Things are bubbling away for many startups but even more so for the big, listed tech companies.
The K-shaped covid economy, where some companies and individuals do well even if the majority struggle, is evidenced in a number of ways.
In his latest blog post, Ray Dalio, co-chief investment officer and co-chairman of hedge fund Bridgewater Associates, states about 5% of the top 1,000 companies in the US are in a bubble, according to his analysis and classification. This works out at about 3% of the S&P 500 index, and these relative handful of companies have seen stellar share price increases of about 350% on average over the past year or so (chart below from Dalio). The majority, however, have barely budged in their share prices.
Naturally, this sort of bifurcated market attracts investors to find the next big thing, and speed is of the essence. This creates the demand for faster flotations, particularly if they can include egregious remuneration for insiders bringing these deals to market – otherwise known as special purpose acquisition companies (Spacs).
Matt Taibbi and Eric Salzman recently added Spacs to their Financial Devil’s Dictionary in their podcast.
As they note: “America still leads the world in one thing: inflating speculative bubbles using gibberish finance acronyms. Meet the latest ‘Get-Super-Rich-Quick’ scheme, the Special Purpose Acquisition Company.”
The temptation to leap on these Spacs is certainly high. As the Economist notes: “Last year in America, underpricing led to $30bn of unrealised gains for newly public companies (and their employees). With Spacs and direct listings, another route to going public, there is no pressure for a price to pop.”
But who benefits from Spacs? The promoters listing them given they receive founders’ shares of up to 20% of the proceeds. The entrepreneurs that reverse acquire the Spacs can do if the valuation is a large enough premium to the previously valuations and if they raise enough money to fund their development and certainty on price. It is, however, less clear for the public market buying in to the deals.
In an earlier article, the Economist quoted academics Michael Klausner and Emily Ruan of Stanford University and Michael Ohlrogge of New York University, who looked at blank-cheque firms that made acquisitions between January 2019 and June 2020. They found that while companies that went public through the Spac route fell in value by an average of 3% after three months, 12% after six months and by a third after 12 months, about half the sample were “high-quality” – defined as those run by former Fortune 500 bosses or set up by large private equity firms – and these performed much better.
Whether quality will remain high is unclear. As Taibbi and Salzman said: “In 2021 already, 160 Spacs have raised over $50bn, nearly matching last year’s record of $83.4bn.”
Given Spacs tend to raise more cash once they find an acquisition target (about five times that in the initially listed pot, the Economist reckons) this could bring $600bn of deals in the next one to two years, which is about double the entire global VC market, based on Pitchbook’s data for 2020 deal values.
Looking at one deal can, therefore, be illustrative of the issues.
Bonny Simi, pilot and founder of US airline JetBlue’s corporate venturing unit, read the runes correctly in December when she left to join portfolio company Joby Aviation as head of air operations and people.
Late last month, Joby, which is in prototype phase of developing an all-electric, vertical take-off and landing (eVTOL) passenger aircraft, agreed a $6.6bn reverse acquisition with New York-listed special purpose acquisition vehicle Reinvent Technology Partners.
Simi, who remains an adviser to JetBlue Technology Ventures (JTV), said: “The regional transportation ecosystem is ripe for disruption, and startups like Joby Aviation will revolutionize how people move across urban areas. Joby’s vehicle platform will be the standard to beat. Nearly four years ago, we saw that Joby already was the emerging leader in the eVTOL space, and [the developments with Reinvent] validate our early investment.”
Simi through her network in Silicon Valley (she studied under legendary finance professor Ilya Strebulaev at Stanford) had uncovered Joby soon after setting up JTV in 2016.
Amy Burr, managing director at JTV, in a guest comment this issue highlights its insights since it was the GCV award winner as new entrant of the year.
But while Joby has already raised a reported $820m in venture backing in the past decade, it is still many years from operations.
