Philip Ammerman
19 February 2024
On February 1st, 2024, Swedish electric motorcycle Cake shocked the world by announcing that it was entering bankruptcy proceedings. Since its launch, Cake has been seen as a European clean mobility champion with a superior design and functionality that was intended to woo thousands of drivers to the electric motorcycle future. This positioning helped Cake raise over $ 74 million in funding and launched six different motorcycle models.
The reality was apparently far different. According to TechEU, Cake sold only 6,000 motorcycles during the course of its life--a claim we cannot confirm.
While I do not have any inside information on why exactly Cake failed, I would like to use this opportunity to review the Cake strategy first of all as a startup, but also as an electric motorcycle startup, to try to understand what might have gone wrong. Along the way, I also contrast why it is so challenging to bring a new generation of all-electric motorcycles to the market, complementing or replacing the internal combustion engine.
All information presented here has been taken from public sources of information.
1. Model Development and Investment
One of the key perceived strengths of Cake has been its ability to launch at least 6 electric motorcycle models since its launch in 2017, with a seventh model under development. The standard startup approach to product development is to launch a number of upgrade or new offerings every year. This is widely considered to be essential in terms of focusing the attention of a fickle customer base, as well as investors, on product market fit and traction.
The reality of motorcycle model development, however, is that it takes a lot of time and a lot of testing to get on the road. Most motorcycle engineers count on at least a 2-3 year development and testing period before a motorcycle is ready to be sold. Average development costs in Europe today are anywhere from € 2 – 4 million, including prototype development, testing and industrialization.
In contrast, Cake developed and launched 6 models since its foundation in 2017, where two of these years, 2020 and 2021, saw a significant reduction in commuting and transport due to COVID:
Makka
Aik
OSA
Kalk
Bukk
Kids
If we assume an equivalent development cost per bike, then developing 6 models would have absorbed at least € 18-20 million of Cake’s total VC funding, and probably much more given the various design partnerships mentioned.
Please note that this is only the development time needed: the time to commercially launch and scale up sales to at least 5,000 units per motorcycle model will also normally take at least 3 years (per model) and cost at least € 2 million in marketing expenditure in the best case.
If we assume € 2 million development costs and € 2 million marketing costs (best case), Cake would have spent € 24 million on launch costs alone. This is almost certainly an underestimate.
2. Model Differentiation
In addition to the time needed for development and commercial sales, we have a few comments about the differentiation of Cake’s models. There appears to be significant design overlap in at least four models, as seen below:
Figure 1: Makka - Aik Model Overlap (Cake Website)
In this example, we have the entry-level electric scooter, the Makka, compared alongside the Aik electric bicycle. The design overlap is significant. Despite the similarity in design and design functionality, note that every component is different: there is very little part sharing between models.
Finally, the pricing strategy can only be described as eccentric. There is little in the design or branding to suggest that the electric bicycle should cost more than the scooter. Although there are expensive electric bicycles (see for example Peugeot’s Trekking bike), the large majority of e-bikes retail between € 1,000 – 2,000. The value proposition of this e-bike, which is priced at such a high point, is difficult to establish.
The design and performance overlap is even more extreme with the Cake Kalk and Bukk off-roaders. These models were positioned as high-powered, electric off-road motorcycles, yet the product design and performance difference are so similar as to call into question the entire model strategy.
Figure 2: Kalk - Bukk Model Overlap (Cake Website)*
* Model prices reflect motorcycle specifications in Table 1, below.
The design parallels are even stronger than in the previous example. And yet, there are almost no similar components used. Nearly each vital component with possible exception of the swingarm and the front forks is different.
The similarity in price underlines the similarity in performance. Table 1 shows the rated performance of each model based on the Cake website:
Table 1: Comparing the Kalk and the Bukk (Cake Website)
The rated performance on these models is so similar as to make the decision to brand the Kalk and the Bukk as separate motorcycles highly questionable.
If the Bukk had a much greater range (for example, 150-175 km) or a higher payload (for example, 150 kgs rather than 95), it might be possible to understand the logic behind a separate model. But the differences in performance and price are so minor as to call into question why the new model (the Bukk) was approved for development.
The off-roading and dirt racing community has other comments on the performance of the bikes, but this is mainly anecdotal and cannot really be included here.
