Arc expands into electric commercial and defense boats, raising $50 million

Los Angeles startup Arc Boat Company wants to expand its fledgling business and even sell electric propulsion systems to defense contractors, in an effort to fulfill founder Mitch Lee’s desire to “electrify everything on the water.”

To do this, Arc raised $50 million in a Series C funding round from Eclipse, a16z, Menlo Ventures, Lowercarbon Capital, Necessary Ventures, and Offline Ventures.

Expansion into these new markets will not come at the expense of Arc’s consumer boating business, Lee told TechCrunch in an interview. Sportsboats are a category that generates “significant revenue” for Arc, he said, and helps prove to commercial customers that the company’s technology is capable and durable.

It’s almost a rough plan for how Tesla could start, and one that Greg Rayshaw — a former vice president at Tesla and general partner at Eclipse — said could work to Arc’s advantage.

“The right strategy was to develop the technology, make it work at the highest level of consumer boats, and then use that technology as you gain some experience with it and make sure that the economics work really well for the commercial sector, and that you have the reliability for the commercial sector,” he said in an interview with TechCrunch. “And that is where we are today with Ark.”

This approach seems to work. Organic interest from commercial and defense players has been so strong that it has accelerated the startup’s plans to expand into these sectors, Lee said.

“Our thesis is that the entire industry will transition to electric in the same way that all lawn equipment transitions to electric, because it’s just a better experience,” he said.

I don’t expect Arc to build complete boats for these new markets. For commercial applications, he said Arc would likely take the same approach it did with it The hybrid locomotive that debuted last year. This project involved Arc designing boats for a client (Curtin Maritime) and building them in collaboration with a shipyard (Snow & Co.). For Defense, Lee said he feels more comfortable being a direct supplier of propulsion systems for new Primes and Primes because there is a “huge unmet need for electric powertrains.”

Lee also said that potential commercial and defense companies want different things from Arc.

“The traction we’re seeing in the commercial space is driven by a combination of two things: the lower cost of electricity and the higher cost of combustion,” he said. “The cost of electricity is going down for obvious reasons. We’re beneficiaries of the automotive R&D system. And the cost of combustion is going up because of compliance burdens, because these things — I mean, this is my blunt way of saying it, but they’re cancer-spewing machines.”

In defence, Lee said there is a lot of interest in making autonomous boats and other watercraft.

“In order to make it autonomous, you need to incrementally improve in terms of its reliability and uptime, because you no longer have a crew of people on board turning wrenches to keep these giant main combustion engines online,” he said.

Arc has grown to about 200 people, and Lee said he expects to add more after fundraising, especially in the production, engineering and go-to-market teams for commercial watercraft. He seems passionate about running a company that covers multiple business areas.

“This is where diversification is incredibly valuable. There are unique strengths to being in the consumer space. It has great cash conversion cycles (and) profitable margin opportunities,” he said. “Then you balance that with commercial applications, which have a tremendous amount of defensibility. You can arrange demand years in advance. So you balance those two things, and they start to coalesce into a stable, defensible, predictable business.”

While moving into new products and markets is always a risk, Raishaw said he believes Arc — whose ranks include many former employees of SpaceX, Tesla and Rivian — is well-positioned for success.

“I have yet to meet a company that has been able to move as quickly as Arc does in terms of developing something, whether it’s a technology or a product, doing it very quickly, doing it very efficiently, and then having rapid cycles of learning about it,” he said. “That’s their secret weapon, and it’s the reason they win in the long run.”