Joby is expected to operate for commercial use in the US beginning in 2024 after becoming the first company to receive an eVTOL certification basis plan with the Federal Aviation Administration and receiving the US Air Force’s first ever airworthiness approval for an eVTOL aircraft. The piloted, four-passenger aircraft is faster than existing rotorcraft, flies 150 miles on a single charge, and will be 100 times quieter than existing rotorcraft or small planes during takeoff and landing, JetBlue said.
That private and public capital markets have been prepared to fund Joby – and its peers – reflects the potential market size for success but also the deep pools of liquidity available for potential growth stocks. With $1.78 trillion invested in the VC over the past decade, according to Pitchbook, there is every sign this will continue. And corporate venturing units have helped scale up and professionalise the market.
Raj Singh, managing director of investments at JTV and co-winner of the GCV Powerlist award with Simi in September, said: “As with all of our investments, JetBlue Technology Ventures’ goal is to better position JetBlue with startup-led innovation that could radically change the travel industry. Travelers today are more conscious of their carbon footprint than ever before, so the reduction of pollution that comes with electrification is highly appealing.”
The Joby deal is also noteworthy for bringing together the digital with physical ways of connecting people.
Long- and short-haul travel is being disrupted through the covid-19 disease, accelerating shifts to cheaper or more sustainable modes and reflecting changing communication and work patterns caused by technology more broadly.
Reid Hoffman and Mark Pincus, the two directors of Reinvent alongside Michael Thompson as CEO, were among the first three investors in social network Facebook and early investors in Twitter and Airbnb. As Pincus was in the early phases of founding gaming group Zynga in 2007, Hoffman was among his earliest investors having earlier set up business network LinkedIn.
Pincus and Hoffman acquired the six degrees patent that enabled the social media and network effects model to flourish based on Metcalfe’s law, which states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2).
These network effects, as well as undermining the need to travel so frequently given online ties, also are starting to disrupt finance.
Pincus and Thompson began investing together in 2017 after the latter reportedly returned investors’ money from BHR Capital, a successor to hedge fund Bay Harbour Management, according to Hedge Fund Alert at the time.
Alongside Hoffman, they established Reinvent Capital in 2018 with an eye to tapping into the late-stage venture deals being agreed.
In its regulatory filing for the Reinvent Spac, they said: “A substantial market opportunity exists for a potential business combination in the private technology sector. As of August 2020, per PitchBook Data, there were 417 private technology companies valued over $1bn globally, accounting for over $1.65 trillion of cumulative valuation, up from 18 private technology companies valued over $1bn in 2010.
“More than half of these companies are headquartered within the US, and most are focused on our key investment sectors, including consumer internet, games, marketplaces, ecommerce, and other technology subsectors.
“While the quantity and scale of private technology companies have grown, the number of technology initial public offerings (IPOs) has remained constant at approximately 40 technology companies per year. Per studies from Jay Ritter, the average age of a technology company going public has increased from four years in the first dot-com boom to 11 years in the last decade.
“Based on Dealogic data, the average market capitalisation of technology company IPOs has increased from approximately $400m to approximately $2.8bn in this time. We believe this disconnect between the quantity of scaled technology companies and the number of those companies that actually go public each year has created an attractive backlog of potential targets for our blank-check company.”
It is an opportunity set to make the three even richer as the initial shareholders in Reinvent collectively own 20% of the Spac. In the S-1 regulatory filing: “In August 2020, our sponsor paid an aggregate of $25,000 to cover for certain expenses on behalf of us in exchange for issuance of 14,375,000 Class B ordinary shares, par value $0.0001 per share, or approximately $0.002 per share.”
The deal with Joby now prices each share at $10 each, according to the 8-K filing this week.
Whether in business, finance or life, the power of relationships and networks holds true.
Singh will this month join Clubhouse in his “ask me anything” session after our recording of the Global Venturing Review weekly podcast and discussion of the week’s main news at 9am PST/5pm UK.
