GM Goes VC, Launching a $100 Million Fund to Back Startups

Large companies often become venture capital investors to help bring promising technologies to market sooner, and General Motors just joined that club by setting up a $100 million VC fund.

The announcement is good news for the growing number of start-up companies that have charged into the automotive business recently, from those developing more-efficient gasoline engines to ones working on batteries and other components for plug-in electric hybrid and all-electric cars.

Ultimately, the investment fund should benefit consumers. GM will select technologies that could help its own product development efforts. The company has named Jon J. Lauckner, GM's vice president of global product planning, as the head of the new General Motors Ventures.

The automaker has indicated that it will not only put money into new designs for car components, it also will invest in new "business models." That's corporate-speak for new ways to sell more carsand services. For example, the company said last year that it would work with eBay to test the idea of selling cars online. GM also could invest in electric car-charging networks. Making car charging more accessible to consumers on the road is a fundamental challenge for those who want to see any kind of electric cars go mainstream.

GM has made investments in startups before, though it wasn't done through a specific venture investment division: The company put money into startup ethanol makers Coskata and Mascoma.

Follow the Money

Major car companies have been under pressure from federal and state governments to build more fuel-efficient cars. Automakers typically wage tough fights to avoid these kind of mandates, and they have often succeeded in the past.

But carmakers also are adept at following the money, and they've been aggressively pursuing federal funds allocated to promoting energy-efficient vehicles. As gas prices has risen in recent years, being perceived as being out in front on fuel efficiency has been a public relations boon -- witness, for example, the goodwill the Prius has generated for Toyota (TM).

When GM emerged from the bankruptcy proceedings last year after being rescued by the federal government, it promised to become more nimble, and to devote more resources to developing cars that run on batteries.

"One thing we have learned from the last 100 days is that GM can move quickly and decisively. Business as usual is over at GM. Our goal is to build more of the cars, trucks, and crossovers that customers want, and to get them to market faster than ever before," said Fritz Henderson, GM's CEO until late 2009, in a statement last July.

A Crowded Race

GM has to move quickly in a market filled with new comers, some of them well-funded by private and government money.

American start-ups such as Tesla Motors, Coda Automotive and Fisker Automotive are all working on plug-in hybrid or all-electric sedans.

Tesla has gotten $465 million in federal loans to set up factories for building powertrains and assembling its Model S. The company, which is planning for an initial public offering, also recently garnered attention when it agreed to spend $42 million to create a joint venture with Toyota to build cars at a defunct factory in California. Toyota said it would spend $50 million to buy Tesla's common stock right after the IPO.

GM also must contend with emerging automakers in China. With investments from Warren Buffett, BYD has launched a plug-in hybrid and plans to build electric cars. Last month, BYD announced a joint venture with Daimler (DAI) to build electric vehicles. Both companies will put in an initial investment of 600 million renminbi (about $88 million) into the joint venture.

GM plans to launch its own plug-in electric hybrid, the Chevy Volt, later this year.