This year has seen an explosion of Special Purpose Acquisition Companies (SPACs) on Wall Street. Already, 138 SPACs have IPOed and another 72 have filed to go public, wildly outstripping the 59 SPACs that went to market last year. The clean energy space has been impacted by this SPAC spree, with nearly a dozen companies in the energy transition finding a path to the public markets this year, including much-maligned Nikola. All this activity has a number of observers screaming bubble: A crash in this market could be incredibly damaging for Cleantech 2.0.
A SPAC, also known as a “blank check” company, is essentially a shell that raises money in the public markets with the intention of finding and merging with an attractive target within a given timeframe, usually 2 years. Often organized around sectors or geographies, modern SPACs are helmed by management teams with experience and expertise in the sector of interest, providing investors confidence that the team will identify and merge with a viable target. SPACs have a number of features to protect investors in the event they don’t like the target company, and funds are returned if a SPAC is unable to complete a merger within the allocated timeframe.
The proliferation of SPACs this year has been explained in a variety of channels over the course of the summer. Many point to SPACs as an easy pathway for growth companies to go public without all of the delays and pitfalls of the traditional IPO. With money pouring in to SPACs, interest has exploded. 2020 produced more SPACs than all of 2019 within the first half of the year and is on pace to produce more SPACs than the previous five years combined. Many of the new SPACs raising cash in the market are focused on the cleantech sector, with multiple listings for cleantech focused SPACs announced this year each raising hundreds of millions of dollars.
Such a large infusion of cash in to the cleantech arena is absolutely welcome news, and the billions raised will provide a number of companies with the runway they need to develop products and reach market. But the cash also has the very real potential of overheating a nascent market and inflicting serious harm that sets the entire industry back years, much in the same way the influx of venture capital dollars in the mid 2000s during Cleantech 1.0 led to a series of bad investments that killed early-stage cleantech funding for nearly a decade.
The concern is that if there is an influx of excess capital in to the market through SPACs, that capital will necessarily be competing for a limited number of attractive investments. In this scenario, SPACs stop helping healthy and promising companies reach the public markets fast and instead end up providing a lifeline to weaker companies that are struggling to raise funds in the private market. In a Twitter thread from September, Shayle Kann noted that of 10 recent completed or announced SPAC mergers in the clean energy space, the target companies were losing $64m in EBITDA a year on average and half were pre-revenue. In short, these companies are selling a growth story with valuations heavily based on their future projections.
That isn’t unlike many Silicon Valley IPOs, but foisting what looks like venture-level risks on to the public markets doesn’t always end well. There is considerable downside if retail investors hunting for the next Tesla