We can fully imagine the difficulties Cake distributors must have faced in terms of consumer confusion and indecision about which model to purchase. We also understand that splitting the marketing budget between similar models dramatically affected marketing performance and ROI.
3. Design and Performance
Although design is often seen as a subjective issue, there are several issues relating to Cake’s fabled industrial design which deserve comment. The first is that of naked design. In naked design, a motorcycle has all fairings and sidepanels removed, and the inner components are left exposed. This is a common feature of all Cake motorcycles.
While numerous motorcycles have achieved a very striking naked design, the suitability of this for more fragile electric motorcycles in an urban and off-road environment requires some thought:
Off-Roaders: For the off-road models, the naked design approach taken by Cake has all components open to the elements. This takes a toll in real world driving conditions. Cake’s Kalk and Bukk models leave vital battery and motor components exposed to the weather, dirt, mud and water. And yet, Cake’s offroad model warranty terms explicitly state that the batteries should not be exposed to water, either during driving or cleaning.
Urban Models: For the urban models, the disadvantage of naked design is the damage that occurs in driving and parking conditions, as well as the potential for deliberate sabotage or theft. This is particularly the case for the batteries, which are among the most expensive parts of the motorcycle. Cases of theft are widely being reported where thieves are stripping copper cable for re-sale. Leaving a motorcycle parked curbside overnight, with its battery exposed, is an exercise in risk.
Drag Increase: Finally, the great disadvantage of naked design is that it increases drag. For a lightweight motorcycle with limited battery power and range, this seems an exercise in performance mismanagement.
4. Marketing Overreach
Statements made by Cake point to a very rapid expansion which apparently either did not materialise in terms of real sales, or were beyond the capability of the company to support it. Within 14 months, Cake announced sales partnerships to sell 189,000 motorcycles in five very challenging sales territories: South Korea, Japan, China, Mexico, and the United States. It is highly likely they did not have the working capital or resources to carry out this plan:
On 25 October 2023, Cake announced a partnership with Shanghai Forever for the development of a “country specific model” for China with accumulated sales of 130,000 units to 2027. Given the competition in the Chinese market, this is a very aggressive goal.
On 13 March 2023, Cake announced a production licensing and market partnership with Italika and Citio for future production and sales of 50,000 units of Cake to be produced and sold in Mexico and North America. Strategically, this might be a good decision in that Italika is already a scale manufacturer and could presumably manufacture at lower cost than Sweden. On the other hand, a simultaneous market launch in Mexico and the United States is a huge investment, especially if split over 6 different brands. It also has the effect of providing two rival brand manufacturers with the entire production schematics for Cake’s motorcycles at a very early point in the development process.
On 31 October 2022, Cake signed an agreement with Goldwin, a sportwear manufacturer and distributor, to sell 5,000 motorcycles in Japan. It is unclear how the two companies would combine their expertise.
On 25 August 2022, Cake announced a $ 20 million sales partnership with Kolon in South Korea. If we assume an average price of $ 5,000 per motorcycle, this is a unit sales estimate of about 4,000 motorcycles.
Any single market entry strategy into one of these countries would be a challenge. Here, Cake has announced five such market entries, each one with a different ecosystem of competitors, consumer pricing, regulatory requirements, supply chain issues and other challenges.
5. Asset Overreach
Cake may have made the same mistake in over-investing in physical assets. While there is nothing wrong with a strong investment policy, it is important that this be calibrated for break-even and reflect wider sales and commercial necessities and realities. What are some examples of asset overreach from Cake?
The company was apparently relying on a Taiwanese assembly operation before opening a factory in Sweden. The new Swedish factory was announced at Albyberg, and was estimated to cost $ 25 million in total with a capacity of 20,000 units per year and 250 workers by 2025.
Rather than focusing on motorcycle assembly, design and sales, Cake also expanded into primary component production. In April 2023 it announced its own design for a IPM motor, the Jante. As there have been no announcements of sales of the Jante to other manufacturers, it looks like the entire development and production cost would have be absorbed by Cake itself, while different Cake models would also have to be re-engineered to accommodate it. This is a very peculiar decision for a company that was reported to be selling 6,000 motorcycles.
