Anatomy of a failed EV startup

Most startups die in darkness. They disappear behind closed doors, while investors privately assess their losses and employees look for new jobs. Any lessons learned tend to stay hidden, and do little to inform successive entrepreneurs.

A few months ago, Andrew Krulewitz pulled the plug on Zevvy, the company he founded to get electric vehicles into the hands of drivers who could benefit from them the most: long-distance commuters. The startup developed a novel, uncapped pay-per-mile lease to expand access to people who couldn’t afford to buy EVs outright, and it served hundreds of long-haul commuters in the Bay Area.

But soaring interest rates and unexpected fluctuations in the EV market made the fledgling business untenable by early 2024. Then Krulewitz did something that founders almost never do: He took to LinkedIn to announce the demise of his creation, recommend his staff for open jobs in the industry, and share his thoughts on why the venture didn’t work.

I’d reported on Zevvy when it was a young startup in October 2022, so the LinkedIn post caught my attention. Krulewitz displayed the kind of transparency that founders rarely exhibit when things go the wrong way. But the truth is, it’s just as important to examine the climate solutions that don’t work out as it is to chronicle the ones that do. So I called him up to talk through why even cleantech startups with good ideas can still fail, and how, despite its failures, Zevvy contributed to efforts to expand adoption of EVs.

Transportation drives more greenhouse gas emissions than any other sector of the economy, more than electricity production or heavy industry, and the key to cleaning it up is electrification. Zevvy tackled that problem and demonstrated there’s a segment of hardworking drivers who can save money operating an electric car if they are given the right financing tools. Though leasing a fleet of used EVs proved challenging for a small and scrappy startup like Zevvy, Krulewitz sees plenty of room for new ideas in the sector.

“Innovation is still very much needed in EV retail in particular,” Krulewitz told Canary Media in a recent interview. ​“It’s not just around affordability, it’s around information that is or is not being given to consumers at point of sale.”

Zevvy succumbed to a specific set of circumstances, but many of the dynamics at play apply to climate startups more broadly.

It’s all about timing

Timing seemed to work in Zevvy’s favor, at first. Krulewitz, a self-described ​“fast-talking, first-time founder,” handily raised pre-seed and seed financing to get the company off the ground.

In 2021, Zevvy launched pay-per-mile EV leases without a mileage cap, in contrast to mainstream leases with mileage limits that ruled out long-distance commuters. Krulewitz wanted to lower the barriers to EV adoption for the people who are on the road the most; they stand to save the most money from operating an EV versus a fossil-fueled car, and they also can avoid more carbon emissions than the work-from-home crowd who might buy an EV but not drive it very much. The average Zevvy customer ended up driving 2,000 miles per month, but many drove thousands more than that.

That promising idea soon ran into confounding macroeconomic headwinds, however. Zevvy bought a fleet of used EVs to lease to its customers, seeking better value than buying new. Shortly thereafter, the Chevy Bolt battery recall disrupted the nascent leasing operation. Then Tesla’s voluntary price cuts unexpectedly lowered the market value of the cars Zevvy owned. Those price declines were helpful for consumers, but they meant the lease pricing Zevvy could offer became less competitive versus other options on the market.

The real kicker was when interest rates started spiking in 2022. Krulewitz didn’t want to use up the company’s ​“precious venture dollars” buying the used EV fleet to lease out, so he raised a debt facility.

“Getting the lowest possible cost of capital was our goal,” Krulewitz said. ​“The return required to finance a thinly capitalized startup like us, plus the inherent riskiness of the consumer population we were serving, that required a very high rate of return.”

To lower its cost of capital, Zevvy took a rate that would float with the market. When interest rates started soaring, so did the cost to pay off the debt for the fleet of cars that suddenly wasn’t worth as much on paper.

Surging interest rates also spooked venture investors, who largely pulled back on their climatetech investing right when Krulewitz needed more capital to grow.

The Inflation Reduction Act could have offered a lifeline, since the law created the first tax credit for used EVs and the 45W tax credit for companies that lease EVs.

But here again, the timing proved inauspicious. Zevvy didn’t yet have corporate profits to offset with the tax credits, so it would need to work with other companies to monetize them. Financiers were hesitant to underwrite a business model making use of the leasing tax credit: ​“It was too new and there wasn’t that much precedent,” Krulewitz said. A policy that seemed tailor-made to support an EV leasing startup didn’t end up helping Zevvy in practice.

