Anyone trying to assess the prospects of electric vehicle maker Rivian has a paradox to contend with. The more cash investors throw at the company (and they have thrown a lot), the better its chances of surviving the shake-out that is hitting EV start-ups. But it also seems that the more cash investors come up with, the more cash Rivian burns.
This raises a wider issue for many tech-related start-ups with cash balances that ballooned in the era of cheap capital. As the financial cycle turns, investors have to contend with the question of which companies hold real promise and which were merely the result of overinflated hopes conjured into existence by low interest rates.
Access to large amounts of cheap capital can float new business models that otherwise wouldn’t have seen the light of day — think Uber. But companies created at such times find it hard to adjust.
Comparisons between Rivian and Tesla are striking. Thanks to Elon Musk’s powerful personal allure with investors, Tesla was able to raise around $26bn in equity and debt before it eventually managed to put itself on a sustainable financial footing.
Rivian, at a much earlier stage in its development, has already raised roughly the same amount. That is despite the fact that it began making cars less than two years ago, and that supply shortages left its production volume last year at less than half the 50,000 it originally forecast.
It has also spent money at a rate Musk could only have dreamt of. Last year, Rivian consumed about $6.5bn in cash. That was nearly double the $3.5bn that Tesla burnt through at the nadir of its finances in 2017, when rumours about bankruptcy were rife.
The mountain of money made it possible for Rivian to dream of a much faster path to becoming a large-scale carmaker. Rather than start with a single model, it rushed out three vehicles at once — a pick-up truck, sport utility vehicle and electric delivery van. It also planned to race ahead with a lower-priced consumer model based on a whole new platform by 2025, though the timetable has been delayed a year as it grapples with the strains of growth.
Is it possible to build a complex manufacturing operation this quickly? Cash helps, but it can’t bring the production knowledge that took Tesla years to amass or instil the disciplines needed to match manufacturers with years of experience.
Rivian founder and chief executive RJ Scaringe has blamed the company’s early problems partly on the supply chain complexity that came from trying to do three models at once, though he claims the company is through the worst of this. But he has also pinned much of his hopes for putting Rivian on an even keel on the company’s next vehicle platform, known as the R2, about which very little has been disclosed.
At least the Wall Street optimists finally have some good news to celebrate. Rivian’s second-quarter production numbers showed that its supply pressures have eased and it is overcoming some of the bottlenecks, making it more likely that it will hit 2022’s original 50,000 target this year. The company’s high-priced vehicles are more visible on American streets and it has received high marks for quality. Its outdoorsy brand is starting to catch on with a certain part of the US coastal elite.
If Rivian can scale up, then its dreadful financial profile could start to look much better fairly quickly, starting with its negative gross margins. In the first quarter, direct costs linked to building its vehicles were double its revenues. Spreading its fixed manufacturing costs across a larger production base would do wonders.
Like other EV start-ups, Rivian also benefits from following in the footsteps of Tesla, which single-handedly created consumer demand for high-quality electric vehicles. Rivian also has just joined companies like Ford and General Motors in agreeing to tap into the Tesla network.
However, a doubling of Rivian’s market capitalisation to $24bn in little more than two weeks seems out of all proportion to its accomplishments so far.
Rivian’s greatest stroke of luck so far has come from the timing, including a $11.9bn initial public offering in 2021 that came at the peak of Wall Street’s EV mania. All that cheap money has given it a rare shot at joining the big leagues of the global automaking. But at its current burn rate, the $11.2bn of cash it still has on hand will barely get it through to the end of next year. Investors are unlikely to feel as generous when they are asked to dig into their pockets next time.
richard.waters@ft.com