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Anyone trying to assess electric vehicle maker Rivian’s prospects has an irony to contend with. The more money investors pour into a company (and they throw a lot), the better its chances of surviving the shake-up to electric vehicle startups. But it also appears that the more liquidity investors get, the more money Rivian burns.
This raises a broader issue for the many tech startups with inflated cash balances in the era of cheap capital. As the financial cycle turns, investors are having to grapple with the question of which companies held real promise and which were just the result of inflated hopes coming into existence due to low interest rates.
Access to large amounts of cheap capital can float new business models that would otherwise not have been possible – think of Uber. But companies created in such times find it difficult to adapt.
The comparisons between Rivian and Tesla are striking. Thanks to Elon Musk’s strong personal appeal to investors, Tesla managed to raise about $26 billion in equity and debt before finally being able to put itself on a sustainable financial footing.
Rivian, at an early stage in its development, raised about the same amount. That’s despite the fact that it started making cars less than two years ago, and supply shortages left its production volume last year less than half of what it originally projected, of 50,000.
It also spent money at a rate Musk could only dream of. Last year, Rivian took about $6.5 billion in cash. That was nearly double the $3.5 billion that Tesla burned in its financial gutter in 2017, when rumors swirled about bankruptcy.
This financial mountain has allowed Rivian to dream up a much faster path to becoming a full-scale automaker. Instead of starting with one model, I scrambled out three vehicles at once—a pickup truck, an SUV, and an electric delivery van. It also planned to move forward with a lower-priced consumer model based on an all-new platform by 2025, though the schedule has been pushed back a year as growth strains grapple.
Is it possible to build a complex manufacturing process so quickly? The criticism helps, but it can’t bring in the production know-how that Tesla took years to accumulate or instill the specializations needed to match manufacturers with years of experience.
Rivian founder and CEO RJ Scaringe blamed the company’s early woes in part on supply chain complexity that came from trying to make three models at once, though he claims the company went through the worst of it. But he’s also pinned a lot of his hopes on putting Rivian on an even keel on the platform of the company’s next car, known as the R2, about which not much has been revealed.
At least the Wall Street optimists finally have some good news to celebrate. Rivian’s production numbers for the second quarter showed supply pressures have eased and it’s ironing out some bottlenecks, making it likely it will hit its original 2022 target of 50,000 this year. The company’s pricier cars are more visible on American streets and score high for quality. Its outdoor brand is beginning to appeal to a certain portion of America’s coastal elite.
If Rivian can expand, its dire financial profile could start to look better fairly quickly, starting with its negative gross margins. In the first quarter, direct costs associated with building its vehicles were twice its revenue. Spreading fixed manufacturing costs across a larger production base would do wonders.
Like other electric vehicle startups, Rivian also benefits from following in the footsteps of Tesla, which has single-handedly created consumer demand for high-quality electric vehicles. Rivian has also joined companies like Ford and General Motors in agreeing to take advantage of Tesla’s network.
Still, doubling Rivian’s market capitalization to $24 billion in just over two weeks seems out of proportion to its accomplishments to date.
Rivian’s biggest stroke of luck to date has come from timing, including an initial public offering of $11.9 billion in 2021 that came at the height of the electric-car craze on Wall Street. All this cheap money gave it a rare opportunity to join the major leagues in the global auto industry. But at the current burn rate, the $11.2 billion of cash still on hand will barely make it through the end of next year. It is unlikely that investors will feel generous when they are asked to dig their pockets next time.
richard.waters@ft.com