Last week, homegrown electric scooter startup Ather Energy raised $51MM in to help transform last mile transportation. 

Battery of Dreams

Far from the slick scooter that the company has today, Ather had humble beginnings in the incubator of IIT Madras. 

Started by IIT Madras alumni Tarun Mehta and Swapnil Jain in 2013, the duo returned to their institute's incubator to develop a battery pack. The battery, which was lithium ion, is a progression from the earlier battery types used in electric vehicles. The team, which had initially worked on building swappable batteries, thought they would sell their batteries to scooters makers.

But, unfortunately, there was no vehicle to sell it to.

The founder saw that electric scooter vehicle owners usually used to complain about negligible power and poor battery life. Most founder journies begin with finding a pain point, a problem to solve. 

Ather Energy had found its problem to solve, an aspirational electric scooter. 

Building a scooter around a lithium-ion battery that would help solve these pain points. But, the road between idea and actual execution is a long way. In a capital intensive business like building a new scooter from scratch, it would be very hard work.

Especially if you were a young, first-time entrepreneur with no experience building a scooter, and not much capital to begin with.

A Tall Order

In a market where most first-time entrepreneurs go the route of building internet businesses, the Ather Energy team took up the ambitious task of manufacturing an electric scooter from scratch.

The team had everything going against them. 

They were building for an electric scooter market, which was unproven. Developing the scooter would take years of no revenue and only costs, profitability was a distant dream. The founders were first-time entrepreneurs with only a few years of work experience. 

Market, model, management were all question marks to investors. 

It is why the company had significant difficulty raising capital. Apart from the (now incredibly) valuable investment from IIT Madras, Ather had to efficiently build out its product.

Ather had a tall order of having no orders and yet innovate in a capital intensive business. 

Faced with a capital crisis, the company found angels in the form of the Flipkart founders. In his reply to my tweet on how Flipkart is helping build an ecosystem, Tarun (Ather's CEO) elaborated how this financing significantly helped Ather. 

With a strong roster of angels, Ather now had significant credibility. 

Capital, Capital, Everywhere, But?

With the backing of well-respected founders, Ather had got more than just a capital boost. 

Encouraged by the vote of confidence by Flipkart's founders, Flipkart's earliest investors backed Ather with another $12MM in 6 months time.  One may have even thought a lot of capital would translate into successes soon.

But that was far from the truth.

Ather had started to test out its scooter product, the Ather S340, and pushed incredibly hard to get it in place for a startup conference. Like all startups, there were clearly inefficiencies in the product, though it was likely necessary to get where the company is today.

But that would only be the beginning of a reality check for the young company trying to disrupt two-wheeler mobility.

Building a full-scale product like a scooter cannot be shortchanged. Scooters have been in the market for years, and customers already have fairly well-defined baseline expectations.

Unlike an internet platform, where most people have likely never seen such a use case (e.g. Flipkart), customers know what to expect from a scooter. One can iteratively make changes to a website ("shipping software"), but you cannot go with a half tested battery system for an electric vehicle.

Customers will be unforgiving, and Ather had to get it right when they launched.

From choosing wrong vendors to the wrong components, the "prototype" mentality ("shipping products") had begun to hurt Ather. The company had to get vendors, components - everything right to build a product that could be produced at scale.

The young company now needed veteran hands. 

Main Tera Hero

The software style approach to building scooters would take the company a long way in the future, but was bottlenecking the company in 2016.

Ather had to scramble to various parts of the world to get components, such as an electric wiring harness, or get the right vendors. The company needed to maintain its scrappy culture as a startup while getting the processes of a large scale automotive company. 

In late 2016, the company got the Hero they needed, with the automotive giant committing $19MM.

Bringing Hero on board would soon begin to transform Ather, with assistance on the right processes. More importantly, vendors and component manufacturers would now look at the young startup as a related party of their large customer. 

If the backing of the Flipkart founders lent credibility with the capital markets, the backing of the well-respected two-wheeler automotive giant would lend credibility in the automotive markets. 

Senior hires would soon join to bring structure to the company. Suppliers would be more welcoming and timelines would begin to take shape. The scooter would be slated to release in mid-2018. 

The company was getting in line to become a serious challenger in a giant market. 

Two Big Wheels

As this hilarious standup on Indian Bikers testifies, two-wheelers are everywhere in India. 

Two wheelers is one of the few markets in the world where India is number one, selling more than 20MM units every year. Assuming an average price of $1,200, the market is ~$25Bn. The leader in the market is Hero, accounting for more than 30% of overall sales, and dominating over the years.

