As SBD Automotive continues to track the rapid, but foreseeable, onslaught of strategy messaging, investment, supply chain changes, and toolchain development around software-defined vehicles (SDVs), a reasonable expectation is that a thriving community of startups would be part of this industry-wide transformation. With change comes opportunity, and a blue ocean tends to attract entrepreneurs – the types of people who create startups that change how industries do business. The reality of the “SDV Startup”, however, feels quite different.
Instead of a slew of startups accelerating the transition, a combination of OEM software in-sourcing, half-measure software architecture changes, and efforts from industry software and hardware incumbents to protect existing market share, have sucked the air out of the SDV innovation ecosystem.
Is there really that little ground for startup-generated innovation in a software-defined vehicle? While a combination of factors seems to be limiting the growth of a startup ecosystem geared towards in-vehicle software, it may not always be this way.
In this Insight, we explore automotive’s historical relationship with startups; identify what kind of market opportunities can get investors excited to invest in automotive; understand where new opportunities might present themselves moving forward, and introduce a framework for entrepreneurs, industry investors, and venture capital (VC) firms to consider when the time might be right to accelerate investment in the SDV ecosystem.
A historical view of automotive’s relationship with startups
Automotive has not, historically, had a particularly close relationship with the startup community – with activity levels increasing in only the past 15-to-20 years.
According to SBD Automotive’s analysis into this relationship, automotive OEM investments increased steadily in the latter half of the 2010s, while direct acquisitions decreased. As many VCs focused their investment dollars on tech and web, automakers continued to exercise the tried-and-true business of manufacturing cars that tied together hardware and software from a wide array of supplier partners. This approach leaves little room for innovation, however.
While in the 2010s OEM investments in startups were largely focused on data monetization and connected services, the software-defined vehicle didn’t truly enter the conversation until 2020. Keen observers saw this coming, especially so through Tesla’s homebrew software platform that powered early volumes of the Model S and Model X. After previously describing this trend as “Car IT”, SBD Automotive officially published a market-first report on SDVs in 2021, laying the groundwork for the impending waterfall of investments and software supply chain disruption.
This disruption wave, itself prompted by Tesla, proved to be a nexus for startup activity. Companies like Sibros, Tekion, and Phantom AI all emerged from former Tesla employees who exited the company with ideas they felt could help the rest of the industry accelerate its own software-led innovation.
But, even so, activity levels within the startup community around the SDV have felt low in comparison with the levels of investment and need from automakers. Instead, VC dollars have poured in to artificial intelligence – a much larger, multi-vertical, addressable market (and arguably an emerging building block of the SDV, overall).
So, where are all the SDV startups? Are there no entrepreneurs, or is there simply no money to be made?
Platforms for innovation (and scale)
Scale drives investment. When a founder creates a pitch deck for an idea, they must understand the total addressable and serviceable market (TAM/SAM). This could be a consumer market (B2C) or business market (B2B), but they ultimately need to be able to demonstrate three things:
1. A gap in a market exists
2. Their product can fit that gap (product-market fit)
3. They have a business model to profitably capture that market
If we apply this framework to the SDV, there would be no lack of ideas that satisfy numbers 1 and 2. It’s number 3 that creates a problem.
SDV opportunities are currently fragmented across automakers. That is, very few common platforms exist across many automakers that would allow a startup company to access multiples of vehicle volumes. While companies like Google and Apple have brought their own infotainment ecosystems into the car, the functionality of these systems – coupled with the limited commercial appeal of in-vehicle customer applications – make them a generally unattractive channel for new development. It’s primarily seen as a way for existing app and service providers to extend their already-profitable service into another channel.
Under the hood, millions of lines of code power the actual function of the car. Automated driving systems, vehicle control, active safety, and other software-driven capabilities – engineered primarily by an automaker and their Tier 1 suppliers – rely on an army of software engineers to build and test highly customized software that power these systems, often on customized platforms.
Some companies like BlackBerry have the luxury of a healthy market share for some of the enabling operating system software in the car. A small group of incumbents can be a good thing – it provides stability and a nexus for investment in common in-vehicle software needs.
But when analyzing the full picture – even in this transition period of SDVs – there just isn’t that much room for scale with the level of specificity and near-term opportunity that make startup investment attractive. The opportunity may be captured best by those who understand how car software works in the first place: the incumbent software vendors and Tier 1 suppliers.
This will change, however, once the SDV technology stack matures. With virtualization, operating system, and middleware software all being disrupted through open-source and standardization initiatives, and OEMs themselves taking on more of the development of application software and other, “differentiating”, domains in the car, a more mature technology stack means that the path to market – and scale – gains clarity.
