UK – Over a year ago, British startup Tevva Motors Ltd – which had already raised millions of dollars in funding on the strength of its 7.5 tonne prototype electric truck – announced plans to merge with an American company called ElectraMeccanica. It was an unlikely match: ElectraMeccanica had launched a single product, a battery-powered three-wheeler, which had to be recalled due to numerous technical faults. Following the merger, the new company, called ‘Tevva Inc’, would begin with a cash balance between USD70-80m, debts of USD26m, and two facilities on either side of the Atlantic. It was apparently a marriage of convenience: a means to recapitalise Tevva’s business and enter the American market; and when the deal collapsed, the declaration of bankruptcy, which came six months later, seemed as inevitable as the change of seasons.

In fact, a lot of work was being done behind the scenes to save the company between the termination of the merger deal and the entry into administration in mid-2024. On 6 June, Lee Manning, Cameron Gunn and Ben Woodthorpe of ReSolve Advisory Ltd were appointed as administrators and tasked with finding new investors. However, Andrew Pepper, who specialises in restructuring and business “turnaround” at ReSolve, spent a long time advising Tevva’s board of directors on how to avoid insolvency, and he was by no means assured of the inevitability of failure.

Here we had a company with a great idea. Unfortunately, it’s been poorly executed to a certain extent. We need to raise more money to do certain things. How do we reshape the business to make it more attractive to the outside world?

Pepper spoke at length with Truck & Bus Builder about his experiences as a specialist in “turnaround special situations”, not only talking about Tevva but also about other industries he has dealt with. “A lot of the EV work I’ve done is actually quite similar to [other] technical startups,” he told T&BB. Take Company A: here is a business which has had millions invested in it and which is now burning three million a month just to keep going, while making hardly a penny in sales. Company A secured its investments on the back of a bold and original idea which will eventually make a lot of money, or so the investors hope. Put enough into developing Company A's intellectual property and, one day, the returns on investment will start flowing in.

This situation, while crudely outlined, is typical of the cases which Pepper deals with on a daily basis, whether the company is a game developer, a food technology firm, or an EV startup. In Tevva’s case, the company had a “great concept on paper”: “it was all buzzy and everyone was saying, ‘EV’s the best way forward’”; however, after ploughing millions into the IP, the company found that there was no market for its product. In Tevva’s case, the adage, “build it and they will come”, did not apply.

Other EV startups have gone about it in a more traditional way. One company which Pepper is currently advising has built up its business with sales rather than with massive investments. This is an eminently sensible way of doing things, though it must be said that it is not always assured to succeed. Sometimes, an idea comes along which appears guaranteed for success: “whatever you spend today, you’ll get all your money back tomorrow”. In “IP-rich” or “technology-rich” businesses and sectors, new ideas are all too often subjected to excessive hype, and massive sums of money are invested in the hope that they are more than passing fads.

I think the EV market has been guilty of that, believing that there is absolutely a market, and then a lot of these EV businesses come to market and find there isn’t the customer base who are prepared to pay the money in the timescale required.

How startups fail

In the past, Pepper worked as an insolvency practitioner, handling the administration and liquidation of large firms which had gone bankrupt. Today, he works with companies which are not yet insolvent, advising them on how they can avoid going bankrupt. Companies which start off with huge sums of investors’ money will grow and grow until they run out of money to spend, at which point they return to the investors to ask for more in order to keep going. If a company fails to get the investments it needs, it begins a “decline curve”, leading ultimately to collapse. Consultants such as Pepper are brought in during the decline curve, when the company is still solvent and has the time and means to turn things around.

Although Pepper is hired to assist in times of trouble, he always tackles each case with optimism. Often, investors have already spent tens of millions on an idea, and Pepper gives them the benefit of the doubt that they have done so with good reason. Inevitably, he encounters many cases where the IP has been overvalued and investors continue to sink large sums into something which is possibly not worth even a quarter of the total investment. “We go into these [cases] with a hopeful but realistic approach,” he told T&BB. Provided that the company can come up with a convincing plan to get some money flowing in, investors may be prepared to fork out more cash to keep it afloat. However, Pepper often finds that the investors have had their confidence “knocked out of them”: “A lot of this is about a break in confidence, a break in the belief system, that those businesses had.”

In startups which have an unproven idea or technology, it is very tricky to determine the base value of the firm:

With a lot of these businesses which are losing all their money with no real, strong milestones, whether it’s worth thirty million or one million, it’s very difficult to work it out… the base value is in the eye of the beholder.

One of Pepper’s methods for resolving this conundrum is to generate competitive tension:

get three or four people into the room who really want it and say to themselves ‘Someone’s put in forty million or fifty million or a hundred million [already], so if I can put in three million and buy it, surely I’ve got a bargain.

In this way, Pepper tries to convert the proposition from one based on hype and belief to one based on pure calculation, or the “practical accountant’s view”. But this is not guaranteed to work: in the end, the would-be buyers

may have an internal FD [finance director] that says, ‘I know it sounds a bargain. But what are we actually getting? All we’re getting is a business that still requires fifteen million pounds in cash flow to get to the next level. And even then, what does the next level truly mean? And what valuation is the next level?’

This is an issue which plagues not only EV startups but any kind of business which are “IP-hungry” and reliant on “goodwill”. 

Andrew Pepper

The case of Tevva

Tevva is an exemplary case. In March 2021, the company announced that it had raised USD12.5m in an oversubscribed funding round to gear up for series production of its medium- to heavy-duty electric trucks. Several months later, the company received an additional USD57m, but at this point, its ambitions were scaled back. Now the money would be used to scale up production of its 7.5-tonne model only, with the aim of delivering to customers from the third quarter of 2022. However, the customers did not come. Rather than scaling up to a production capacity of 3,000 vehicles per year, Tevva entered 2024 staring down the barrel of a gun.

