How could a 3-year old start-up with $19M financing, 40 employees, and no customers be worth $1 billion?
In fact, that $1 billion GM paid for Cruise may have been a bargain.
Yes, a company that 12 months earlier was valued at $90M may have been worth more than the 11x premium GM paid.
What does Cruise Automation do?
Cruise produces after-market hardware that, once mounted on a car, gives drivers an autopilot option. The hardware consists of several sensors including video cameras, radar, GPS and inertial sensors.
Initially available on Audi A4 or S4s for hands-free highway driving, Cruise purposely operated in a niche market. Their kit sold for $10,000.
In this video, Cruise demonstrated basic use cases including lane centering and hands-free steering. Cruise was also capable of monitoring vehicle distance and automatic braking. Other autonomous features such as adaptive behavior for dynamic driving or obstacle avoidance were not on the immediate product roadmap.
What were the terms of the acquisition?
Fortune reported the deal was a combination of cash and stock worth “north of $1 billion”. Since it’s assumed this deal was valued on future value for research and development, one can assume earn-outs and growth metrics are a large part of the valuation.
Why did GM acquire Cruise?
Certainly not for customers, revenues, or profits. Cruise only planned to release 50 kits in 2015.
Instead, clearly, this acquisition is one of technology and people as GM’s EVP of Global Product Development, Mark Reuss, echoed upon Cruise’s acquisition.
GM’s acquisition is a way to leapfrog its sluggish R&D efforts to catch up to the future of autonomous driving. Consider that in 2012 GM announced the Cadillac would have hands-free semi-autonomous driving in a few years. That won’t actually come to market until 2017 with the Cadillac CT6. In less than three years, Cruise presumably surpassed GM’s internal efforts.
The stakes are high with autonomous driving and GM can’t fall behind. In another post, I examined how Tesla, Google, and even Apple are rapidly advancing into the automotive market.
Brilliantly, the Cruise acquisition complements GM’s corporate development initiatives: its $500M investment in Lyft and roll out of Maven, GM’s car sharing brand. Lyft gives GM a logistics network and pool of customers to roll out fully autonomous cars in the future. Lyft could also be a channel for GM to retrofit or upsell existing Lyft drivers for autonomous functionality. For example, Lyft’s Express Drive partnership with GM could quickly build up a dataset for autonomous driving in metro areas. Lyft could log millions of route miles, driving conditions, and obstacle detection to engender safety of autonomous vehicles.
How do you assess the valuation of such an acquisition?
In venture investing, assessing the valuation of an early stage company with few to no customers and an early product is more art than science.
But in mergers and acquisitions, valuations become more objective than subjective. Here are a few ways to consider why Cruise’s valuation is justified and even undervalued.
What is the value of the market?
The automotive industry’s Total Addressable Market (TAM) is massive. McKinsey estimates that by 2030, traditional car sales and services will be $5.2 trillion. New revenue streams from rideshare and onboard-data services could generate an additional $1.5 trillion of annual automotive revenue by 2030 as well.
More specifically, in assessing GM’s Segmented Addressable Market (SAM) – and its competitive positioning for autonomous driving – TechCrunch presented the following:
“GM sold close to 10 million cars globally in 2014, more than 3 million of them in the U.S. Google has said its driverless car project won’t be ready for market for five to 10 years. GM could add Cruise’s technology to its latest models and have them ready for market in the next couple of years.”
However, the TAM and SAM don’t consider future markets that may emerge or existing markets GM could enter with autonomous driving. Imagine if Cruise were to remain an independent technology arm and entered the long-haul trucking industry. The American Transportation Research Institute estimates that in 2011, 36% of long-haul trucking costs were spent on driver wages and benefits. Trucking costs in 2008 were about $750 billion so providing autonomous driving to the trucking industry alone would be an addressable market of $279 billion.
GM’s newly purchased autonomous driving technology creates a new market: transportation data. Coupled with a fleet of drivers via Lyft, Maven, and GM sales, this could be a sizable asset. Imagine if the millions of route miles per year logged by Cruise’s drivers detect and report road repairs, dynamically route traffic, determine road violations, target advertising, enhance insurance underwriting, etc. At scale, this new market could be several billions of dollars with only a handful of large players.
What are the ROI calculations?
Let’s leave the adjacent markets (trucking) and future markets (data) aside for a moment. Consider the Return on Investment (ROI) just from GM’s current line of business. If autonomous driving or advanced forms of autopilot are feature parity for survival, acquiring Cruise has several easy back-of-the-envelope justifications.
Retrofitting a vehicle with autopilot capability in less than three years and $19M of funding indicates Cruise was exceptional at deploying an innovative product. Consider also that the current team members – PhDs, data scientists, software developers, etc. – are perhaps some of the most sought-after talent in the autonomous driving space. Acquiring other such experts in computer vision, GPU computing, perception engineering, compressive sensing, LiDar, etc. requires a nimble team proven to innovate.
According to recode, “GM reported net sales of $152.4 billion and net income of $9.7 billion for 2015.” So this acquisition is a 0.6% of 2015 sales. Consider that Toyota, VW Group, and Google spent 3.5% to 13.2% on R&D as a percentage of sales.
Several traditional car manufacturers already have some level of autopilot capabilities including Daimler Chrysler, VW Group, and Toyota. Car competitors of the future, including Tesla and Google, have proudly demonstrated fully autonomous driving (see this post for more detail)
Assume that for GM just to maintain 3 million new vehicle sales per year in the U.S. alone, it will need some level of autopilot or autonomous driving features. Now assume that from 2018 – 2028, this autopilot feature accounts for $1,000 (instead of $10,000) of the sales price for just 10% of those 3 million new U.S. car sales. That’s $3B in revenue thanks to Cruise. (300K cars sold x $1,000 price x 10 years).
While the sticker shock of $1B for a 3-year old company sounds outlandish, when comparing that cost to R&D in the automotive space or feature parity for future sales, looks like GM got the better part of this deal.
At Graphene Ventures, we look for paradigm shifts and seek investment opportunities as markets change. Our investment in Lyft is one indicator of our commitment to how transportation industry will change.
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