BusinessDay 24 May 2017

C002D5556
A6 BUSINESS DAY
Wednesday 24 May 2017
FT
ANALYSIS
In association with
Driverless cars - The new gold rush
LESLIE HOOK & TIM BRADSHAW
Money is flooding
into autonomous
car start-ups in Silicon
Valley, along
with huge amounts
of hype. For the sector’s evangelists,
questions about sales, regulations
and business models are missing
the point.
It is a breezy spring day in Willows,
California, and a motley collection
of cars is preparing to take on the
winding course at the Thunderhill
Raceway. But unlike most auto races,
this isn’t a test of the skill of the person
sitting behind the wheel. These
cars are driving themselves.
The entrants in the Self Racing
Cars challenge range from navigation
technology start-ups and
component suppliers to budding
software companies and students. In
a narrow sense, the race is a failure:
after two days of practice, most teams
never manage to make it around the
course fully autonomously.
Still, there is electricity in the air.
Programmers buzzing from energy
drinks make tweaks to their codes
while investors stroll in the parking
lot to check on their companies. Selfdriving
cars are the hottest thing in
Silicon Valley, and this race is a way
for the smallest, boldest start-ups to
show their stuff.
“You are seeing a Cambrian
explosion of different possibilities,
as each different start-up explores
a slightly different space or path
through the problem,” says organiser
and investor Joshua Schachter,
boldly comparing the proliferation
of driverless car start-ups with the
appearance of complex animals
on earth.
Last year there were just three entrants
in the race. This year, there are
10 - just one indicator of the youth
and the rapid growth of the driverless
sector. Entrepreneurs and investors
are rushing to cash in on a trend that
has already made several fortunes,
and autonomous vehicle start-ups
seem to pop up almost every day.
Investment in the sector reached an
all-time high of $750m in the first
quarter of this year, according to CB
Insights.
But even enthusiasts are beginning
to worry that the sector might
be overhyped. Carl Bass, one of the
competitors in last month’s race and
a Silicon Valley veteran, is among
them.
“There is such a crazy thing going
on in the market right now around
autonomous vehicles,” he says as he
hops into his self-driving go-kart. “It
is kind of like if you can spell ‘selfdriving’
you can sell it for a billion
dollars.”
Yet it is not just Silicon Valley
money pouring in. The world’s top
automakers such as Ford and General
Motors have joined Google’s
parent Alphabet, Uber and other
tech companies in funding research
for self-driving technology.
For the automakers, autonomous
vehicles pose an existential threat.
Instead of owning cars, consumers
in the driverless age will simply
nthony Levandowski, a former Google engineer.
summon a robotic transportation
service to their door. One venture
capitalist says auto executives have
come to him saying they know they
are “screwed”, but just want to know
when it will happen.
This desperation has prompted
a string of big acquisitions, which
in turn has fuelled the hopes of the
fortune-seekers in Silicon Valley.
Last year GM paid $1bn for Cruise, a
self-driving car start-up, while Uber
paid $680m for Otto, an autonomous
trucking company that was
less than a year old. In March Intel
spent $15bn to buy Israel’s Mobileye,
which makes self-driving sensors
and software.
Rise of the ‘acqui-hire’
As in past tech hype cycles, the
business model for driverless cars
is not clear, nor is the timeline for
how long it could take the market to
develop. At the moment, driverless
cars have nearly mastered highway
driving but still struggle in complex
urban environments, and there are
huge legal and regulatory questions
to be worked out.
But such details do little to diminish
the promise of the technology,
say entrepreneurs and investors in
the sector. “This is going to be earthshattering
for the [transportation]
industry,” says Sebastian Thrun, one
of the pioneers of self-driving cars
at Google.
“Transportation is a multitrillion
dollar industry. I would argue that,
given the potential of this technology,
we are under-hyping it.”
Other driverless tech evangelists
echo this view. “This is almost like
something that should be a mission
of the human species, instead of
a company,” says James Wu, chief
executive of mapping start-up Deep-
Map. “It can benefit everybody and
save lives.”
In the near term, one of the biggest
challenges for the sector is a
severe talent shortage. People with
expertise are in high demand, giving
them extraordinary leverage. Instead
of taking a job with a salary, they
launch start-ups, then sell out to a
company that wants to hire them.
This lucrative route has come to be
known as the “acqui-hire”.
