VCs remain bullish on eVTOLs, with cargo applications leading the way

Venture capital (VC) firms see strong potential in the eVTOL space, with many spotting increased opportunities for the platforms in the post-COVID-19 world.

VC interest in the industry was underlined in January, when TDK Ventures announced an investment in AutoFlight. The company is the developer of the V50 White Shark drone, which can carry loads of up to 20 kilograms (44 pounds), as well as a larger eVTOL under development.

A major attraction for TDK Ventures was AutoFlight’s current focus on the air cargo space, as this is likely to find market demand earlier than the air taxi domain, said investment director Anil Achyuta.

He compared the eVTOL industry to pharmaceuticals, where it can take hundreds of millions of dollars to bring a drug to the marketplace. Building an eVTOL also demands huge capital investment, he said. Because it will take some time before regulations around the world — and public acceptance — will enable a large market for air taxis, it makes sense that a company first concentrates on the air cargo sector, as this will likely be less demanding than air taxis from a certification perspective.

A company like AutoFlight is well-positioned to tap into the air cargo market, which will put it further along the path to building an air taxi as that market develops, he noted.

“We feel like they can be profitable along the way. . . . Air cargo in itself could be a large enough market that one could potentially generate very large returns,” even without an air taxi demand, he said.

Adam Grosser is managing partner at Sandcast. He has a long history in the aviation business, having started the Sustainable Aviation Symposium in 2006, as well as investing in a number of aviation-focused businesses throughout his career and flying as a pilot himself.

Grosser has not invested directly in the eVTOL space to date, though he has advised companies in the area and sees strong potential. He also highlighted the potential of the cargo domain, noting that while there are still challenges around beyond-visual-line-of-sight operations and a need for full regulatory approval, this is likely to come much more easily than in the people-carrying business. He said that cargo eVTOLs could be particularly beneficial for remote and rural communities.

“To some degree, cargo is easier, and the need is profound,” he said.

That isn’t to say that VCs are writing off the air taxi domain. Achyuta stressed that his company views this as potentially an extraordinarily profitable market. The aim is to take it one step at a time, “using the basic building blocks and the learnings that one gets from air cargo, and utilizing similar aerodynamics and engineering.”

While there is likely a higher commercial opportunity in air cargo at present, the air taxi vision is “supportive of a much more impactful vision for the future of transportation,” said Julien Etaix, investment manager at Upfront Ventures, which has not yet invested directly in the eVTOL space but sees strong potential there for the coming years. This vision means that air taxis “could receive outsize public capital aimed at transforming urban ecosystems,” he said. “I thus believe it is hard to rank both opportunities at this point in time.”

The COVID-19 pandemic has had a substantial impact on the pace of VC investments as a whole, said Etaix, as firms focus more time on their existing portfolio. The eVTOL sector is “unfortunately not immune to market-wide negative momentum.” Strategic investors with an eye to the long-term eVTOL future may now see opportunities to invest in the ecosystem at more attractive valuations, while more general investors may wait on the sidelines until the dust settles.

“I therefore expect tougher funding conditions for the entire ‘deep tech’ ecosystem,” he said, though he added that he is not concerned about the longer-term potential of the market or the return expectations for investors.

Grosser said there could even be positives for the sector to emerge from the crisis, which has underscored the many advantages of unmanned cargo transportation: for example, delivering medical goods directly to people who may have to self-quarantine.

“In times where traditional retail is compromised, automation of a variety of forms I think will rise to start to fill that void,” he said.

VC interest in eVTOLs is not limited to the platform manufacturers, but to developers of a range of systems that will be required to operate them. For example, Grosser pointed to the need for sensors to enable sense-and-avoid technology, or to non-GPS-based navigation tools that could operate in GPS-denied environments. He also highlighted the need for unmanned aerial traffic management that integrates with air navigation service providers in their respective geographies.

“Beyond the batteries and the motors and the actual vehicle, there are hosts of solutions that are both actionable, necessary, and often more attractive from an investment standpoint.”

Many of these technologies are also applicable in other, closely related sectors, notably the drone domain. True Ventures has made a series of investments related to the latter, and is interested in the eVTOL space, though has not made direct investments there as yet.

Jon Callaghan, the firm’s co-founder and managing partner, believes that the COVID-19 crisis will “call to the fore the need for more autonomous supply, specifically in supply chain movement,” with the potential to move into commercial passenger movement further down the track. He said that while the pandemic has been a severe shock to society, “this dislocation will accelerate much of the digital transformation across enterprise and across large social opportunities and challenges like transportation.”

Callaghan said that investors in eVTOLs could learn much from the initial investments in the drone domain. He said that some of the early expectations for that sector — in terms of the types of businesses that drones would transform, for instance — were disappointed, at least at first. This was primarily because various aspects of the technological ecosystem to support the sector, along with training demands, progressed at different paces. However, he believes the eVTOL domain is developing in a different way, “with entire systems already being worked on together. . . . Innovators are working on every aspect of the industrial system required for success.”

Etaix said the sector faces a number of challenges from an investor’s perspective, notably around safety: the industry “is incredibly fragile to perceived risks if a single company suffers from the loss of an aircraft,” he noted. Regulatory bodies and VC investors therefore have a responsibility to build a flexible framework for experimentation and rapid development, while ensuring the highest standards of safety, in order to underpin acceptance in the general population.

“It is still very early to tell what societal changes may erupt from COVID-19 and its consequences on the global economy,” he added. “But I am a firm believer that humanity has an incredible desire to travel, explore and be as social as possible, which will have to be reconfigured with the future risks of pandemic outbreaks.”