The implosion of the SPAC boom has proven a multiquarter process. We may be in the final throes of the experiment, at least from a startup perspective.
SPACs, or special purpose acquisition companies, gained popularity during the final years of the last economic bonanza, when capital was cheap and public markets were hot. In essence, SPACs are synthetic companies taken public with no real operations of their own. Later, they merge with a private company, taking their new partner public without much of the usual fuss.
Blank-check combinations are a hack to get around the traditional IPO process, allowing less-mature companies to raise capital and go public. It also seemed to be a great shortcut for SPAC promoters to make money. Retail investors, not so much. The results of recent SPAC deals have generally proved lackluster at best and disastrous at worst.
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Some companies that had considered SPAC combinations backed away from their proposed transactions. Consumer fintech startup Acorns pulled its blank-check deal in January of this year, leading this column to call the overall SPAC experiment a failure because it had not managed to clear any meaningful portion of the growing unicorn backlog. The pace at which traditional IPOs have been able to take billion-dollar startups public is far below the rate at which more unicorns are minted, and SPACs were unable to change that market reality.
But many companies did pursue SPAC combinations. Electric vehicle SPACs were particularly messy, as TechCrunch reported here. The traditional perspective that SPACs are best used for floating less-than-spectacular companies held true. And as a result, the post-combination performance of many SPAC deals has left retail investors holding the bag.
The damage continues to mount, with a SPAC’d EV company recently declaring bankruptcy. It turns out that those rosy projections were just that.
This morning, we’re running a short survey on the performance of venture-backed companies that went public via blank-check combinations. Then we’ll talk about impending regulatory changes, the growing trend of SPAC deals getting canned, and then look to the future. Some firms are holding to their plans to go public via SPAC. Are they bold, misguided or something else?
The damage done
BuzzFeed, a media company, was once a darling of the investing class. Crunchbase data shows that a16z led its $50 million Series E, while NBCUniversal led consecutive $200 million rounds. Other venture backers included New Enterprise Associates and RRE Ventures. BuzzFeed saw its private-market value scale to around $1.7 billion.
Then time passed, and BuzzFeed wound up taking the SPAC route to the public markets. Now it’s worth around $240 million, or about $1.78 per share. (SPACs are generally sold at $10 per share, the price at which they usually execute their combination.)
Latch, which sells hardware and software to apartment buildings, raised money from Techstars, Lux Capital and RRE, among other investors. PitchBook data indicates that it reached a $411.76 million valuation ahead of its SPAC combination, which pushed its valuation well above the $1 billion mark. Today, it’s worth $194 million, or $1.35 per share.
AppHarvest, an agtech company that grows crops indoors, raised more than $100 million before going public in a blank-check merger, Crunchbase data indicates. Its value also reached the $1 billion mark in its public debut, per PitchBook. Now, it’s worth $270 million, or $2.65 per share.
The list goes on and on. Consumer fintech lending service Dave reached a $1 billion valuation back in 2019. Then its value multiplied in its SPAC deal. Today, its valuation has been slashed by more than 90%, with its 89-cent share price today pushing the company’s worth to below $350 million.
It is not correct to say that a SPAC combo is a valuation kiss of death, but it is fair to note that the two are paired more often than is comfortable.
The public market question
Is it unfair to bring up the severely lacking performance of post-combination SPACs when other assets are selling off? No. The public markets are more regulated by design than, say, crypto or private markets. But thanks to some loose rules, companies got to project huge growth to entice investor demand and raise capital. Now that those projections are coming up dry, prices are often in free fall.
While public markets have sold from highs, many SPAC deals’ declines on the stock market have been a multiple worse than what’s happened with companies that took the traditional route to IPO. Finally, noting that crypto has also lost value in recent weeks and months is not the defense of SPAC deals that some think.
The scale of damage caused by what turned out to be over-hyped SPAC deals turned regulatory heads, and changes are coming. The U.S. Securities and Exchange Commission (SEC) proposed new rules for SPACs, including “additional disclosures about SPAC sponsors, conflicts of interest and sources of dilution,” along with “additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions.” Importantly, the SEC’s proposed rules would make SPAC projections more similar to “those required in registration statements for an initial public offering.”
No more infinite growth, in other words. The SEC’s rules went into a comment period that was extended and, per The Deal, closed yesterday. TechCrunch will have more on the rules when they are set.
The changes come too late for investors who bought into SPAC deals only to see their capital evaporate. But for SPACs that were still brewing when regulatory changes started to circulate, there was still one last option: smashing the eject button.
SPACs are getting yanked
The number of canceled SPAC merger plans keeps on rising.
On June 3, Axios counted that 19 companies had given up on SPAC exit plans since the beginning of the year — including the above-mentioned Acorns as well as Forbes and SeatGeek. According to rumors, Traveloka also joined the list that very day, with the Asian travel company now aiming for a traditional IPO on a U.S. stock exchange.
Looking further back, The Wall Street Journal referred to Dealogic data showing that “more than 35 SPAC mergers have been called off since the start of November, topping the total from the previous four years combined.”
Some withdrawals are also happening behind the scenes, with blank-check vehicles pulling their own IPO plans. For instance, Tiga Acquisition III and Freestone Acquisition recently did so.
And sometimes, it’s investors pulling the rug.
“It’s very rare for one of a SPAC’s early backers to end their involvement after it starts trading,” Bloomberg wrote. Yet, this is what happened with ex-Credit Suisse CEO Tidjane Thiam’s fintech SPAC, Freedom, which parted ways with asset management giant Pimco. While Pimco was replaced with Chinese entrepreneur Edward Zeng, whom Freedom described as a better fit, “Pimco’s move shows the sharp turnaround in sentiment from last year,” Bloomberg noted.
Not all SPAC mergers are being canceled. French music streaming company Deezer, for example, is still set to go public on Euronext Paris. However, SPAC regulations are very different in France than in the U.S. — a topic for another day, but one that explains why this exit model hasn’t as drastically fallen out of favor in Europe.
SPACs may have fallen out of favor for now, but they could rise again in the future if we see a similar set of rosy economic conditions. If and when that does happen, we’d all do well to remember this moment in time as a warning to future investors.
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