Welcome to today’s rendition of Critical Materials, our daily roundup of electrification and tech to start your morning with what’s important in the EV space.

Today we’re discussing one of the largest bubbles that has burst in the past decade: EV startups. Many have run out of cash, and the former CEO of one in particular has just been sentenced to a stint behind bars for fraud. We’ll also touch on U.S. regulations potentially guiding the future of combustion powertrains, and ask you for your input on hybrids. Let’s get to it!

30%: EV startups are running out of cash

Just a few years ago, every small auto startup wanted to be the next Tesla. Now they’re running out of cash, or at least that’s what a new study conducted by The Wall Street Journal has found.

Investors were willing to infuse these tiny companies with gobs of cash to risk reaping the rewards—and that included speeding up the ability for the public to invest by merging rather than raising funds through an IPO. That meant fast access to investor cash in three to six months rather than a year or longer.

The startups were poised for greatness, and huge financial targets were predicted by investment bankers—well, targets that were made on the assumption of “full access to unlimited capital.” Now that cash has dried, and up many of those companies may not yet be mature enough in today’s shifting EV environment to sustain themselves.

Nearly all of the struggling companies went public through special-purpose acquisition companies. SPACs are alternatives to traditional initial public offerings that surged in popularity during the pandemic. Unlike IPOs, they let startups make unchecked projections about how quickly they could grow.

The rapid change in fortunes for EV startups highlights the risks of investing in the industry, which continues to shift in unexpected ways. Demand is growing steadily, but hasn’t exploded as many startups and investors predicted. Tesla and other market leaders are also cutting prices to win customers, pressuring newcomers that are still struggling to get production started.

WSJ analyzed 43 different publicly traded EV startups that went public from 2020 to 2022. Of those companies, 18 were on track to run out of cash by the end of next year if they did not raise additional capital or cut costs. In fact, of those 18 companies, 7 (including Faraday Future, Canoo, and Fisker) had just “weeks” of cash on hand remaining. 5 (like Lordstown Motors) had already filed for bankruptcy.

On a positive note, 16 of the studied companies—including Rivian and Lucid—have enough cash on hand to continue operations beyond 2024. Only 4 of the 43 companies studied are generating positive cash flow from their operations.

60%: Proposed regulations could force automakers to drop ICE platforms sooner than anticipated

ICYMI: the U.S. House voted to block a Biden administration proposal (known as the CARS Act) to push auto sales steeply towards EVs over the next decade. Under the proposal, EPA projections expect as high as two-thirds of new light-duty car sales to be fully electrified by 2032, a jump from the previous unofficial target of 50% of sales being electrified by 2030.

The rulemaking would call for a 56% reduction in vehicle emissions by 2032, which could also mean shifting 67% of new car sales to battery-electric options. This follows a recommendation from the National Highway Traffic Safety Administration earlier this year which called for Corporate Average Fuel Economy (CAFE) standards to require automaker fleets to average 58 miles per gallon by 2032.

While the act itself was blocked in its current form, Automotive News reports that automakers have been silently sounding the alarm amongst industry players. The Alliance for Automotive Innovation, an industry trade group representing at least 15 automakers that fought back against the right-to-repair movement by running an ad campaign that insinuated that customers may be stalked and assaulted if automakers allowed access to vehicle diagnostic data, even penned a letter to the White House to warn what the industry simply isn’t ready to take the leap.

[The proposed rules] could prematurely force abandonment of many internal combustion engine vehicles and their associated revenue, reducing the availability of capital necessary for automakers to fund the EV transition.

It’s a tough pill to swallow. On one hand, cleaner-burning cars and more EVs on the road mean less tailpipe emissions. On the other, it’s a forced change that automakers (and potentially consumers) don’t have deep enough pockets to withstand. Manufacturers are already reeling back their targets on EV production for next year citing over-inflated consumer demand. 

And to make it even more difficult, if automakers failed to meet the targets proposed in the CARS Act, it could mean huge fines paid out for failure to comply. It’s estimated that CAFE fines could exceed $14 billion across the industry, including $6.5 billion paid out by General Motors and $3 billion by Stellantis.

90%: Nikola founder to face four years in prison

Trevor Milton, the founder of Nikola found guilty of securities and wire fraud last year, will spend four years in prison for his role in defrauding investors about the progress of the startup’s electric semi-truck.

Despite Milton pleading for probation and his lawyer reaffirming that his overstatements in the company were not made in malice, a judge sentenced Milton on Monday to an incarceration length that was “in line” with the 11 years originally recommended by officials for his charges.

Milton was originally indicted by a federal grand jury in 2021 following a criminal complaint by the U.S. Securities and Exchange Commission that accused the then-CEO of lying about “nearly all aspects of [Nikola Motor’s] business.” Prosecutors alleged that these lies helped to pump Nikola’s stock after it became publicly traded via a SPAC merger.

Nearly 10 months before the official charges, short-seller Hindenburg Research released an intricate report alleging vast fraud by Nikola, including Trevor Milton’s specific roles in the acts. This includes exaggerating the number of actual reservations customers made for its vehicles, false claims of how it developed its “Bluegentech” natural gas turbine technologies, and a slew of claims on how the Nikola One class 8 semi-truck was even faked to be in-motion under its own power when, in actuality, it was rolling down a hill. Milton called the claims a “hit job” against Nikola’s stock and denounced the claims.

Since its peak of nearly $80 in 2020, Nikola’s stock has since fallen below $1 and is now under threat of delisting.

Milton’s prison stay is meant to serve as both a punishment and an example to deter executives from committing similar crimes in the future. It’s unclear if Milton will end up serving this exact sentence, as he is likely to appeal the conviction, according to Automotive News.

100%: How about a hybrid?

With all this talk of BEV impossibility in the U.S., it’s hard to ignore that automakers have seemingly given hybrids a back seat.

Presently, hybrid sales make up about 10 percent of new car sales—that may seem like a sliver, but keep in mind that it’s nearly double the sales figures seen in 2020. Sure, this operation doesn’t eliminate tailpipe emissions completely. But it can help to greatly reduce them while still helping fleets align to CAFE standards.

Hybrid sales are soaring outside of the U.S. In fact, hybrids are slated to make up the majority of Japan’s auto sales in 2024 according to a new report from Bloomberg. They’re more affordable, require smaller batteries, and still provide significant benefits to the environment.

Should the U.S. be focusing on hybrids as a stop-gap for full battery-electric EVs, or will only a full commitment to electrification see buy-in from the public? Let us know in the comments.

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