a long time ago, sometimes technology shifts look like toys in the beginning - and micromobility literally came out of the toy supply chain. Now I think the micromobility shaming has somewhat subsided because of better vehicles and more meaningful opportunities.
I’m not an investor in VanMoof but I think they have the potential to be a really valuable global business given their supply chain-centric approach. Some of this market opportunity will be driven by pure consumer demand, but in other parts of the world like Europe, smaller vehicles like e-bikes or scooters are the only way they can do urban deliveries. Puneeth Meruva, our fund’s associate, put together a great micromobility research report about the need for greater supply chain focus.
The other undervalued segment I would highlight is teleoperation, which is the direct control of a vehicle remotely. An example would be a drone pilot being controlled from thousands of miles away. In autonomous vehicles, teleops have been seen as a crutch if your AV system doesn’t work. The latency is also pretty bad if you’re using a cellular connection. But now, particularly with the growth of low Earth orbit satellites, we’re seeing much lower latency which could spur this teleops segment. It’s not just one idea that is valuable, but rather that idea in conjunction with something else. Even the Avengers five years ago couldn’t have imagined we’d now have Project Kuiper or Starlink all coming online in the next year or two.
We invested in Teleo, which does construction vehicle teleoperation. The interesting part about construction sites is they have their own networks which means really low latency. Teleo provides the pipes and capability, while the construction company’s drivers are the ones remotely operating.
Let’s turn the tables to what’s being overvalued. What are your thoughts on the SPAC market being so hot with EV startups in the last year?
There’s definitely some EV companies that did a SPAC because they ran out of financing in the private markets, and had no other options. A few of these companies that didn’t deserve to live another day are now so well-capitalized that they might actually succeed. So it’s hard to look at the EV OEM SPACs and pick which is the best. I’m not an investor in Rivian, but my personal bet is on them and I think they’ll likely go the traditional IPO route at some point this year.
I remember when I was young, the first time I went to the circus I wasn’t sure if it smelled like popcorn or feet. That’s my description of SPACs right now. It’s all really kind of confusing and somewhat icky in that companies you’ve never heard of are now worth $2 billion. There’s definitely a clown running around somewhere too.
How has the SPAC market affected your portfolio and/ or investment strategy? How do you see SPACs as an exit pathway for transportation companies?
Some companies are taking SPACs as a real opportunity and it can be great. We’re investors in Joby Aviation, which will be publicly listed through Mark Pincus and Reid Hoffman’s SPAC. They’re not going to be in the air until 2024 but need a lot of capital in the meantime to build new airframes. So they looked at their capital needs, and it made sense for them to SPAC. But they also had great access to private, late-stage capital.
There are other companies that didn’t have as many options and a SPAC was really their life raft. By the end of this year, there will probably be like 30 mobility-related companies that have SPACs. It’ll be like early-stage investing where about 10% will be really fantastic…and the rest will be like feet.
Feel free to send us new ideas, recent fundings, or general curiosities. Have a great week ahead!
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