Funding the Future

Special Purpose Acquisition Company (SPAC) Disruptions

A Special Purpose Acquisition Company (SPAC), sometimes called a “blank cheque” company, is formed purely to merge with an existing private company so that it may raise capital by going public on a stock exchange. This is often an attractive option for companies looking to raise large amounts of capital in a short period of time. Going public with a SPAC is both quicker and less risky than a standard IPO (Initial Public Offering), allowing the non-SPAC company to forecast investments months earlier. While SPACs go back to the 1980's, you may have heard about them recently because they accounted for 50% of new publicly listed US companies in 2020, and are looking to account for more than that in 2021.

What is it disrupting?

SPACs are behind a huge increase in the electric mobility industry over the past few years which threatens to disrupt almost all parts of urban transport as we know it. For some start-ups it seems to be the only realistic option for bringing their product to market.

Lucid Motors is a luxury electric carmaker looking to compete with the higher end BMW,Tesla and Lexus models. Four years ago Ford America was in negotiations to purchase the company and save Lucid Motors from bankruptcy but in February of this year it merged with a SPAC to go public. Lucid Motors now has a higher market capitalisation than Ford America of US$90 billion.

Aurora, a self-driving vehicle technology company founded in 2017, also recently undertook the SPAC process and raised US$1 billion to contribute towards its US$11 billion valuation. These are incredible numbers for such young companies but also show the immense amount of capital required to make these disruptive technologies mainstream.

Electric and autonomous vehicle start-ups have to compete with established giants such as Stellantis (the company behind Fiat and Chrysler among many others) and the Volkswagen Group (which owns Audi, Bentley, Porsche, and so on) for their customers who expect the same standards from new electric cars as they did from the petrol and diesel powered cars they have driven for the last century. Autonomous vehicles have their own industry giants to compete with but also have to overcome the much larger issue of public fear and distrust of robots. The solution is a R&D money pit with little to no short term returns on investment. It’s the sort of issue that usually scares off investors and may not be possible without immense resources such as Google's or in this case a SPAC IPO.

This issue is even more pronounced for the start-ups trying to create an entirely new type of transportation. Electric Vertical Take Off and Landing vehicles (EVTOL) are looking to overcome all the obstacles that prevented the average person from taking a helicopter from Taamaki Makaurau to Tauranga. They promise to be quiet, carbon free, cheap to run, and either autonomous or a taxi service so that you don’t need to pay a pilot to avoid the traffic jams.

These are lofty promises that are difficult to sell to typical private investors, especially when the startup will spend millions of the investors’ money in R&D before they can bring about a prototype, let alone entice and establish an entirely new market. There are also traditional players such as Airbus, Boeing and Bell to compete with. As a result SPACs have been used for a majority of the startups in this space.

Joby Aviation hopes to create an air taxi service with EVTOLs that can travel over 200 kms before recharging and are 100 times quieter than a helicopter. It built on earlier private funding rounds with their SPAC merger in August that raised US$1 billion, despite not being able to provide its air taxi service until 2024 at the earliest.

Lilium similarly hopes to have something to show investors in 2023 when it says it will have built 25 of its 7-seater EVTOL vehicles. Lilium went public through a SPAC merger in September raising US$524 million. Archer Aviation went public through a SPAC the same month, raising US$860 million for EVTOL vehicles and a ride share like service that could cost less than US$80 and cut 50 minutes off your hour-long commute.

Conclusion

SPACs certainly aren’t a guaranteed success. They gained an infamous reputation in the eighties for enticing investors with pipe dreams and providing little if any returns. The SPAC renaissance of the twenty twenties looks significantly more robust but hasn’t proven itself yet. Of the companies mentioned, only Lucid has brought a product to market (albeit in very limited numbers).

However, without a SPAC IPO, its hard to imagine these start-ups obtaining the capital they need to R&D their prototypes, lobby governments regulating the new technologies, and invest in the new infrastructure needed on the ground. That’s why for better or worse SPACs are likely to be a fixture of modern capital raising and a consistent driver of disruptive development.

If you’re wondering how to develop your start-up into an industry leader or take the idea in your head and create a whole new industry, get in touch.