Q: Did GM get a deal for Cruise? A: Yes.
Making the case that GM got a deal and that Cruise has the people necessary to accelerate the future’s arrival.
General Motors announced Friday that it is acquiring Cruise Automation for $1.0bn.
From the Wall Street Journal:
General Motors Co. punched the accelerator on its quest to sell cars that pilot themselves, unveiling plans Friday to acquire a San Francisco firm that developed a system for retrofitting existing vehicles with autonomous-driving software. […] Terms of GM’s pact with Cruise [which was founded in 2013] weren’t disclosed. According to people familiar with the matter, the deal is valued north of $1 billion in cash and stock.
Most reports suggest that the extent of Cruise’s “business” progress to-date comes in the form of selling approximately 50 kits (priced at $10,000 each) to add autonomy retroactively to select Audi models. At ~$500,000 of cumulative sales (or even a few multiples of that), we can assume that GM management did not base its billion-dollar valuation on the promise of near term financial returns.
We can make a case, however, that GM got a great deal. If we establish that the Cruise Automation team can pull the future into the present more quickly than GM would on its own, we can also demonstrate that that translates into tangible financial gains for GM and its shareholders.
The reality of being GM in 2016
Within 5 years, if it’s not already, meaningful autonomy will be a requirement for customers buying new cars. There are direct financial implications if GM struggles to keep up or is late t0 the autonomy party:
- GM spent $7.5bn on R&D in 2015. That’s ~5% of its revenue. A small (let’s say +/- 0.5%) improvement or compression in GM’s profit (read: EBITDA) margins is worth almost $1.0 billion to the company’s valuation (at the 1.5x multiple the market currently implies). It is not hard to imagine a steady increase in R&D costs if the team in Detroit starts to fall off the autonomy pace. Similarly, if the company can become a leader on this front, one can see those costs being controlled.
- Relatedly, if its autonomy technology fails to meet customer demands, GM will become vulnerable to losses in market share, the implications of which would be significant. A +/- 0.5% swing in US auto market share equates to ~90,000 automobiles per year. That represents ~1.5% of total GM car sales in 2015. A change of that magnitude, given the dynamics of GM’s model, could have a ~$2.5 billion impact on GM’s market value.
In its communications about the transaction, GM indicated that it views the acquisition of Cruise as an accelerant to its autonomous driving capabilities. We believe, based on the above, that it is reasonably worth multiples more than $1.0bn to GM shareholders if the Cruise team can not only help GM keep pace but in fact allow GM to meet customer demands sooner rather than later.
The question, of course, is: can the Cruise team deliver on that promise, based both on the work they’ve already done and the work that they may continue to do? Observers will be quick to ask under what terms the Cruise team remains committed to the company and to its new Detroit-based owners. But, until we know better, and assuming for the moment that the team remains reasonably incentivized to stick with the company, our attention turns to the track record of the Cruise team and what it may portend for the future.
Cruise: A story in three chapters
Forensic analysis of Cruise’s human capital yields a three-part narrative: (i) a founder with incredible momentum (ii) surrounds himself with equally impressive (if possible) inner circle and (iii) turns his company into a hiring machine. That narrative leaves us feeling that, if there’s a team out there capable of getting GM its fair cut of the unevenly distributed future, this is it.
A founder with incredible momentum…
If you look at Kyle Vogt’s experiences since finishing at MIT in 2008, it’s hard to imagine that anyone has gathered more entrepreneurial momentum over the same period. Prior to founding Cruise in October-2013, he co-founded two businesses, Socialcam and Twitch (originally Justin.TV), which were acquired for $60m and +$1.0bn respectively. That both businesses dealt in the capture, broadcast and streaming of video makes Vogt’s track record more relevant to the machine vision requirements of Cruise specifically and autonomous vehicle technology generally. The short succession with which Vogt has been able to create such substantial equity value also stands out.
…surrounds himself with equally impressive inner circle…
The Cruise story becomes more interesting when you dig into the first group of teammates that Vogt selected as his inner circle (see graphic above). Vogt raised $4.3m soon after founding Cruise. The company operated on that financing (plus any sales) through May-2015 before closing on an additional $12.5m in financing in June-2015. It was during the 2014-through-early-2015 period that Cruise grew to ~7 people, based on our analysis of publicly available information. If Vogt’s previous experiences are impressive, the brainpower he brought on during this period is equally as striking. We attribute at least equal value to this group in our evaluation.
…and turns company into a hiring machine.
It’s easy to see from the graphic immediately above that the Cruise team grew by another step function in the months following the company’s second round of financing (the aforementioned $12.5m round that was led by Spark Capital and Sam Altman). Evaluating the human capital acquired with these fresh funds also leaves a positive impression. This is especially true if you apply the maxim that talent attracts talent and that therefore hiring success begets hiring success.
We are inclined to apply the maxim here, and we use it is as the basis of our argument that indeed GM got a good deal with the $1.0bn it spent to acquire Cruise. Time will tell, but to re-state our premise: we believe Vogt and team can pull the future into the present more quickly than GM would on its own, which in turn we believe translates to tangible financial gains for GM and its shareholders.
Sources
Note: Wall Street Research, Crunchbase, LinkedIn and other publicly available resources were also used for the purpose of this analysis.
