Going public hasn't always been easy for mobility startups, but in 2020, the rise of special-purpose acquisition companies, better known as SPACs, changed that.
2021-01-22SPACs, which raise money from investors with the sole intention of buying another company, offer startups a faster and easier path to the public markets than a traditional IPO. Last year, according to PitchBook, 26 companies developing technology for electric vehicles, autonomous vehicles, and other modes of transportation went public through mergers with SPACs, or announced their intention to do so.
Many lack meaningful revenue. Some don't intend to release products until 2022 or later. But, in a sign that investors are excited about the potential of firms with innovative approaches to moving people and things, those 26 companies were together worth more than $100 billion, as of January 11, according to Pitchbook.
If you had invested in an index comprised of those companies last year, you would have received a return well above that generated by the S&P 500. During the second half of 2020, an index of the mobility companies that announced plans to go public through a SPAC would have earned a 77.7% return, compared to 22.2% for the S&P 500.
But given how young and unproven most of those companies are, there are risks for investors who want to bet on them or other mobility startups. In a January 15 research report, PitchBook analysts Asad Hussain and Zane Carmean laid out what they consider the two primary dangers presented by mobility SPACs.
Overheated valuations
The first is that optimistic valuations could dampen investors' enthusiasm if they fall.
Some of the interest investors have shown in EV companies over the past year has been driven by Tesla's soaring stock price. The company's valuation is higher than any other automaker's, which some observers believe is excessive given Tesla's relatively small sales numbers and its reliance on the sale of regulatory credits to generate profits.
But Tesla at least has a track record of building vehicles customers love. QuantumScape, a solid-state battery startup that merged with the Kensington Capital Acquisition Corp. last year, predicts it won't begin earning revenue until 2024, but still had a market capitlization of $18 billion as of Wednesday afternoon.
And Nikola, the electric semi-truck maker that has received inquiries from the Securities and Exchange Commission and Department of Justice after a report written by a short-seller questioned how honest the company and its founder have been, was worth $8 billion as of Wednesday afternoon.
Though Hussain and Carmean predict the EV industry's value will expand from $78 billion, as of January 11, to $437 billion in 2025, they wrote that a decline in the stock price of a well-known EV company could make investors more hesitant to invest in EV and other mobility companies that want to go public through SPACs.
A lingering bad reputation
Another risk comes from SPACs' longstanding poor reputation. Before 2020, SPACs were seen as a tool for companies in poor financial condition, Hussain and Carmean wrote.
Though they believe that reputation is improving, it might be difficult for mobility companies that merge with SPACs to make deals with customers and partners who are still concerned about SPACs.
Have you been involved in a mobility SPAC? Do you have a news tip or opinion you'd like to share? Contact this reporter at mmatousek@jkmperu.com, on Signal at 646-768-4712, or via his encrypted email address mmatousek@protonmail.com.
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