While it won't be what the year is best remembered for, for tech investors, 2020 will go down as the year when so-called "special purpose acquisition companies" (SPACs) took the innovation landscape by storm. A SPAC is an alternative to a conventional initial public offering (IPO) in which an investor group takes a shell company public through its own IPO and then uses the proceeds from the IPO to acquire a private company, which now becomes the new publicly traded company. Investors essentially get to outsource their due diligence to the SPAC sponsor, and the private company gets to bypass the risk and indignities of an IPO roadshow and simply negotiate a price directly with the SPAC sponsor.
Dozens of emerging tech developers in energy, materials, digital, and more have gone (or announced plans to go) public via SPAC so far this year, including luminaries like (would-be) electric truck maker Nikola, 3D printing unicorn Desktop Metal, lidar developer Velodyne, and solid-state battery specialist QuantumScape. Venture capitalists have gotten in on the action too, with Lux Captial* creating its own $345 million "Health Tech Acquisition Corp." to take targets public.
For conventional venture investors, corporate venture capitalists, M&A executives, and anyone interested in emerging tech innovation, what does the SPAC fad mean for investment in the space? We see several key impacts:
More exit opportunities mean more funding for harder-to-back sectors
Most clearly, additional options for exits will help bid up valuations and help loosen investors' purse strings. While segments like enterprise software, biotech, or direct-to-consumer products that have been favored by VCs might not need the help, the SPAC alternative can help back areas like energy and materials that are not as good a fit for the traditional venturing model – as the examples highlighted above show. In particular, corporate venture capital (CVC) groups with investments and live potential deals in SPAC-happy sectors, such as energy storage and electric vehicles, should aim to strike while the iron is hot and add additional investors to their syndicates.
More dubious exits create noise in the market
The SPAC class of 2020 contains some strong players like ChargePoint and Desktop Metal, but others, such as Nikola and QuantumScape, have significant issues, suggesting that the quality control process isn't up to snuff. Those interested will still need to evaluate SPAC graduates critically – and note that a successful SPAC may not represent even as strong a point of validation as a traditional acquisition or IPO.
Companies that shouldn't be public now will be
As the SPAC bubble inflates and less well-vetted companies make it to the public markets, some will suffer the ill effects of going public too early without the requisite business stability and buttoned-up financial and operational controls. While most of these SPAC targets haven't been public for long, a company like Loop Industries (which went public via a more conventional reverse merger, not a SPAC) is a cautionary tale about the challenges of an early-stage tech developer being a public company.
Corporate M&A teams will need to get more aggressive
If more companies now have the option of raising significant funding through a SPAC, they may be less receptive to a corporate acquisition offer. Business development leaders, at least in some sectors, may need to push into exploring opportunities at earlier stages to get the jump on SPAC sponsors if they want to keep startup acquisitions as part of their strategy.
For corporate innovation teams, CVCs, and business development executives, SPACs are an important development to track but not a game changer. You still need to invest for strategic impact, find ways to leverage your expertise and market access to outcompete other options, and build real value. However, having a significant additional funding alternative will turn up the pressure in some cases and shine a brighter light on rising innovative companies that might otherwise have flown a bit more under the radar – increasing the pressure on innovation teams to act and have answers for the C-suite about their strategy. More speculatively, corporates could even consider sponsoring their own SPACs – like a hypothetical Dow Chemical plastic waste SPAC or a General Motors vehicle autonomy/electrification SPAC – as a future model. Regardless, expect the SPAC trend to continue, and quality to be uneven, so keep tracking funding developments and evaluating each carefully on a case-by-case basis.
* Lux Research was spun out of Lux Capital as an independent company in 2004; Lux Capital remained a minority investor in Lux Research until 2017, but there is no longer any relationship.