Figure 3: Investing in Components and New Models (Cake Website)
On 13 December 2022, Cake announced plans for yet a new model, the Kibb. This is a “semi-autonomous electric ATV for regenerative farming” intended for production in 2025. We note that the end-user group here is totally different from the core urban commuter customer focus on Cake, and the company shows no competence of being able to enter this segment. This is a disastrous loss of focus at a time when the core motorcycle models were not selling, and when the Bukk offroad model was still in development.
6. Working Capital and Production Finance
It is highly likely that Cake did not calculate its working capital and production finance requirements correctly. If we simply take the decision to partner with Italika for 50,000 units in North America and with Shanghai Forever for 130,000 for China, it is clear that the working capital requirements are massive. It should also be clear that operating margins in the electric motorcycle business are low, and that in addition to production finance, one needs to budget millions for advertising, promotion, dealer inventory, after sales service, warranty costs and more.
If Cake had a strong existing sales stream, part of this could be justified by operating cash flow (assuming the other sales were profitable). But suddenly choosing to launch 180,000 units in two major markets (North America and China) within a few months of each other without understanding working capital requirements is beyond ambitious: it may be unrealistic.
Why Did Cake Fail?
In short, Cake likely failed for the following reasons:
It launched too many models in too short a time. Of the 6 models mentioned on its website, one was probably rushed to market (Bukk) without sufficient testing, while an additional one, the Kibb, was still under development. That’s 7 models since 2017, none of which appears to have reached break-even in terms of sales.
These models were not so clearly differentiated while end-user focus was unclear. In particular, the Bukk and Kalk had significant design overlaps, as did the Makka and Aik.
According to external sources, Cake did not achieve minimum sales momentum or break-even sales. This is peculiar, given the large number of sales contracts announced in China, Japan, and North America.
The company tried to implement a global market strategy, including both high cost and low cost markets and including markets with a high risk of IP and knowledge leakage and ultra-high competition. At least two of these partnerships involved a production partnership, meaning full sharing of confidential production schematics and engineering with competitors who are also rival manufacturers.
The naked design choice most likely affected the quality and operational capacity of certain models, and especially the Bukk and Kalk off road models.
In addition to too many models, Cake expanded into components too soon in the process. And especially since there were insufficient sales of own models, and likely no possibility to sell components to competing electric motorcycle manufacturers.
It over-reached in terms of committing to too many factories in too short a time. This was compounded by selling too many models (low profitability) while trying to enter too many markets at the same time. The result is a large external capital financing requirement, which eventually turned out to be impossible for investors to accept.
Most critically: it assumed that as a startup, it could continue raising capital while making losses despite the fact that investors in the mobility sector have seen massive losses in recent years.
This is likely the reason behind the quote by Stefan Ytterborn, founder and CEO of Cake, relayed by TechEU:
“It is not one but several circumstances that make us end up in this situation. Climate issues are no longer in focus; we are in a recession. It's about us, but it's also about the risk capital ecosystem.
At the moment, it is completely dead; there are no takers in the later phase Cake is in.”
As with the dawn of any paradigm shift in technology, there will be winners as well as losers in the process. It is hoped that the lessons of Cake and other high-flying startups with a physical product or service and a low inherent profit margin, such as WeWork, Convoy, Freshly, Zume and others will be understood by both founders and investors.
Once hype ends, the laws of financial reality quickly reassert themselves.
© Philip Ammerman, 2024
Philip Ammerman is an investment and technology consultant and Managing Partner of Navigator Consulting & Innovation Partners. Philip has advised on investments in the tech sector since the Web 1.0 boom began with the launch of Netscape Navigator and Internet Explorer in 1995. In addition to advising on startup investments across a range of sectors, Philip is a co-founder of GR1T Motorcycles, an all-electric motorcycle company based in Munich, Germany.
All statements made in this article are the personal opinions of the author.
All images are the copyright of Cake and have been sourced from the Cake website.
Sources of Information (Reverse chronological order)
02.02.2024
TechEU
25.10.2023
Cake website
20.04.2023
Cake website
13.03.2023
Cake Website
13.12.2022
Cake Website
31.10.2022
Cake Website
25.08.2022
Cake Website
15.07.2021
Cake Website