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Special purpose acquisition companies are having a real moment—and not in a good way.
In the last two years, SPACs have exploded in popularity as an alternative means of taking a company public. Los Angeles clean tech and electric vehicle companies, in particular, have embraced the model: Surf Air, Energy Vault, Faraday Future and Heliogen all spring to mind. But most of those firms are now trading well below their initial offering price—reflecting how a host of high-profile blow ups, combined with economic and regulatory forces, have turned the strategy into a financial pariah.
If you need a refresher, a SPAC is a means of taking a company public that circumvents many of the regulatory hurdles involved in a traditional IPO. The speed at which the process operates has made it popular in the tech sector, which loves to “move fast and break things.”
The SPAC model begins when a shell company (with no assets or business of its own, really) goes public through an IPO. Because the company is only a shell, the IPO process is extremely simplified with far fewer SEC hoops to jump through. Investors in the shell company typically receive stock at $10 per share as well as warrants, which are additional securities that allow them to purchase discounted stock in the future. The shell company then goes hunting for a promising startup that wants to go public; if they find one they like, they can then merge with that company, effectively folding the startup into the public company. Before the merger is complete, investors have the option to withdraw their investment or stay on the ride if they think that the target company will ultimately succeed.
Over the last two years, SPACs grew in popularity by an insane amount—with the U.S. SPAC market peaking at more than $155 billion in deal value in the first quarter of 2021 alone, according to a report from law firm White & Case. But since then, it’s been a downward spiral; U.S. SPAC deal volume cratered to less than $55 billion by the fourth quarter of last year, and slipped even further to around $8 billion in the first quarter of 2022, per the law firm’s report.
So why did the winds shift so suddenly? Most of the analysis points to three main causes.
The first is that SPACs aren’t performing well. While the stock market at large has certainly been bearish recently, the Defiance Next Gen SPAC Derived ETF (SPAK)—a fund that tracks a huge swath of SPAC performance—has declined around 30% since the start of the year, far outstripping the decline of the S&P 500 (which is down around 13% in that time). Add in a smattering of high-profile catastrophes likeNikola,View and—the granddaddy of them all—WeWork, and the space has started to look like a losing proposition to many investors.
Performance alone would be enough to slow SPAC enthusiasm, but the market is also facing heightened scrutiny from regulators. At the end of May,the SEC proposed tighter restrictions on the SPAC market that are designed to protect investors. The SPAC strategy has been accused by critics of offering outrageous value to the sponsors who initially form the shell companies, while offloading much of the risk onto retail investors. The SEC’s proposed regulations aim to rebalance the scales and provide increased transparency—which, for sponsors, makes starting a new SPAC less attractive.
Finally, there’s been a massive shift in economic sentiment in recent months. Tech stocks have gone from hitting eye-watering valuations to suffering a serious correction (the Nasdaq Composite is down 22% since the start of the year) and “recession” is the word on everyone’s mind. Inflation continues to climb at its highest rate in some 40 years and the Federal Reserve has hiked interest rates in response, making investors significantly more risk-averse. That’s all led to a slowdown in the global IPO market at large, from which SPACs have not been spared in the least.
It will be interesting to see whether SPACs are able to rebound alongside a general upturn in market conditions, whenever that may arrive. (It’s not looking great at the moment.) If they don’t—and if SPACs are resigned to becoming a relic of a particularly frothy economic moment—tech startups and other companies may have to devise new ways to tap the public markets. Or, you know, just resort to a traditional IPO. — David Shultz
Bird Is Reportedly Laying Off 23% of Its Staff
The layoffs at Santa Monica-based electric scooter firm were first reported by tech jobs tracking site Layoffs.fyi, which said it got access to an internal company memo.
Yohana, a Concierge Service for Families, Launches in LA
For $249 per month, Yohana promises to help its customers with everything from finding a plumber to planning a birthday party to buying baby food.
Calaxy Raises $26M To Bring Blockchain to Fans
This new Web3 social media app, co-founded by NBA player Spencer Dinwiddie, lets creators sell their own crypto tokens to fans, who can redeem the tokens for exclusive content.
‘Always Sunny’ Star Rob McElhenney Launches Web3 Startup
The actor and filmmaker launched Adim, a platform where creators can collaborate, come up with new characters and get a financial stake in their future success.
TikTok Introduces Its Answer to Snapchat’s Bitmojis
The video-sharing app, which has its U.S. offices in Culver City, is the latest social media firm to add avatars to its platform.
E3 Gaming Conference Will Return Next Year
After three years without an in-person event, the annual E3 video gaming convention will finally return next year—though it remains to be seen whether it will come back to its usual home in Los Angeles.
Miso Robotics Partners With AWS To Test Its Kitchen Robots
Food tech startup Miso Robotics has added a major new partner in Seattle ecommerce and cloud computing giant Amazon.
🎧 Listen Up! Melin Hats Co-Founder on Building a Business
On this episode of the PCH Driven podcast, the Melin Hats co-founder Brain McDonell joins the show to talk about losing everything, working when he was young and building his company from scratch.
What We’re Reading Elsewhere...
- GQ profiles L.A. gaming and esports conglomerate Faze Clan.
- MedTech Innovator unveils its new accelerator class of medical startups, including several from SoCal.
- L.A.-based BasePaws gets acquired by animal health company Zoetis.
- Santa Monica-based music tech company Songtradr acquires AI startup Musicube.
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