Arc expands into electric commercial and defense boats with $50M raise

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

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

The expansion into these newer markets won’t come at the expense of Arc’s consumer boat business, Lee told TechCrunch in an interview. He said sport boats are a category that generates “meaningful revenue” for Arc, and helps prove to commercial customers that the company’s technology is both capable and durable.

It’s a plan that roughly approximates how Tesla got started, and one that Greg Reichow — a former VP at Tesla and a general partner at Eclipse — said can work for Arc.

“The right strategy was go develop the technology, get it to work on the high end of consumer boats, then take that technology as you get some experience with it and make sure the economics really work well for the commercial sector, and you have the reliability for the commercial sector,” he said in an interview with TechCrunch. “And so that’s where we’re at today with Arc.”

This approach appears to be working. Lee said organic interest from commercial and defense players was so strong that it accelerated the startup’s plans to expand into these sectors.

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

Lee doesn’t expect Arc to build whole boats for these new markets. For commercial applications, he said Arc will likely take the same kind of approach that it did with its hybrid tugboat that debuted last year. That project involves Arc designing the boats for a customer (Curtin Maritime) and building them in conjunction with a shipyard (Snow & Co.). For defense, Lee said he’s more comfortable being a direct supplier of propulsion systems to primes and neo-primes because there is a “huge unmet need for electric powertrains.”

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

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

In defense, Lee said there’s a lot of attention on making autonomous boats and other watercraft.

“In order to make them autonomous, you need a step-function improvement in terms of their 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 around 200 people, and Lee said he expects to add more following the fundraise, especially on the production, engineering, and go-to-market teams for commercial watercraft. And he sounds excited to run a company that straddles multiple lines of business.

“This is where diversification is incredibly valuable. There are unique strengths to being in the consumer space. It’s got great cash conversion cycles [and] lucrative margin opportunities,” he said. “And then you balance that out with commercial applications, which have a tremendous amount of defensibility. You can line up demand years in advance. So you kind of balance those two things out, and they start to blend into a stable, predictable, defensible business.”

While it’s always a risk to move into new products and new markets, Reichow said he thinks Arc — which has many former SpaceX, Tesla, and Rivian employees in its ranks — is well-situated to succeed.

“I’ve not yet met a company that has been able to move as quickly as Arc does in terms of develop something, whether it be a technology or product, do it very quickly, do it very efficiently, and then get fast cycles of learning on it,” he said. “That’s their secret weapon, and why they’re going to win long term.”