It appears that we have yet another SPAC meltdown on our hands. Embark, a maker of autonomous trucking software, has laid off most of its staff, intends to use its remaining employees to wind down its operations, and is working with its board to “to evaluate [its] options, including selling assets, restructuring the company or shutting down completely.”
For a company that closed its blank-check combination back in late 2021, it’s a stunning fall from grace. Crunchbase counts more than $100 million invested into Embark before its SPAC deal, including capital from Sequoia and Tiger Global.
It raised even more capital when merging with Northern Genesis Acquisition Corp. II. And after not that many public earnings reports, it’s seemingly game over.
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Sure, self-driving vehicles wound up being farther out than many anticipated. Those surprised by their slow development seem to include every entity that placed bets on that technology being more mature than it is. Embark is hardly the only company in its larger market area to struggle.
But from a deal with a multibillion-dollar price tag to a smoking crater, we have to ask whose fault this all was. After all, it’s very embarrassing. And bad.
Sophisticated
The goal of certain investing rules in the United States is to prevent unsophisticated investors from losing their shirts or, alternatively, getting swindled.
A way around accredited investing restrictions to open up investments into highly risky entities is to take them public via blank check companies, better known lately as SPAC combinations. Many companies pursued these deals when the public markets were frothy.
It isn’t clear how many private-market investors in those companies managed to sell their shares at attractive prices before values (more often than not) dove post-combination. But we have to presume that the answer is not zero. On the other hand, the result of investing in many SPAC deals was, unfortunately, annihilation. And I think that, collectively, investors at the peak of the SPAC boom weren’t looking at the situation with clarity.
The sin appeared to be at least misplaced, if not false, optimism. Let’s use Embark as an example, though it is far from the only company we could call to task for the following sort of mess:
- Embark announces a SPAC combination with a public shell company and intends to list at a valuation of more than $5 billion despite no historical revenue generation.
- The deal, Embark says, will, on paper, generate enough cash to “fully fund capital expenditures through 2024[.]”
- That timeline is predicated on Embark having an anticipated “$613mm of cash to pursue its go-to-market strategy and consolidate its market leadership position” after the combination closed.
- However, the company wrote in smaller print, the cash balance was incumbent on no redemptions by SPAC shareholders — essentially existing owners of the pre-combination SPAC stock opting out of the deal — and some cash coming from the company itself.
What happened when the deal closed? Did all that cash appear? Nope. When you go back in time and read the company’s PR on the matter, you will note that it touts its new valuation of around $5 billion but doesn’t actually detail how much cash it raised during its SPAC deal. So TechCrunch went hunting. From page 44 of Embark’s 2021 recap SEC filing, the following provides a bit of clarity:
Following the initial public offering, the exercise of the over-allotment option in full and the sale of the private placement warrants, a total of $414.0 million was placed in a trust account. After deducting payments to existing shareholders of $299.9 million in connection with their exercise of redemption rights, the payment of the $14.4 million of deferred underwriting fees and a total of $14.6 million in expenses in connection with the Business Combination paid from the trust account, the remainder of the trust account was transferred to Embark’s balance sheet to fund our operations and continued growth.
Nearly $300 million of the $414 million that the SPAC combination was set to create appears to have evaporated before the deal was done! This helps explain why the company’s financing cash flow in 2021 was just $268.9 million, which Embark notes was “primarily” driven by “proceeds received from [its] Business Combination.” It is also why the company closed 2021 with cash and equivalents of $264.6 million, a figure that is far below the $613 million that was trumpeted as possible back when the SPAC deal was announced.
But simply raising less cash than hoped for is not a catastrophe, right? It happens to companies of all stripes all the dang time! Sure, but Embark’s cash burn was rising at the time (compare Q4 2021 free cash flow to the same quarter of 2020 for reference), and revenue was nowhere to be found. Indeed, despite sharing projections with public investors that it might generate revenues of $867 million in 2024 and $2.77 billion in 2025, the company’s most recent earnings report (Q3 2022) included zero revenues.
To recap: Big plans to raise a ton of money to fund the company fell short, and Embark wound up becoming worth incredibly little in a quick fashion. Despite a 1-20 reverse stock split executed last year, Embark is worth just $2.55 per share as I write to you, giving it a market cap of around $60 million, per Google Finance. That works out to value destruction of around 99% from its prior $5 billion valuation.
Given that venture investors will tell you that they are both good at what they do and that their firm has some pretty hefty advantages in how it secures deal flow, closes deals and helps its portfolio operate, you wonder why they couldn’t better see the risks here.
Big bets beget big busts, yeah? But there’s at least a theoretical reason why we let more sophisticated investors fund private companies like startups and not regular folks, say, saving for retirement.
Venture investors — pro investors who claim to know what they’re doing — managed to export their risk to the public markets using SPACs. Perhaps they were looking to offload their less exciting deals or simply find a way to secure some capital for those projects without putting more of their own coins to work. Perhaps. But regular investors absorbed the blows.
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