Deep Tech & SPACs
Update: I dove into this topic further in a follow-up post on where tech markets are going.
Over the past 6 months we’ve seen a ton of completed/rumored SPACs, as well as heard conversations at the board level for companies that are currently in discussions to get liquidity via a SPAC. It’s reached a point where If there was a prediction market on VC-backed companies that will get taken out by a SPAC in the next 12 months, there would be a few unanimous favorites if you polled the broader VC ecosystem.
This phenomenon is far reaching, but it specifically is interesting to me on the deep tech end of the market.
Over the past 6 months the financial markets have become incredibly narrative driven as investors face an unparalleled fiscal policy by the government to keep markets moving, while struggling to parse the next wave of valuation metrics, new business models, and technologies that emerge with a strong narrative surrounding massive growth potential.
I’ve long been a believer that narratives rule everything in private markets, but I’d argue only a few companies historically have been able to flip this at the public market levels as well for an enduring period of time (most notably, Amazon, with a clear prioritization of expansion at all costs effectively giving the company carte blanche to do whatever it wants without material scrutiny from public market investors).
Deep or Frontier Tech is perhaps an even more narrative driven subset of the broader tech sector than most others. Over the years, private market investors have gotten excited about various verticals due to the perceived technical moats, the massive greenfield TAMs that this innovation can access, and the clear narrative of “this is the future we were promised.”
Josh Wolfe describes this phenomenon tangentially as “science fiction to science fact” which only further hat tips narrative importance and ease of proliferation.
Across each category of deep tech, we go through a hype cycle that leaves scars at the firm and market level, almost killing entire categories for VCs (try raising a VR series B+ over the past few years, for example).
Often these deep tech companies require patience as commercialization metrics lag traditional companies, with upside that is arguably not as asymmetric across all categories. This creates a valley of despair for many companies that were able to raise seed and A capital, but where series B firms struggle to gain $25M+ check size conviction without material social proof and company comparable metrics. If a company is able to break through that barrier (often with great narrative and early signs of commercialization) then there is a secondary exhaust when it comes time to raise growth capital, as growth stage investors are even less primed to dream big without consistent revenue figures or scalable, decent-margin revenue, with a diversified customer base.
As Deep Tech has become a category, the universe of investors and well-funded companies has grown materially over the past decade. This has led to a large number of companies that are growth-ish stage, looking for liquidity.
Enter SPACs.
A few years back we saw companies like NIO go public with almost anemic traction but a narrative anchored to one of the most polarizing companies on Wall St, Tesla. The stock popped upon IPO, investors showed excitement, then reality came crashing down, cratering the stock from ~$10/share to just below $2/share in a matter of months.
Over the past few months, many have documented the increasing narrative driven nature of stocks, profiling things like r/wallstreetbets, Davey Day Trader, and Robinhood traders. We can debate how much retail investors are truly moving markets, but what’s clear is that narratives are impacting public markets, and deep tech companies that match to pop-culture, science fiction driven narratives are a likely beneficiary, as they are far easier to grasp at a high-level than the hottest cloud infrastructure IPO.
Investors have wanted exposure to futuristic technologies via public markets for some time now and often are left playing tangential stocks (Nvidia as a proxy for ML or crypto, for example), or hoping that an R&D group accrues enough value to a larger company to make it material (Cruise/GM and Waymo/Alphabet at one point).
We got an early look at this phenomenon with the Virgin Galactic reverse merger (which 3x’d in a few months early on), then alongside the explosion of Tesla we saw Nikola Motors (2x in 5 days) and Hyllion both hit the markets. Now in just the past week we’ve seen Luminar (a LiDAR company that could be seen as exposure to self-driving technology) and Desktop Metal (the only real additive manufacturing play on the market) both getting taken out by SPACs after having raised $100M+ in private markets and with less than scaled revenue metrics.
There are similarly rumors that we could see acquisitions of Lucid, Fisker (EV) and Proterra (EV bus) as well in the near future drafting off of Tesla success. I wouldn’t be surprised either if well-funded and long-private companies in the space sector (like a Planet Labs or Rocket Lab), Autonomous Vehicles, or Robotics/Drones, were to entertain SPACs as a liquidity option.
Deep tech companies thrive on narrative, and as narrative has shown outsized ability to carry a stock lately, I believe we’ll see multiple attempts at using SPACs to fund companies that today rely more on narrative than business metrics for a longer period of time than previously seen in public markets. While this could be considered passing the buck, I’m excited to see another financing and liquidity option arise for companies and investors solving some of the world’s hardest problems.
By the way, as of today NIO is now at an all-time high.
