The small convention floor at the Grand Hyatt Hotel was crowded. Executives from some 30 next-generation aviation companies from around the world gathered near San Francisco International Airport to talk about the burgeoning air taxi ecosystem.
But they were also there looking for money, hoping to get backing from a dozen investment firms in attendance. Founders pulled potential investors into private meeting rooms or chatted them up at lunch during the first two of last week’s three-day Airtaxi World Congress & Urban eVTOL conference. (The third day was spent at Marina Municipal Airport for flight demonstrations.)
With one investor for every 2.5 companies — and with venture dollars going into future air mobility companies still down from their high point two years ago — finding funding to support the relatively new electric vertical take-off and landing (eVTOL) industry is a challenge.
Some companies are looking beyond venture capital, in some cases securing millions of dollars in backing from the U.S. military.
"We know that building out hardware companies is hard," Elizabeth Reynolds, managing director of Starburst Aerospace, an El Segundo-based consultant and accelerator, said during one panel discussion. "There's a lot of opportunity. But we don’t yet know who is going to succeed. We don’t know which aircraft bodies will be the ones that make it through all the regulatory processes."
Counting the dollars
Among the 36 Bay Area companies involved in the eVTOL industry, air taxi competitors Joby Aviation Inc. in Santa Cruz and San Jose-based Archer Aviation Inc. are eying the opportunity to commercialize as early as 2025. But to get there on that schedule, the companies have to first get past a conservative fundraising environment, seek federal aviation certifications and navigate local politics.
When, and if, they do all that, they can take advantage of a global marketplace that could be worth upwards of $68 billion by 2032 — a big leap from the $8.2 billion valuation it had in 2022 and the $14.1 billion worth it’s projected to have at the end of this year, according to a report by Custom Market Insights. Contributing to that growth are technological advancements, environmental concerns, and increased frustrations over road traffic and airport congestion in urban areas.
Venture capital backing of air mobility startups steadily grew from 2017 when VCs invested $600 million into these companies to 2021 when that amount hit $6.9 billion. VC dollars have backed off that high, hitting $4.4 billion last year and $2.5 billion in the first half of this year, according to a recent report by McKinsey and Company. With the exception of funding this year, when more than half of those dollars went to companies developing surveillance and cargo drones, a majority of the funding went to eVTOL startups.
McKinsey added that based on current spend rates and cash on hand, publicly traded eVTOL companies have an estimated ten to 33 months of funds remaining.
But air mobility founders have another source of potential funds — the federal government. According to McKinsey, companies are leaning in on public-private partnerships and seeking government contracts like AFWERX’s, the Air Force’s innovation arm, Agility Prime program.
Agility Prime’s mission is to support the development of air taxis and similar technology, which could give the Air Force a head start in exploring how it could use those aircraft. Companies that receive a contract under that program will receive financial and testing support.
The Air Force has committed to invest $11 billion in air mobility companies. So far, it’s awarded 23 contracts to 15 companies, and has spent at least $100 million on those deals, according to the AFWERX website.
Why VCs raise Defense concerns
The fact that a number of startups have accepted military dollars doesn’t necessarily sit right with some private-sector investors.
William Dean Donovan, managing director and co-founder of DiamondStream Partners — a Seattle-based venture firm focused on middle-staged "mobility transformation" startups — said he’s seen companies struggle with managing both military and commercial deliverables.
Donovan said that when startups take Defense dollars, their focus shifts. In a panel discussion on investor attitudes, he said those founders take this approach: "I’m going to go down that path, and I’m going to do what the Defense Department needs. Then I’ll see what the applications are on the commercial side."
The alternative, Donovan said, is for those startups to be "extremely disciplined" with what they give to Defense "so that it doesn’t compromise the cost my commercial vision."
Starburst Aerospace’ Reynolds said on the same panel that accepting Defense Department funding poses its own challenges to startup founders and their CEOs.
"The additional difficulty of working with governments is [understanding] what do government contracts actually mean," said Reynolds. "From a business perspective you want to … make sure that everybody is aligned on the path that you’re taking."
Reynolds said that going into business with the government should not limit a startup's efforts to raise venture capital. It really comes down to "finding the right partners" and using a government contract to help with development, she said.
Ian Monroe, president and chief investment officer at Etho Capital — a San Francisco-based climate-focused firm — said companies should stay cautious about getting in too deep with the government.
"We don’t think working with the military makes you ineligible. We draw the line of whether or not you have weapons-making as part of what you’re doing," Monroe said. "You have to think about potentially making yourself ineligible for some capital if you go too deep that way."
See the eVOTLs fly
'Grateful' for federal support
One upside to taking Defense dollars is the credibility it can bestow on a startup. Archer Aviation, which is developing an air taxi that can carry a pilot and four passengers, entered into a contract with the Air Force valued at $142 million this summer to develop an alternative to helicopters.
On July 31, the day the deal was announced, Archer’s stock rose more than 40%. Those gains have been pared, with the company now up more than 12% since then.
Joby Aviation is another local player that’s taken both venture money, $2.1 billion of it, and Defense contracts. Joby has been working with the government for more than six years, and in April it announced its third Agility Prime contract extension, valuing it at $131 million.
The agreement with the Air Force called for Joby to deliver its first electric aircraft in early 2024. But the company delivered its first eVTOL to Edwards Air Force Base six months ahead of schedule, on Sept. 25.
Neither Archer nor Joby officials responded to interview requests. But Joby founder and CEO JoeBen Bevirt in April praised the Agility Prime program as a "remarkably successful example" of public-private partnerships.
"We’re grateful for the support of the program and for the U.S. government’s wider commitment to global leadership in this important new sector," Bevirt said
