To SPAC or not to SPAC... that is the question.

The good, the bad, and the ugly (cleantech edition)

Ahhhhh the wild SPAC species — commonly found roaming the halls of Wall Street bankers, pre-revenue start-ups, and anyone who enjoys a good Reddit rabbit hole.

I’m certainly not the first to share my perspectives on SPACs, and definitely won’t be the last — but I’d like to offer a few personal reflections, specifically gained from…

1. Helping multiple pre-revenue companies raise SPACs

2. Running due-diligences on behalf of SPAC sponsors & investors

3. Wide-ranging conversations with lawyers / bankers / entrepreneurs / investors

So here it goes — the good, the bad, and the ugly of SPACs — as seen by a pragmatic climate optimist. (Spoiler alert - it all adds up to a net positive for the climate!)

The Good

Badly needed investment dollars… where they matter

30-50% of the technologies needed for a carbon neutral economy are still in the R&D or pilot stages. To get those technologies from the lab to at-scale, you need investment dollars. I’m not talking $5Mn for 6 programmers in a basement… I’m talking $10s and $100s of millions in pilot, demo, and at-scale manufacturing and operations — notably, with technical risk (e.g., “will it work?”) embedded.

This is the #1 benefit of cleantech pre-revenue SPACs — they are moving large scale investment dollars to early-stage clean tech start ups that need them. And from a start-up’s perspective, they are doing so in an “affordable” fashion, at valuations that are ~3-5x higher than what that start-up might find in a private fundraising round.

This is fundamentally a good trend for the world. (full stop)

Faster, more efficient, higher certainty public pathways

Now, removing ourselves from the cleantech-only lens… SPACs are objectively faster, more efficient, and higher certainty routes for a start-up to ‘go public’.

SPACs take 6 months instead of 18 months, are run in a machine-like fashion with investment dollars in-waiting and a rapid-fire pitch process, and the valuations are known after ~1 month, rather than valuations changing right up to the last minute of a listing.

All of this boils down to less headache for the start-ups (and hopefully the investors), which is, in-principle, a good thing.

High-growth investment alternatives (when done right)

To borrow a line from my investment banker peers… SPACs are exciting, high-tech, early-stage growth stocks that are viable investment avenues for public markets looking for that type of risk / return profile. Key phrase: risk / return

These days, the only high-growth stocks you can find are generally apps on your phone (Facebook, Netflix, Slack), so an opportunity for public markets to access these types of companies is an attractive proposition… as long as the investor understands the type of risk underlying the investment (e.g., venture-like for pre-revenue clean tech start-ups).

Like any pre-revenue company, there’s a chance the whole thing goes to 0… so invest wisely my friends.

The Bad

Over-saturation leads to under-cooking

Last I checked there were >$100Bn (easily) in public investment dollars sitting in SPACs, with a 2-year ticking time clock to be invested in a start-up. This is after a 2019/2020, amidst a pandemic, where >$100Bn was already invested in start-ups through SPACs.

What this combination of dollars and incentives does, is lead to earlier-and-earlier stage companies pursuing a SPAC route. As mentioned in “the good”, it is objectively an attractive financing mechanism, pending you can manage the requirements of being a public company (e.g., SEC, board committees, quarterly reporting, etc.)

While this is not inherently bad, it does mean that the risk-profile of SPACs generally continues to get higher (e.g., likelihood of succeeding as a pre-revenue company), while the valuations do not change materially to reflect said risk.

Sponsor economics - a rich, 20% promote fee

Don’t get me wrong, I can appreciate a healthy dose of capitalism, and the SPAC sponsors who meet with, strategize over, diligence, and ultimately decide between 100s of start-ups put in real work… but does that warrant a guaranteed 10x return? (Talking to you Chamath…)

Let me explain…

• It costs a SPAC sponsor ~$25K to set up their fund

• They will end up paying 2-3% of the size of that fund in banker / legal fees

• And for that work / risk, they generally get allocated 20% of the fund size

So… that means if you can manage to raise $250Mn into a SPAC, you have a $50Mn payday (minus ~$7Mn in fees) on the other side of it pending you can find an attractive target and close the transaction — which these days, is almost guaranteed (see “the ugly” for when these days might change…).

One recent development worth highlighting: just this past week, banks have been starting to restructure this payout so it is a bit more fair to everyone… but the majority of SPACs are still structured as I laid out above.

The Ugly

Bubbles, bubbles, bubbles

While I believe the trend of pre-revenue cleantech SPACs is a net positive for the world, there is a mad rush of them which, to all the experts predictions, will likely lead to a bubble. (Note: this bubble will be a ‘coming back to earth’ of valuations, not necessarily the end to the SPAC trend.)

When this happens (a pre-cursor of which happened the last couple weeks), you’ll see more and more lawsuits the-likes of which Nikola experienced, retail investors who bought shares unknowingly through Robinhood will lose their shirts, and the whole SPAC market will come to a screeching halt. (even if you are one of the good SPACs!)

I can promise you it won’t be pretty.

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What does this all add up to?

If you ask me, it is a net-positive trend for the climate that is worth the impending ‘bumps-in-the-road’ that are bound to come. But that’s just me… you should form your own opinion!

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1… 2… 3… SPAC!

Until next time…