The purchase prices of recent
acquisitions work out to “roughly
a $10m price tag per person,” says
Thrun, who is often referred to as the
godfather of self-driving cars. “It is a
lot of money.”
He hopes the price tag will fall as
more engineers gain the necessary
skills, noting that the self-driving car
seminar he co-teaches at Udacity has
had more than 25,000 applicants.
The most controversial acqui-hire
was when Uber snatched up a small
trucking start-up, Otto, founded by
Anthony Levandowski, a former
Google engineer.
Levandowski was an early member
of Google’s self-driving team, now
known as Waymo, earning more than
$120m in bonuses for his work.
But outside Waymo he was worth
even more. Levandowski started
discussions with Uber before leaving
Waymo; when he founded Otto,
it was purchased by Uber for $680m
in equity in just six months. (The
events that surround Levandowski’s
departure are the subject of a lawsuit,
which alleges that Uber infringed on
Waymo patents and stole trade secrets.
Uber has denied wrongdoing).
With headline deals like these, investors
such as Amy Gu, a partner at
venture capital firm Hemi Ventures,
fear that the sector may be attracting
the wrong type of entrepreneur. “I
think a lot of people are attracted to
the industry purely by the capital that
is flowing in, instead of by their desire
to figure out this problem,” she says.
While she is still investing in
autonomous start-ups, she says
she seeks companies that have a
revenue model rather than just an
exit strategy.
Self-driving engineers say the
frenzy has complicated life for them
too - and poses risks in terms of safety
and reputation. US regulators have
so far been fairly permissive about
testing autonomous vehicles, but
many worry that one terrible accident
by an overambitious start-up
would quickly change the environment.
Testing of autonomous vehicles
is already legal in more than a
dozen states, and federal guidelines
were issued last year.
Some of these start-ups operate
in a kind of paranoid secrecy, so that
their competitors do not know what
they are doing, or even who works
for them. Zoox, based in Menlo Park
in the San Francisco Bay area, has
raised hundreds of millions of dollars
in venture funding without ever
showing its technology or its “robo
taxi” design in public.
David Liu, founder of self-driving
start-up PlusAI, says he has seen rivals
try to draw new employees with
the promise of a quick acquisition.
“You have a couple of guys who
worked in Tesla or Apple or Google
before, they start a company and
expect to be sold in six months,” he
explains. This mindset is often accompanied
by unfounded marketing
claims that, he worries, could
damage the credibility of the entire
industry.
Tell it to the Teamsters
There is no clear timeline over
how soon autonomous vehicles will
become widely available. Mr Liu
expects it will take five to 10 years
for commercial trucking to become
automated but 30 to 50 years for
individual passenger cars, with
“robo-taxis” happening somewhere
in between, perhaps in 15 years.
Automobiles are a heavily regulated
industry, and carmakers in
Detroit often speak a different language
to entrepreneurs in Silicon
Valley. Established carmakers are
terrified of missing out, but also
afraid of damaging their brands by
moving too quickly. Start-ups, in
turn, can be overly dismissive of the
carmakers’ expertise. A widespread
assumption is that as autonomous
vehicles become accepted, people
will stop buying cars altogether and
instead use autonomous transportation
fleets that they can summon by
smartphone.
In the tech world, there are three
main contenders working on services
like these: Waymo, Uber and
Tesla. Tesla has already been pushing
the boundaries with intelligent
driving assistance in its cars. Waymo
and Uber are testing robo-taxis, albeit
with a human still sitting in the
driver’s seat.
It is unclear where the clutch of
new autonomous vehicle start-ups
will fit in. With no path to the consumer,
most are not able to generate
revenue, and some are struggling.
Several engineers specialising in
artificial intelligence, an area that is
core to autonomous driving, told the
Financial Times they had recently left
the sector because of doubts about
its viability.
“In the actual gold rush, you knew
there was gold out there somewhere,
and people were able to mine it,”
says Josh Hartung, chief executive of
Poly-Sync, which makes software for
autonomous vehicles.
In the autonomous gold rush,
it’s less obvious whether there is
any gold there, he says. “There is
effectively zero revenue that is being
produced by this industry,” he
points out. “You’ve got this massive,
multi-billion-dollar science project,
that’s basically on VC life support,
until such a time as somebody ships
and makes money.”