Rivian stock (RIVN) surged on Wednesday after the EV maker announced a joint venture deal with Volkswagen (VWAGY), crucially bringing fresh capital into Rivian’s coffers.

Volkswagen announced it intends to work with Rivian to create “next generation software-defined vehicle (SDV) architectures” to be used in both companies’ future EVs. The joint venture will use Rivian’s “zonal hardware design” and platform as the foundation of future vehicles, as well as Rivian’s electrical architecture expertise for the vehicles. Rivian will license its existing IP rights to the joint venture.

In exchange, Volkswagen will invest an initial $1 billion in Rivian through an “unsecured convertible note that will convert into Rivian’s common stock,” with up to $4 billion in additional investment staged through 2026 for a total infusion of $5 billion.

Irving, Calif.-based Rivian's shares closed up 23.2% on Wednesday.

“The partnership fits seamlessly with our existing software strategy, our products, and partnerships. We are strengthening our technology profile and our competitiveness," Volkswagen Group CEO Oliver Blume said in a statement.

“Not only is this partnership expected to bring our software and associated zonal architecture to an even broader market through Volkswagen Group’s global reach, but this partnership also is expected to help secure our capital needs for substantial growth,” Rivian CEO RJ Scaringe said in the statement.

For Rivian, the news of fresh capital allays concerns over the company’s runway as it bridges to the release of its next-generation vehicles, the R2 and R3 mass-market SUVs. In terms of its cash cushion, Rivian said it had $5.98 billion at the end of Q1 versus $7.86 billion at the end of Q4.

"This news is meaningfully positive for RIVN as the agreement should provide the company with access to capital to not only fund the ramp-up of production of the R2 at its Normal, IL facility but also to build a new facility in Georgia for its mid-size vehicle platform," Bank of America analyst John Murphy wrote in a note to clients on Wednesday. "We have assumed RIVN would need to raise more capital, and VW's investments in RIVN will prove valuable in helping it achieve the scale necessary to get to positive free cash flow."

Murphy also noted potential benefits from cost savings and operating efficiencies in the joint venture deal, which could ultimately lead to higher gross margins.

Separately, Scaringe told Reuters yesterday that Rivian was improving its cost structure and simplifying production at its Normal, Ill., plant via upgrades to its factory equipment, among other things.

Pras Subramanian is a reporter for Yahoo Finance covering the auto industry. You can follow him on Twitter and on Instagram.

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