2020 was the year of EV SPACs and here are the 4 factors fueling the boom

2020 was the year where we saw the proliferation of SPACs (Special Purpose Acquisition Companies aka “blank-check companies”). As shown in the chart from the WallStreetJournal below, SPACs ended up raising far more money in 2020 than ever before. As of the date of this post, there are 220 SPACs with $70B+ in trust seeking acquisitions…

SPAC sponsors targeted companies in high growth industries, and some of these deals, especially in the EV (Electric Vehicles¹) space, have been particularly successful. According to our own deal tracker, 20+ startups in EV space raised more than $10B via SPAC deals (incl. PIPEs) in 2020.

Please find the link to the most up-to-date version of this tracker below.

All of these have been so far positively performing² (compared to the SPAC IPO price) with Quantumscape highest at $84.45 per share, representing a whopping 745% return above the SPAC initial offering price. First principles thinking would require all of us to ask the following question: why was 2020 the year of EV SPACs? As an ex-investment banker that helped advise companies on IPO and M&A transactions and as a VC investor with portfolio companies going through SPAC and IPO routes, here is my attempt to answer it. I believe that 2020 created a perfect storm for EV SPACs for a few reasons:

1. High volatility creating an environment hostile to the traditional IPO process

Volatility is a key topic for every startup that is contemplating an IPO. Good ECM (Equity Capital Markets) bankers would tell you that you would need a certain period of low volatility (less than ~20) for good pricing.

Source: Google Finance

In a traditional IPO process, a company goes through a 6+ month-long process and the price of the offering is decided during the final night before the IPO, which is affected by volatility. As seen above, the volatility has gone up sharply in 2020, which created a hostile environment for traditional IPOs and resulted in eye opening first-day pops, incl. a 112% pop for Snowflake, an 86% pop for Doordash and a 115% pop for Airbnb. Yes, these are billions of dollars left on the table. Essentially, 2020 made it more visible how broken the traditional IPO process is.

In comparison, a company gets the price at the beginning of a SPAC process after negotiating with SPAC sponsors. This provides more clarity and execution certainty. The SPAC process also allows tapping into larger funding pools thanks to PIPEs. In a nutshell… SPAC = growth round + IPO. These are all happening a fraction of the time needed for a traditional IPO. If you would like to learn more about the SPAC process (and compare it to the IPO process), please see another post I’ve put together earlier for some of our portfolio companies below:

Also, I would highly recommend this excellent post by Bill Gurley: https://abovethecrowd.com/2020/08/23/going-public-circa-2020-door-3-the-spac/

2. Historically low interest rate environment increasing risk appetite and making growth stocks more attractive

Given the unprecedented measures taken by the Federal Reserve, we are living in a historically low interest rate environment. As of the writing of this post, 10-year treasury bond yield is around 0.9%.

Source: Cnbc

Imagine, you are an investment professional at CalPERS or any other large institutional investor. In order to stay solvent, you would probably need to return at least a few percentages per year. Back in the day, you could do this by lending money to the US govt, which is assumed to be theoretically risk-free. During the early 1980s, this rate was above 10%! Now, the returns are much lower (the same applies for other fixed income investments), and you see a new asset class rising with SPACs, where early SPAC investors can gain substantial returns (again see the chart), what would you do? In a nutshell, historically low interest rate environments help increase the risk appetite for investors and attract everyone to high growth/tech stocks, which is the topic of the next factor.

3. Tesla’s soaring stock price increasing interest in e-mobility

In 2020, Tesla’s stock price had a meteoric rise of 696% YoY and made the company the largest auto manufacturer in the world by the market cap. Below is how Tesla’s stock price increase compares to the tech’s famous FAANG stocks, namely Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX); and Alphabet (GOOG).

Source: Google Finance

Exacerbating environmental conditions and global pandemic helped increase the awareness around ESG³. Also, the upcoming Biden administration’s announcements made it clear that ESG would be a key priority going forward and a transformation is due. All in all, this helped fuel the excitement around EV startups and yes, Tesla was used as a comparable in these presentations to illustrate valuation multiples and growth projections.

4. Forward-looking projections making it easier to tell the story

As growth is the top-of-mind for investors, forward looking projections play a key role. During a traditional IPO process, there are many rules in place that limits the timing and dissemination of the disclosures and forward looking statements during an IPO (Ask your lawyers about “gun-jumping” and quiet periods). On the other hand, during a SPAC process, a target startup and SPAC sponsor can start promoting as soon as the reverse merger deal is announced and CNBC could turn into a video roadshow venue the next morning. These efforts and forward looking projections, typically showing substantial growth figures, are making it easier to tell the story and promote. Below is a slide from Quantumscape’s deck illustrating sizable revenue projections down the road.

Source: Quantumscape Investor Deck

Unless there are any substantial changes in these factors, I would expect the SPAC boom to continue in 2021. Having said that, there are a few cautions we should mention:

  • Many of these companies are pre-revenue. As a result, the return profile of these investments will look more like a VC-style “power law” returns, where a small number of these will likely make a big chunk of the returns.
  • Due to substantial economics, SPACs are attracting unusual sponsors with limited investment experience, such as celebrities and politicians, which could create an “ICO like” environment and hurt the reputation of SPACs as a class.
  • Fundamentally, it comes down to the reputation and capabilities of the SPAC sponsors. Assessing a target company with very limited cash flow, operating history or revenues is no easy feat. Private Equity and, especially, Venture Capital investors are paid to do such analyses on a regular basis.
  1. Please note that we’re including Lidar startups in this bucket, as well.
  2. Please note that we are excluding the warrants in our return calculations for simplicity purposes.
  3. ESG (Environmental, Social and Governance) that is also known as “sustainable investing.”

Baris is an engineer with work experiences in top-tier investment banking and venture capital. At BMW i Ventures, Baris has played a key role in the firm’s investments in AutoFi (led Series B), Zūm (led Series C), Tekion (co-led Series B), Mapillary (led Series B, acquired by Facebook), Xometry (led Series B) and Vera (acquired by HelpSystems). Baris has also supported existing portfolio companies, including Life360 (ASX:360), Strivr and Moovit (acquired by Intel for ~$1B). Baris holds a Master of Engineering and Technology Management from Duke along with an MBA (Dean’s Fellow & Full Tuition Waiver) from UNC Kenan-Flagler Business School, where he led VCIC, the world’s largest venture capital competition. Please feel free to reach out on baris@bmwiventures.com or @BarisGSF over Twitter.

Principal @BMWiVentures. Proud @DukeU, @UNC (yes, both!) and @vcic alumnus. Engineer with top-tier investment banking and VC experience. Views are mine.

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