Over the past five years, we have seen high interest in the future air mobility (FAM) industry, driven by technology advancements in areas such as electric propulsion and advanced flight controls, along with a growing societal focus on sustainability and the emergence of mobility as a service. Existing aerospace companies and more than 500 new industry participants are currently developing new FAM offerings across sustainable aviation, supersonic aircraft, passenger electric vertical take-off and landing (eVTOL) aircraft (sometimes called flying cars), and surveillance or cargo drones. The industry has seen a decline in funding in the first half of 2022 compared to 2021, and some may question whether FAM players will continue to attract capital. We believe that skepticism is misplaced. True, funding has slowed on an annual basis, but that is compared to a record $6.9 billion in disclosed funding in 2021. Over the long-term, capital flows are still ahead of the pace in prior years.
As of the end June 2022, cumulative disclosed industry funding totaled $15 billion. That includes $2.2 billion that was invested from January through June 2022—an influx that increased the cumulative total by 17 percent. The $2.2 billion might seem like a significant decrease from the same six-month period last year, when $4.3 billion flowed into the industry, but 2021 was a major outlier with record inflows of capital. Deal activity is also down in the first half of 2022, with the total number of transactions declining by about 25 percent compared to the first half of 2021. Average deal size also declined.
The decline in first-half funding for 2022—again, compared to a record year in 2021—occurred for five principal reasons.
SPAC deals have subsided. Last year, much of the deal activity—in terms of value—came through mergers with special purpose acquisition companies (SPACs). The year 2021 saw $2.8 billion raised in total SPAC-related funds, among four FAM companies (Archer Aviation, Joby Aviation, Lilium Air Mobility, and Vertical Aerospace). In contrast, the industry raised just $800 million in SPAC funding for the first six months of 2022, through two companies (Eve Air Mobility and Surf Air Mobility1). This trend mirrors that of the broader market, which saw the number of announced SPAC mergers fall by 55 percent, going from 166 in the first half of 2021 to just 74 in the first half of 2022. The reduction of SPAC-related transactions and overall slowing of funding may also result from the low share price performance of the first four companies that went public through this approach, which have lost an average2 of 63 percent of their value since their mergers were completed.3
Many of the largest recent deals have come through more traditional channels, such as venture capital (VC) and corporate venturing. For example, Wisk Aero disclosed a $450 million funding round from Boeing, while BETA Technologies and Volocopter both closed new venture rounds ($375 million and $170 million, respectively), which include diverse investors, from private equity to strategics and traditional VCs.
Momentum is shifting to the sustainable aviation segment. Sustainable aviation was responsible for just 2 percent of funding in the first half of 2021; that increased to 23 percent in the first half of 2022. This increase results from funding raised by companies such as Cranfield Aerospace Solutions and Surf Air Mobility. Designing a clean-sheet airframe, as required in the manned eVTOL segment, is capital-intense. In contrast, redesigning propulsion systems (battery electric, hybrid, hydrogen fuel cell, or hydrogen combustion) to upgrade existing airframes and make them environmentally sustainable might be a more accessible and less-expensive endeavor.
The leading players have recently raised big rounds and may be pausing before another big funding influx is needed. The natural cycle time between rounds typically runs between 12 to 24 months,4 with the frequency of earlier stage investments (seed, series A/B), closer to 12 months and later rounds (series C/D/E) closer to 24 months. Given that many big rounds closed in 2021, some of these companies may be between funding rounds, and we could see another round of investment in the second half of 2022 or first half or 2023. For the public companies, their burn rates and balance sheets are available, and most will need to raise capital in the next 12 to 24 months. Aircraft development is an uncertain endeavor, with many cost and schedule overruns occurring on civil aircraft in years past. FAM concepts are likely to experience similar challenges, therefore creating a continued need for investment. Additionally, many players require funding to build out more than just the aircraft; a certified manufacturing system, supply chain, and infrastructure for operations and maintenance will all add to the development costs for many early-stage companies.
Some funding may not be reported. Many promising FAM players are backed by large strategic investors in the supply-chain and infrastructure segments. These may be aircraft OEMs, aerospace suppliers, automotive OEMs, or organizations funded by high-net-worth individuals. Even though these teams may be hiring hundreds of engineers and making significant technical progress, they can channel funding through internal R&D budgets that do not get disclosed to the public. In that way, current funding levels may appear artificially low.
The global economy is in a downturn. Last, equity markets have declined sharply thus far in 2022. The S&P 500 fell 20 percent during the first six months of the year, compared to a 16 percent increase over the same period in 2021, marking the index’s worst first-half performance since 1962. Investors may be waiting until markets stabilize before pursuing or disclosing further deals. Interestingly, global venture capital activity has not seen a similar decline; overall funding has risen 9 percent in the first six months of 2022, compared to the same period last year. This indicates that FAM funding is more highly correlated with the global economy or in a temporary down cycle lull, rather than closely mirroring the broader venture-capital environment.
The bottom line? The short-term slowdown in funding thus far in 2022 is merely a resumption of normal growth after a big spike in 2021. Investors have pledged over $15 billion in total into FAM, spurring the creation of several new segments of aviation and a new level of entrepreneurialism, disruption, and technological innovation. The industry is applying a portfolio approach, casting a wide net, and letting a broad range of companies pursue their own solutions. Some will inevitably fail, and—as with the current blip in funding—that should not be taken as a signal of deeper problems. So many different concepts and designs are in development that some companies will get it right, and we will see a disruptive new mode of mobility emerge.
1 The Surf Air Mobility deal is expected to close in the second half of 2022.
2 Equally weighted.
3 Weighted by merger date market capitalization. The mergers were completed at different dates in 2021.
4 “How much runway should you target between financing rounds?” StartupFIU.