Outlook good for transportation technology funding

Chris Cheever and Chris Thomas of Fontinalis Partners discuss the funding outlook for the ITS industry – where the money’s going to come from, and what needs to happen to facilitate change

By comparison, the ITS sector has tended not to fare so well when it comes to attracting venture capital. Many of the businesses within the ITS space are early-stage technology entities and at first sight this might not seem to be an obstacle. In reality, a wider perspective of the industry being capital-intensive, manufacturing-based and somehow archaic in nature – despite its relative youth – has played no small part in persuading many potential investors to stay away.

However, according to Chris Cheever and Chris Thomas of 1072 Fontinalis Partners (both are Founding Principals and, alongside Bill Ford (Executive Chairman of 278 Ford Motor Company), Ralph Booth and Mark Schulz co-founded the company in 2009 to invest directly into the ITS sector) this is rapidly changing.

“Even until very recently, the ITS industry has been perceived as being oriented more towards hardware than software. That has big implications for the industry’s ability to attract start-up and growth capital, given the longer and costlier production tails often associated with hardware development and deployment. We’re now seeing a proliferation of technologies in operation worldwide which are primarily, if not exclusively, software-based. As a result, we’re starting to see more venture capital organisations take an interest,” says Cheever.

What we’re witnessing, notes Thomas, is a dynamic shift, with a ‘pull’ of growth being brought about by an intense need for “bang-for-the-buck solutions offering dramatically quicker returns on investments”.

Cheever continues: “For years, it was the case that transportation technology companies were out there seeking investment. Now, we’re seeing a reversal of that situation – capital is seeking them out. Many of those companies are doing some very interesting things and can actually afford to be selective about whom they work with on the capital front. In particular, new and proven technologies which allow better use of infrastructure already in place can represent very attractive propositions.”

Nevertheless there remain threats and vulnerabilities, according to Thomas: “Potential ITS customers are still on a learning curve. The benefits of ITS deployments are achieving wider recognition but municipalities are hesitant to be first or early adopters. We are starting to see thought leaders embrace ITS but we’ll always have established constituencies which are determined to pursue historic types of brick and mortar deployments.

“It’s worth noting that in many cases the newer ITS technologies aren’t necessarily looking to displace what has worked for many years but are instead looking to complement previous capital expenditures. For instance, companies such as mobile payment and digital parking provider ParkMobile are moving us away from traditional hardware towards a cost-effective and easy-to-deploy, dynamic technology that only requires signage by zone to enable both accurate enforcement and convenient non-cash payment options. While it is good for all parties, it is important to get both municipalities and customers comfortable with this type of technology. There’s an educational process involved and it’s essential to take time to effectively outline the benefits to everyone.”

The effects of recession

Both agree that the recent recession has been a double-edged sword. Cheever: “It’s certainly put more pressure on the system to adopt more private-sector initiatives.

“Forcing the public sector to be more open has in some ways progressed ITS’s cause, especially where those technologies with proven capabilities and payback periods are concerned. But obviously in the short run it has also slowed the ability to get public dollars out the door, and has negatively affected companies which provide technologies which require more up-front capital to deploy.”

“You need all sides, traditional hardware and mobile entrepreneurs,” Thomas continues. “Vehicle-to-vehicle and vehicle-to-infrastructure solutions are going to require both. What we require are holistic solutions that are actionable. I don’t necessarily see one side or the other ‘winning the war’; it’s going to take partnerships.”

“By default, mobile and consumer-oriented solutions are leading the way at the moment because municipalities don’t have the money to deploy,” says Cheever. “The truth is that we need both and the current pull from the consumer will open the way to massive infrastructure deployments once the funds become available again.”

Public-private cooperation

Although that might sound over-hopeful, these “customer-driven ecosystems” are based on sound business models in which end-users are willing to pay for certain services that may for instance improve travel times or increase day-to-day convenience. But, he notes, access to data is crucial.

The idea of municipalities selling to the private sector data which they are in any case obliged by statute to collect presents an “interesting dilemma”, he thinks:

“However, collecting and rationalising transportation data streams can provide huge benefits to society, and this often requires the expertise of the private sector. For instance, companies like 589 SQLstream, which focuses on real-time transportation analytics, and 579 Streetline, which optimises parking availability and enforcement, provide hugely valuable services which would be incredibly difficult for the public sector organisations to develop themselves.