Founders could finally have confidence in an addressable market.
Industry pains and gains
Without a doubt, industry pains exist today that have in turn attracted startup investment.
The advent of the connected car creates a brand-new vector for data-driven platform innovation. Startups like Sonatus and Aurora Labs have created new car-to-cloud channels for non-differentiating capabilities like machine learning, data analytics, and software updates. Emerging cybersecurity regulations have, likewise, driven the establishment of security-focused startups like GuardKnox and Upstream.
However, the truly cross-industry pains that have manifested in the SDV transition are now the domain of tech giants. AWS has invested heavily in software engineering tools, while Google has expanded its automotive portfolio across Android Automotive (now a de-facto standard for at least part of the IVI OS stack), Google Built-In (formerly Google Automotive Services), and Google Cloud (AI and voice).
In addition, companies like BlackBerry and Elektrobit have accelerated the rollout of new operating system capabilities engineered for zonal architectures that underpin SDV roadmaps.
Lastly, renewed energy around open-source software has created a new type of market opportunity: hardened and supported OSS.
Apex.AI, a startup funded by a variety of OEM venture funds, has developed a set of automated mobility and robotics software development kits initially based on the Robotics Operating System (ROS) and the efforts of the Autoware Foundation (launched in 2019 by Apex.AI). Tier IV, a Japanese startup, is also affiliated with these efforts. Red Hat, a pioneer in open-source software in the cloud, is developing an open-source-based operating system for in-vehicle systems certified up to ASIL-B in partnership with General Motors.
These software platforms require significant capital and particularly niche skillsets, an unattractive proposition for most startups. Effectively, the companies that may be most qualified to develop the software powering the SDV transition are already doing it.
Here and now
In a conversation with Derek Kerton of the AutoTech Council, a group that organizes forums to connect automakers and suppliers with automotive technology startups, he mused about how the current SDV landscape resembles the smartphone landscape in the mid-2000s. In automotive, we have an ecosystem of incumbents that have mature technology products who are being completely upended by disruptive products and HMI – where Tesla is this industry’s Apple.
Despite the lack of a settled ecosystem that allows startups to scale, he did spotlight a couple of startups working to accelerate technology cost reductions and modern software stacks for automotive:
PreAct Technologies – Recently launched new flash LiDAR sensors which can offer an improvement in cost-to-performance ratio over traditional LiDAR systems. In April 2023, the startup closed its Series B funding from investors such as State Farm Ventures and Luminate NY.
OxidOS – Developing a Rust-based safety-critical OS for automotive ECUs. Based in Europe, OxidOS completed its seed round in 2022.
If you would like to learn more about these startups and others in the broader automotive technology umbrella, we encourage you to sign up for the AutoTech Council Science Fair in September 2024.
Other incubators and investment arms are on the hunt. Arms like Woven Capital (Toyota), GM Ventures, and BMW i Ventures continue to invest in startups that show a demonstrable value proposition to the ambitions of their parent companies. Supplier-led venture funds like Magna Technology Investments, the BlackBerry IVY Innovation Fund, and DENSO hunt for startups that might help them retrench their value proposition to OEMs.
Although, in reality, most in-vehicle software plays today either lack sufficient scale to make an attractive business case or are more likely to be acquired for intellectual property by individual OEMs. Only when the ecosystem is set will we be able to see true innovation in the SDV – something that we may see sooner than most realize.
In the meantime, the biggest news will come from the likes of Volkswagen’s investment in Rivian – a top two global OEM investing in one of the top EV startups – not because Rivian fills a gap in Volkswagen’s portfolio, but rather because it has already fully integrated a capable, customizable SDV stack. This shows that OEMs have big, fundamental problems to solve when it comes to SDVs – problems that almost no startup, unless they are an OEM themselves, can ever hope to solve.
Optimizing your investment dollar
If you are part of your company’s investment arm and are on the hunt for potential innovators to partner with, our resources and expertise may be of use to you.
Our Monthly Startup Tracker spotlights new, interesting, companies each month, and our Innovation Guide details breakthrough technologies – any of which could be the next big nexus for startup activity. Publishing later this fall, our AI for Automotive Guide will detail how AI technologies such as generative AI, neuromorphic computing, and other types of computing, can be applied to customer experience and business operations within automakers.
In addition, SBD Automotive frequently partners with industry investors to validate addressable markets and vet potential investment targets to provide confidence in potential returns. This could also include opportunistic IP acquisitions to accelerate an SDV roadmap.
We look forward to a conversation!