Spurred by the belief that the market for fuel-efficient vehicles is about to take off, a slew of tiny car companies is springing up in Europe and the U.S. They are racing to produce the next "green" car, betting that soaring demand will allow them to survive alongside the giants of Detroit, Stuttgart and Tokyo.

Most of the upstarts were founded in the last 12 months and have financial backing from venture-capital firms. They are headed by former top engineers and designers from the likes of Germany's Volkswagen AG and storied U.K. racecar builder McLaren. Responding to soaring gasoline prices and a tightening noose of emissions regulations in Europe and the U.S., the companies are working on a new generation of hybrid and electric vehicles.