Venture capitalists are pursuing investments in auto parts manufacturers to capitalize on the electric vehicle industry.

A number of smaller electric vehicle (EV) component makers, many of which originally operated in different industries, are attracting increased interest from venture capital funds due to the booming market. These companies have pivoted to address gaps left by larger manufacturers, offering comprehensive design-to-manufacturing services to original equipment manufacturers (OEMs).

For example, Indigrid, based in Gurgaon, transitioned from manufacturing TV set-top boxes to producing EV parts like motor control units (MCUs) and instrument clusters over the past six to seven years. Matel, initially a solar water pump manufacturer in 2016, began producing EV parts in FY21. Both companies received their first institutional funding in May-June 2024.

These smaller firms are raising funds to expand operations as local demand for EV parts increases, challenging large manufacturers like Sona Comstar and Sterling Gtake. They aim to offer full-stack solutions; Indigrid, for instance, produces MCUs, vehicle control units (VCUs), battery management systems (BMS), and DC-DC converters.

Matel's cofounder, Netaji C Patro, noted that large players like Sona Comstar specialize mainly in motors, not in MCUs or VCUs, and that design changes with companies like Sterling Gtake and Bosch can be costly and time-consuming. Indigrid's cofounder, Rishab Puri, pointed out that EVs require more electronic components compared to internal combustion engine (ICE) vehicles, offering smaller firms opportunities for innovation.

Well-funded OEMs like Ather and Ola typically design most equipment in-house, but with rising sales, their dependence on supply chain partners is expected to grow. Traditional firms like Bajaj and Mahindra, expanding their EV portfolios, prefer relying more on supply chain partners for various benefits, according to Amit Sharma, a general partner at venture fund Cactus Partners, which invested in Indigrid.

Newer firms like Indigrid and Matel leverage their smaller team sizes to offer quicker product iterations, a process that is more expensive and slower for traditional auto component giants, explained Mohammed Shoeb Ali, cofounder and managing partner at Transition VC, which invested in Matel. However, traditional firms still have the advantage of deep supply chain relationships and larger capacity, while newer firms are testing products on a smaller scale. Despite these challenges, traditional OEMs such as Hero MotoCorp and Bajaj, as well as newer OEMs like Bounce Electric, Revolt, and Omega Seiki Mobility, are beginning to work with these new-age firms.

Although operational for years, these firms previously did not attract venture interest due to concerns about their technical and commercial viability. "This sector is very R&D heavy, and investors and companies often want quicker conversion," said Puri, adding that they spent 3-4 years developing products before they became commercially viable. The lengthy development cycle has resulted in a scarcity of startups and investors in the sector. "The standards are higher in this kind of hardware as you need to validate product design, manufacturing capability, and supply chain relationships. Larger VCs require companies to achieve revenues of Rs 4-5 crore a month for Series A funding, a high standard compared to software firms," Shoeb explained.

With rapidly growing EV sales, these firms hope to benefit from a first-mover advantage, turning their investment in product development into a competitive edge. Overall sales of electric passenger vehicles surged 91% year-on-year to 90,996 units in FY24, with electric commercial vehicle sales tripling in the same period, according to the automotive dealers' body FADA. "This market won't be winner-takes-all, and we're aiming to be the proverbial shovel makers during the gold rush by catering to everyone," Sharma said.