Pepper did not pin the blame on the failure of the merger with ElectraMeccanica. “Tevva’s future was dependent on generating sales revenue. This timeline was slipping which impacted cashflow. They would still have needed to raise funds,” regardless of the outcome of the merger deal. In the months leading up to administration, Tevva pursued “select re-financing deals” on the basis of equity and debt which failed to materialise. In the meantime, the company continued to receive shareholder loans on a monthly basis, but these eventually dried up.

What went wrong at Tevva? Pepper put it quite straightforwardly:

They were very IT development led. They spent millions and millions of pounds on having great technology, great thought processes, building out a magnificent central hub for the business, but they didn’t really have many salespeople.

In retrospect, it sounds absurd, but Pepper explained that the typical attitude of a startup such as Tevva is,

somebody has given us five, ten, fifty million pounds; they believe so much in the business that they want us to spend the money to develop the technology. And, of course, when we’ve developed the technology, there will be a customer for it.

The company found out too late that there were no customers: or, to be more specific, it will take much longer for the customers to arrive than was initially expected; or, there are several other companies offering the same kind of product to the same customers; or, the product failed to hit the milestones required to appeal to the market, on price or on quality for example.

When Pepper was brought in to advise the company, Tevva was burning around a million pounds a month. Even at this late stage, Pepper says, the old shareholders “absolutely believed in the business” and continued putting in money to keep the company afloat. Their belief was maintained up until the company’s final days; it was the loss of this belief which brought the business to an end. “They could not see how to get the business back to cash-positive or profitability going forward, because the working capital required was another X tens of millions.” As of today, the company’s physical assets have already been auctioned off to various buyers, while negotiations over the brand and IP are “ongoing”.

Why startups fail

Pepper gave another example of a company in the automotive sector – albeit not a manufacturer of EVs – which exhibited many of the typical characteristics of a promising-but-flawed startup. The British car retailer, Cazoo, was founded in 2018 and launched its online marketplace a year later. It merged with a special-purpose acquisition company in order to list on the New York Stock Exchange in 2021, opening with a valuation of USD8bn. The value of the company subsequently crashed and the company went into administration earlier this year. 

Pepper explained:

You had the leader [of Cazoo] come out and say, ‘The old model of selling used cars and new cars and the dealership model with the forecourt is absolutely not the way forward. It’s going to be scrapped.’ And he raised X hundreds of millions.

Investors forked out money on the strength of the proposition alone, even before the company had made any money through sales.

It’s very difficult to see what is the valuation, because a company that loses a million a month: what is the value? If there’s no sales, it loses money. In a traditional model, no sales and loses money equals no value.

But the mega valuations of businesses based on “disruptive” ideas such as Cazoo are working off a very different model. Pepper made the point by force of a counterexample:

Three to five years ago, if you said to investors: ‘I want to create a business. I want to make it a balanced business, with sales, marketing production, etc. I want to sell some cars and vans and make a small amount of profit. And I’m not going to spend money on IP all the time’; would that have raised any money? No.

Investors were not in the market for sensible business propositions.

Invariably, the result of the EV hype of three years ago was confusion and disappointment. Companies which had burned through their initial capital in IP development went back to investors and said,

I spent the money doing what you wanted us to do. We built the IP. We built the staff. We built the systems. We’ve got everything ready to go and now we’ve come back for another forty million.

The response:

Our mindsets have changed. Three years ago, we would have said yes. Today, we want to see the burn rate come down, we want to see a gross margin profit – in fact, we actually might want you to break positive cashflow. We might even want a little bit of a profit.

Pepper told T&BB:

I and my team have worked with lots of tech-type businesses whose directors have said, ‘But I’ve done everything they [the investors] wanted me to!’ But there’s no money, because the mindset has changed on the market.

What could the EV startups have done differently? “I’ve worked with so many businesses,” said Pepper,

where I’ve asked, ‘Why have you got that [technology/process/etc.]?’ Or, ‘It’s good, but you’re spending three hundred thousand pounds a month on improving it. What are those improvements for exactly?’

Investing in technology for technology’s sake is a bad business model, especially if there are no buyers lined up. No matter the product, the success comes down to the same basic questions: “Does the customer want it? Can we price it?” What helps most of all in this situation, Pepper said, is to have a tech figure in the company who transfers to a sales role to balance the needs of the business against the priorities of the innovators. Whilst the engineers may be absolutely convinced that the customer will want the product, the salespeople need proof: proof that the customer will not only like the technology but will pay for it at the price point required to make a profit and will pay for it in the timescale required to keep the company solvent.

That’s not to say that Pepper does not recognise the inherent value of a new technology: “I think disruption is brilliant.” But the disruptive thought process of the tech innovator, whilst incredibly valuable at the beginning, may be a hindrance to generating cashflow, making a profit, and hitting milestones. Perhaps the ideal CV for an entrepreneur looking for cash to establish a new automotive company would be a few years’ experience at Tesla and a few years at Ford:

You could work for Ford to understand how to build the car, and then for Tesla to learn how to excite people. Apply these lessons – do you become a better businessman? I think you do.

Asked whether the example of Tesla was a positive or negative influence on today’s EV startups, Pepper concluded:

I do admire them. They’ve excited the market – you could even argue they broke the market. It’s now for young people to take the legacy of that broken market and create something new.