The SPAC Phenomenon and Its Challenges
A few years ago, we surveyed the burgeoning Special Purpose Acquisition Companies, aka SPAC, phenomenon and didn’t like what we saw, so we ever so subtly stuck our flag in the ground and yelled stop.
The SPAC craze was heating up, and something didn’t feel right. Sure it made sense on one hand. The IPO market was slow and SPACs were a quick and easy way to go public. But the more we looked into it, the worse it seemed.
If your interests include anything in the mystery/thriller/spy genre, you might recognize “quick and easy” as something we call a “clue.” Another clue is that SPACs are also called “blank check” companies, and just ask the Austro-Hungarian Empire how that “blank check” worked out for them.
For a little more nitty gritty, we think you should click here and read our white paper, but to summarize, our basic thesis was that a SPAC could work for companies with significant revenue and real earnings, most companies couldn’t justify the valuation which left them un-acquirable (and in fact we’ve seen a number of deals where SPAC companies wound up selling or merging for a mere fraction of what they were “worth” when they SPAC’d).
And founders who SPAC’d were running the risk of their life’s work being diluted or even destroyed. This is where the importance of capstone M&A comes in, as it’s instrumental in guiding these processes.
Lessons from the Automotive Industry
We’ve learned a fair few lessons in our years of operating in and around the capstone automotive industry, one of those being that the time frame to develop new automotive technology takes longer than these companies had given their funding constraints and they’d never have enough cash to get to scale, ie survive.
You need to figure out how to devote about 7 years of your life to develop a product from the idea stage to integration into a real live automobile. When we saw companies with no revenue, and sometimes not even a working product, something didn’t feel right.
Venture capital valuation is essentially witchcraft, oftentimes disconnected from reality, and usually based on optimism (the graveyard of companies with great-sounding ideas is vast.)
The venture community might love your product or service and shower you with flattery and encomiums, but once you’ve flown the coup, the public market will tell you that that wasn’t real. Time and again share prices fell from the standard $10 that SPACs generally open with down to a dollar or two. Market caps didn’t fare so well either. Capstone M&A has experienced this first hand.
A Look at the LiDAR Segment
Let’s talk about a particular segment for a minute that was particularly spicy during the SPAC boom, and is still a work in progress even today, and that’s Lidar, or LiDAR, or light detection and ranging.
Now, smarter people can write whole books on Lidar, but suffice it to say the Lidar buzz benefited from autonomous driving buzz, which has fizzled, which led to way too many Lidar companies. Remember when we were supposed to be lounging in our self-driving vehicles by 2022 and now Cruise and Waymo are left trying to convince us we’re all lousy drivers, oh, and please don’t put traffic cones on the hoods of our unmanned robotaxis?
We happily stipulate that lidar has its uses, and will continue to develop and find new uses, but many of the lidar companies that rode the SPAC boom didn’t have revenue or contracts with OEMs, which should have made them poor candidates. SPACs didn’t care, but the market sure did. All this from a market segment that some say will be worth trillions someday, or nothing depending on whom you listen to.
The SPAC Aftermath
Before the world turned upside down in 2019, we counted nearly 100 companies working on lidar. Our thought then was that after consolidation there would be 5 or 6 suppliers of lidar to the capstone automotive industry. We think that’s still true. At the beginning of 2023, Techcrunch wrote that Luminar counted 25 active lidar programs.
In our white paper, we cited the performance of Fisker, Lordstown, Luminar, Nikola, and Velodyne. Lordstown recently went bankrupt, er, announced a strategic restructuring. Nikola has been through enough twists and turns to warrant a miniseries at least on Hulu.
And Velodyne ceased trading on February 10, 2023 after merging with Ouster, which had gone public itself via SPAC. Of the 10 or so lidar companies that went public via SPAC, you can count on maybe 2 fingers the number that arguably are not train wrecks. Capstone M&A sees this as a cautionary tale.
SPACs generally have a two-year window to complete an acquisition, and a lot of those that haven’t combined are hitting their deadline around now. You think a lot of those investors are breathing a sigh of relief?