To showcase how quickly the market has grown and Hero has dominated, Hero's sales in 2018 were equal to the entire market's sales just a decade ago. 

India is a densely populated country, and by virtue of this tends to have narrow, snaking roads (or paths pretending to be a road). A two-wheeler is usually the quick saviour to get to most places that may just be inaccessible to four-wheelers. 

Two wheelers are the queens of last mile transportation. 

The entire sales, though, are of petrol or diesel two-wheelers. Electric vehicles were largely unavailable or unaffordable for the common consumer. Ather was building for a market that was entirely new, in demand if not in concept.

The race for the electric two-wheelers was on. 

Charged Up

Rising fuel prices and demand for vehicles that ran on cleaner energy were creating a need for electric vehicles globally. While these may have been "nice" economic reasons, owning an electric vehicle was never aspirational.

Until Tesla arrived with its luxury Roadster.

Tesla transformed the electric vehicle industry with fantastic looking and performing,  cars that behaved a lot like a computer. With over the air updates, the cars could be "upgraded" remotely. This strong push helped lift electric car sales from a measly 17K in 2011 to 360K in 2018, dominated by Tesla. 

With a real aspirational product, albeit slightly expensive at $130K+, the market showed it had an appetite. 

While petrol prices became dearer, the cost of managing an electric vehicle began to fall. Additionally, regulations would begin to push towards having fewer petrol vehicles and more electric vehicles. 

Market forces, both regulatory and economic, were beginning to slowly align for electric vehicles. 

Delivering a Ride

Ather had initially estimated its S340 to be rolled out at the end of 2016, but was found to be launching in 2018. In a telling similarity with Tesla, the Roadster 2008 was also delayed by 2 years. 

The S340 would release in June 2018, along with the 450. The price for the 340 would be INR 109K ($1.5K) and the 450 would be INR 124K ($1.7K). Priced fairly higher than your average two-wheeler scooter, the product would have all the features to likely justify it.

Designed in quiet white, the scooter is also surprisingly quiet while delivering strong performance. With clippy acceleration and a strong balancing system, the scooter delivers a smooth ride. The connectedness of the scooter through its screen and navigation systems make it easy to manage and maintain.

All this would be connected to a battery grid, that Ather would need for charging its bikes. Setting this up will be necessary to drive adoption for Ather bikes. 

With a presence in Bangalore to begin with, the company soon plans to expand to Chennai and Pune. 

Building a Business

With a target of 10,000 units the first year, Ather has a production capacity of 20,000 units. 10,000 units imply revenue of ~$12MM, which would form 0.05% of the overall market by volume, a fairly small scratch.

The company also claims unit level breakeven for ~75K units, which implies revenue of ~$90MM, while EBIDTA level breakeven for 200K units, which implies $240MM of revenue (and expenses). This implies that at a ~75K units, the operating cost per vehicle would be equal to the price of ~$1.5K.

Assuming an industry high gross margin of 30%, that implies $450 of margin per unit to cover operational fixed costs. For 75K units, that is $34MM of expenditure on operational fixed costs. Keeping operational fixed costs the same, at 200K units, operating cost/unit becomes $34MM/200K or $170 (from $450).

That leaves $450-170 or $280 on a per unit basis. This works out to 18%, which is healthy to include a "marketing cost per unit" (CAC) aka dealership fee, which usually is 7-8%.

Suffices to say that volume, as in all businesses, will make this work. 

An Electrifying Future

The Indian government expects to help 30% of vehicles go electric by 2030, up from 1% today.

Even if you assume that there is no growth from the 20MM two-wheeler units sold every year, that implies growth from 200K to 6MM, a 30x growth. Over a 10 year period, that is 40% growth year on year, an enviable growth rate.

The challenges for electric scooters are likely to be adoption, more driven by electric infrastructure than price. Over time, as companies like Ather scale and bring down prices, they will be constrained more by the availability of charging points and less by demand. Early adopters, who want electric vehicles, will not be extremely price sensitive. 

Educating customers will remain key, which is why Ather has taken the experience center strategy to showcase how the electric scooter works. This has classically been done by Tesla, which is recently struggling for demand due to electric cars continuing to be pricey. 

Ather, on the other hand, has a massive market opportunity and a bright future ahead, because it is not very far away from market price. The company shows no signs of engaging in the constant brinkmanship that Tesla's founder is particularly fond of. Most people are rooting for Ather to be a truly Indian innovation, solving a truly Indian problem.

Ather can be India's Tesla, and a lot more, if it delivers even 1% of India's scooter market.