“I believe very strongly that the more private sector engagement there is with public sector data the better off the consumer will be. Although the consumer may already have paid once for the data in the form of taxation, what goes on in the private sector provides benefits in the form of better services. Customers have a clear choice: whether to pay for services, or not. I think more access to data needs to happen.”

Thomas agrees: “Data has been siloed for too long. Yes, we need to ensure that it remains secure, that access is controlled insome ways and that it’s used properly butwe can’t ignore the huge benefits whichmore recent market dynamics can achieve.

“It needs some prioritisation. Look at recent stimulus funding packages, for instance. A lot of money was put into essential repairs. We can’t dismiss those but there are choices: do we go for a sensor system deployment or do we fill potholes? In a budget-constrained environment we have to look at what best meets the needs of transportation’s overall footprint. Although there’s an emphasis on returns on investments, we also have to drive change in the longer term.

“For all the budget constraints that we’re seeing at the moment, people aren’t so focused on the short term as to be short-sighted. You have to ask yourself what is meant by ‘low-cost’. Proven solutions are scoring heavily at present but there’s also a real appreciation of technologies that have longer-term benefits.”

There is, says Cheever, a spectrum to consider: “Those quick-to-deploy/fast return-on-investment solutions are succeeding at the moment but at the hardware-driven end we can’t get away from the fact that some ITS solutions require big up-front investments. We face tough times and there are a lot of commentators talking about the threat of double-dip recession in some countries.
Regardless, we will still see thoughtleaders deploying and demonstrating systems and solutions with longer-term benefits.

“And when the economy does turn, two things will happen: those examples will be looked at and followed; and the smart overlays which we’re seeing being favoured now will still be providing benefits. To deny that certain technologies are currently struggling would be a falsehood, however.”

Thomas points to GPS-enabled tracking and enhanced management of white- and yellow school bus fleets by a company named Everyday Solutions as an example of a smart overlay.

“Better tracking and routing can realise a 15-20 per cent reduction in fuel use. But parents can also track the individual buses that are carrying their children. There are both traditional savings to be made, through which municipalities can see an immediate return on investment, and a data overlay of differentiated services for which people are prepared to pay.”

Fairer mechanisms

What the recession has done is highlight the need for fairer mechanisms which align supply and demand.

“There needs to be more of a long term plan; both the public and private sectors need to understand the framework they’re working within,” says Thomas. “Take the need for an actual enactment of a long-term Highways Bill in the US and the failure by Congress to pass a multiyear Reauthorisation Bill as an example: the current lack of a long-term plan is harmful to both entrepreneurs and the ITS ‘space’ as a whole.

“How we get there is a big question but we need our leaders to stop playing politics with this. If we’re going to make real progress we need all stakeholders on board but that hasn’t happened to date.” “The good news is transportation is ripe for bipartisan support, especially in the US. It’s something that I think will have to happen out of necessity, due to the spending required to sustain and improve our infrastructure,” says Cheever.

Deployments – the ability to see and touch – will drive things, according to Thomas. “‘I can give you this here and now’ holds far more power than paper sketches. ITS  is ready from a technology perspective, has been for a while in fact.”Both Cheever and Thomas sign up to the idea that Public-Private Partnerships (PPPs) will undergo a resurgence. “PPPs had momentum but then lost it through inappropriate structures being put in place – the private sector was seen to be over-benefiting,” says Cheever. “We’ll have to see them again but we’re going to need successful examples of their implementation.”

“They certainly left a bad taste,” agrees Thomas, “but there’s also a need to reward the private sector’s risk-taking; where new technologies are being introduced, the investor community has a huge role to play.

“The mindset has to be ‘How can we do business and do things right?’ Early dollars have to be focused on financial aspects and societal benefits – essentially, we have to consider what ‘profit’ we’re looking to take away from a venture. One aspect of current trends is that the organisations dealing with consumers aren’t just providing a faceless experience, so it’s good business to do things well.”

“The public sector is always going to expect to retain a certain level of control and management,” Cheever adds. “But the consumer will increasingly guide the public sector’s actions. Perhaps that most of all will reshape engagement between the public and private sectors.”