Auto-tech startups' alternate route to go public: The SPAC

When Steve Girsky set his sights on investments in transportation technology startups two years ago, the idea of taking a fledgling company to public markets via a special purpose acquisition company was a novel one.

Little did the former General Motors vice chairman know he stood at the forefront of a trend that has morphed into a full-blown stampede.

This summer, the so-called SPAC has quickly become a favored method for automotive technology companies seeking to raise capital and go public — one that comes without the perceived hassles and wait times associated with the traditional initial public offering process.

After spending nearly two years vetting potential targets, Girsky's SPAC, VectoIQ, completed a reverse merger with Nikola Motor Co. — maker of electric and hydrogen vehicles — in June at a valuation of $3.3 billion. Since then, EV startups such as Hyliion Inc., Lords- town Motors, Fisker and Canoo, EV-battery maker QuantumScape and lidar companies Luminar and Velodyne all have announced their intentions to eschew traditional IPOs and go public via SPACs.

"Right now, we are living through SPAC mania," said Quin Garcia, managing partner at venture-capital firm Autotech Ventures.

Also known as blank-check companies, SPACs can present a faster path to the public markets than the traditional IPO, which can take approximately a year and a half to complete. Amid a pandemic that has altered dynamics of both private and public markets, the speed at which a SPAC merger can be completed has presented an attractive option for startups seeking fresh funds.

Further advantages include the potential of raising more money than a traditional IPO would reap, Girsky says, and leeway to provide forward-looking guidance. EV companies in particular have become compelling investments as production and battery costs decrease while reliability and range are on the rise, he said.

But SPACs also can prove to be more expensive than a traditional IPO, and they are more complicated investments that Garcia worries too many investors don't fully understand.

"There's a lot of retail investors who are not professional investors in the market right now, and despite the mess that is COVID, a lot of retail investors have disposable income that they're pumping into some widely hyped domains," he told Automotive News on "Shift: A Podcast About Mobility."

"There's some highly speculative companies that have gone public via SPACs and a number of their investors are retail investors. That part makes me a little nervous."

Special purpose acquisition corporations have no business model per se when they are publicly listed — they exist with little more than a chunk of cash and an intention to find a merger partner within a two-year time frame.

They are not new, though they have been used more frequently in recent years. In 2016, 13 companies went public via SPACs, according to statistics from SPACinsider.com, an online repository of news and insights on the niche market. The figure jumped to 46 in 2018 and 59 in 2019.

With four months remaining in 2020, a record has been set. As of late last week, 88 companies had already gone public via SPAC initial public offerings, and 32 more have announced intentions to do so by the end of the year. Should they all close, that represents a near-doubling of SPAC IPOs year over year.

Part of the surge can be attributed to pandemic-related disruptions of financial-industry norms, says Kristi Marvin, founder of SPACinsider.com and a longtime investment banker. But that's not the sole factor.

"You take the fact that a traditional IPO is inherently risky, and even more so during the uncertainty of a pandemic, and it's an election year, and then you layer in the fact many of these companies are mature and hadn't had to go public because private equity had been more readily available," she said. "So you have companies that need an equity infusion questioning the traditional route or examining their operations."

Collectively, that infusion has been substantial.

Through early Friday, Sept. 4, the 88 companies that had gone public via SPACs had reaped gross proceeds of about $34 billion. Health care and biotech companies have constituted a significant portion of the mushrooming SPAC interest this year. But there's no subsector garnering more attention than auto-tech companies.

"I've been calling this 'the summer of deals with wheels,' " Marvin said.

Tesla's stratospheric stock price has served as a backdrop showcasing the broad potential of companies involved in the electrification of vehicles.

VectoIQ's reverse merger with Nikola highlighted the particular SPAC path. The deal closed in early June. Nikola's stock soared from its opening price of $33.69 on June 3 to a high of $93.99 in a matter of days before careening back toward its current mid-$30s price per share.

Girsky, naturally, is a firm proponent in the advantages a SPAC can offer. Beyond the pandemic, he said private markets were not large enough to fulfill the needs of young startups.

But he cautions that a successful SPAC is not easy, and though many investors understand they're investing in pre-revenue companies, their patience is not unlimited.

Over the course of nearly two years, VectoIQ vetted 75 companies with which it signed nondisclosure agreements and signed six letters of intent. To complete the merger with Nikola, VectoIQ committed its own $230 million and needed to raise another $500 million in private investment in private equity.

"It's not just that you have a backdoor way to go public," Girsky said. "There need to be validation events, so to speak, with new customers, new partners, new prototypes. You need to keep investors interested. They just invested in something and sat around for two years. They don't want to sit around for another two years."