VWB #7: What's the scoop?

Happy Tuesday! ☀️

As James recovers from COVID and we slowly get into the holiday spirit, we’re keeping this edition of VWB fairly short and sweet. This week, we provide bite-sized commentary on some of the recent news stories that caught our eye! 

First, we tackle the challenging landscape for electric vehicles (EVs) in 2024, as new restrictions on IRA subsidies for EVs begin on January 1– impacting both Chinese and non-Chinese automakers. Meanwhile, former Nikola CEO Trevor Milton faces a four-year prison sentence for misleading investors, shedding light on the risks in the fast-growing EV sector.

Shifting gears, we review the once-booming Direct-to-Consumer (D2C) sector, which has plummeted by nearly 97% since 2021. On a brighter note, Japanese baseball star Shohei Ohtani's groundbreaking $700 million contract with the Los Angeles Dodgers, featuring deferred payments, adds an intriguing chapter to the sports industry. 

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We’ll be back next week with a VC year in review, highlighting trends, milestones, and perhaps even awarding some fun superlatives.

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In the News 🗞️

Grim start to 2024 with IRA subsidies for EVs.

The New York Times reported over the weekend that new rules, set to take effect on January 1, will further restrict IRA subsidies for electric vehicles (EVs) in an effort to promote car manufacturing in North America and deter Chinese imports in this industry. The stricter measures will not only impact EVs produced by Chinese companies but will also affect non-Chinese automakers whose EV batteries are sourced from China. In anticipation of the forthcoming regulations, international EV manufacturers such as Tesla, Ford, and GM have already made announcements regarding the exclusion of some of their models from subsidies in the coming year. 

Our Translation 🕵️

As discussed in one of our previous posts, international EV companies still depend heavily on Chinese batteries to power their cars – and the upcoming restrictions will only make it more challenging to keep their prices competitive. Unfortunately, between these restrictions and the presidential elections in the US, the future of EV adoption in the US doesn’t seem too bright for 2024. 

Staying on the EV downhill track (pun intended),

former CEO of electric truck company Nikola, Trevor Milton, received a four-year prison sentence yesterday for deceiving investors about the technological advancements and capabilities of the company. Milton claimed to be developing electric and hydrogen-powered trucks at Nikola, which would have addressed the challenge of heavy-weight transportation in the EV sector. However, the company faced scrutiny as it became apparent that the stock price was inflated. 

Our Translation 🕵️

We were particularly shocked to learn that one of the tactics employed by Milton to mislead investors involved posting a deceptive video on YouTube. This video portrayed a truck prototype smoothly moving downhill, creating a misleading impression about the vehicle's actual functionality! In all seriousness, we hope that the sentencing serves as a cautionary tale for other EV founders amid the sector's rapid–and sometimes unchecked–growth.

D2C? More Like Down the Drain…

The direct to consumer (D2C) boom after the Great Recession of 2008 didn’t just ride the wave of VC funding, it was the wave. D2C unicorns were responsible for a tremendous amount of value creation in VC portfolios over the last decade, and as recently as 2021 over $5 billion was invested in this category. However, this year only $130 million was invested at the intersection of e-commerce and consumer products, a nearly 97% decline since the vertical’s peak in 2021. SmileDirectClub, one of the last remaining D2C venture darlings, filed for Chapter 11 bankruptcy in September and announced this past week that it will be shutting down operations after being unable to find a capital partner.

Our Translation 🕵️

As is the case with many of the D2C companies that gained notoriety (and venture funding) over the past decade, SmileDirectClub proved to be unprofitable year after year, posting a loss of $86.4 million last year (2022). The “growth at all costs, worry about profitability later” mantra of VC’s throughout the 2010’s seems to have fallen out of favor (thankfully), with venture investors focusing more on core business health metrics during diligence and encouraging founders to pursue profitability earlier in their companies’ lifecycles. We are bullish about this shift in the market, hopeful that it will lead to more rational valuations, more lucrative exits, and a more structurally sound economy.

Sho(hei) Me the Money!

As many of our readers may know, James is a huge sports fan. He would be remiss if he didn’t mention the blockbuster contract that Japanese superstar baseball player Shohei Ohtani signed last week. Ohtani and the Los Angeles Dodgers reached an agreement on the biggest sports deal in history, totalling $700 million over ten years. This is roughly $27 million more than history’s second largest sports contract, Lionel Messi’s deal with FC Barcelona. The interesting aspect of this contract is that Ohtani will only receive a salary of $2 million per year for the ten years of the deal. He has negotiated a deferment of the majority of the funds to be paid later, which many experts speculate is to avoid the high tax burden of California.

Our Translation 🕵️

Shohei is a generational talent, both pitching and hitting at an all-star level, something nearly unheard of in baseball today. However, he is also recovering from a UCL surgery on his pitching elbow, which poses a significant risk to his longevity. We will circle back in ten years to see if this contract was a home run or a foul ball. Either way, he sure is exciting to watch and hopefully he will lead to a resurgence in popularity of America’s Pastime.