“As of October 2023, our vehicle assets were worth nearly 50% less than when we purchased them,” Krulewitz wrote on LinkedIn. ​“At the same time, our cost of funds went up nearly 40%. Game over, lights out.”

Venture capital comes with complications

Krulewitz didn’t attribute his company’s demise solely to the slings and arrows of outrageous fortune. 

“You can’t just blame the market,” he said. ​“It was a combination of poor timing and also some strategic errors.”

First up was the choice to seek out venture capital to begin with. Krulewitz calculated that bringing EVs directly to customers was the fastest way to achieve his goals; that meant raising venture capital and giving it a shot.

Over time, though, Krulewitz came to appreciate how laborious and costly it is to work with fleets of vehicles, which need to be maintained, insured, and retailed. These tasks are typically done by massive legacy companies with big balance sheets and regulatory departments. Krulewitz wanted to get drivers into EVs quickly — but it’s a tough sector for a small startup with limited funds and investors expecting venture-grade returns.

One alternative would have been building more of a VC-friendly software platform to attract drivers to affordable EV leasing, and then handing them off to established dealers or financiers to handle the actual vehicle transactions. But that strategy depends on the willingness of legacy institutions to adopt a new approach to leasing; even if they were willing, it takes time to move such companies through the regulatory and bureaucratic hurdles.

Meanwhile, navigating the intersection of automotive, financing, and climatetech made it difficult to nail down the company’s core focus.

“I still don’t know if we ultimately were trying to build a leasing company, a marketplace, or a technology platform,” Krulewitz noted in the post. ​“I certainly pitched versions of each to different constituents, but not fully validating any one model resulted in nothing [being] as good as it should’ve been.”

Access to electric vehicles is (slowly) increasing

The story of Zevvy’s demise points to the serious headwinds impeding mass adoption of EVs. Automakers keep chasing luxury bells and whistles instead of pumping out affordable commuter cars. Legacy companies with the wherewithal to finance EVs for the masses are constitutionally cautious; the upstart risk-takers lack the money and reach to make as much of an impact.

Nonetheless, decarbonizing the U.S. economy still requires a massive shift to electrified vehicles.

There are signs that this shift is underway. Last year, electric vehicles and hybrids drove 16 percent of new sales in the U.S., a record for cleaner vehicles that coincided with record-low market share for traditional combustion engines.

The 2022 Inflation Reduction Act has already done several things to push down prices for would-be EV buyers, Krulewitz noted. The law instituted a tax credit for new EVs that can go up to $7,500 if automakers meet rules for where the car and the battery are produced and the suggested retail price is below $55,000 for cars and $80,000 for pickup trucks and SUVs. But car companies that don’t meet those stipulations often knock $7,500 off their prices to match the tax credit their competitors can get, Krulewitz said.

Now used EV buyers can get up to $4,000 off that purchase, which was not an option before the IRA. And leasing companies can use the 45W tax credit to effectively lower the monthly lease terms for customers, making certain leases more attractive than buying the same model outright.

Other startups are carrying the torch of pay-per-mile accessible EV offerings, Krulewitz said. Spring Free EV initially offered easy EV options for commercial fleets, and now advertises 3-year, high-mileage leases for gig drivers, a group that made up a large portion of Zevvy’s customer base. Hive appeals to high-mileage drivers with shorter-term EV subscriptions that have no mileage caps; it also offers a path to ownership that doesn’t impose a big down payment.

Crucially, both of those companies have specialized funding streams behind them. Last year, Spring Free EV received a $31 million investment from private equity firm Spring Lane Capital that included equity for the startup’s Series A round and a debt facility for buying vehicles. That deal was expected to grow the company’s fleet to tens of thousands of vehicles by 2025. Similarly, Hive raised $30 million in 2022 to support 1,000 EVs for high-mileage drivers, plus solar-powered fast-charging hubs.

For his part, Krulewitz plans to keep working to link up the fields of clean energy, automotive retail, and financing. And there are reasons for confidence in that convergence: IRA credits are flowing, interest rates are stabilizing, and battery costs are continuing to fall, making the mythical cheap EV more attainable with each passing year. EV-focused startups with the right funding in place now may find that time is on their side.