Investors are defying a fall in stock prices for newly opened companies to make hundreds of billions of dollars available to startups, a stack of cash that promises to inject a torrent of money into start-ups in 2022 and beyond.
Specialty acquisition companies, which go public with startups through mergers, raised around $ 12 billion in October and November, roughly doubling their revenue from each of the previous three months, according to the reports. data from Dealogic. So far in December, three PSPCs per day are being created. While this is lower than the record pace in the first quarter, it brings the total amount held by the hundreds of SPACs looking for private companies to go public over the next two years to around $ 160 billion.
Cash committed to venture capitalists and private equity firms focused on fast growing companies but not yet spent is also increasing. The so-called dry powder hit about $ 440 billion for venture capitalists and about $ 310 billion for growth-focused private equity firms earlier this month, according to Preqin.
Despite billions of dollars in market value lost to publicly traded startups, cash reserves represent a sustained demand from investors with interest rates near zero and stock market indices nearing record highs. They show just how resilient the PSPCs and private markets have been than many analysts thought, especially with regulators stepping up scrutiny of so-called blank check companies. Many analysts also expect interest rates to rise in the coming years, which could make bets on start-ups less attractive.
According to investors and executives, startups currently have multiple avenues to access money, especially as so much of it is flowing to companies working to decarbonize the economy. PSPCs and other financiers often engage in competitive bidding duels known on Wall Street as “SPAC-offs,” helping to keep money in startups.
“There is so much money in the world chasing growth and returns,” said Bill Gross, who founded startup incubator Idealab.
Sometimes mistaken for famed bond investor Bill Gross, Idealab’s Mr. Gross is managing director of concentrated solar energy startup Heliogen Inc. Heliogen, which does not expect substantial revenue until 2023, goes public as part of a $ 2 billion PSPC deal. Another Idealab company, Energy Vault Inc., unveiled a $ 1.6 billion PSPC merger in September.
Outside of PSPCs, money is piling up in startups at unprecedented rates from venture capitalists and hedge funds such as Tiger Global Management LLC, which were traditionally more focused on public companies. Nearly 340 new unicorn startups, or about one a day, have raised private funds at valuations above $ 1 billion this year, more than triple the total from last year, according to PitchBook data.
At the end of the summer, Mike Xu, CEO from food distribution start-up GrubMarket, has begun seeking $ 50 million in new funding for his business, which he says is profitable. In November, demand turned out to be so high that it ended up getting $ 240 million from investors, which in itself was less than what many wanted to commit. This included a $ 40 million pledge from Tiger Global which met about a week after entering into talks with the New York-based investor.
“It was extremely quick,” he said of the investment cycle valuing the company at over $ 1.2 billion. “It was more than we expected.” GrubMarket has also secured funds managed by BlackRock Inc.
Carbon Capture Inc., a startup working to remove carbon emissions directly from the atmosphere and also backed by Mr. Gross’ Idealab, recently raised $ 35 million in its first round from investors, including the company of venture capitalist of Salesforce Inc. co-CEO Marc Benioff.
Many startups have also found enthusiastic investors in large tech companies, pension funds and sovereign wealth funds.
The fundraising frenzy continues even as sentiment towards newly public startups has cooled. An exchange-traded fund that tracks companies that have gone public through SPACs is down about 25% for the year. Meanwhile, an ETF of companies that recently made traditional initial public offerings has fallen around 15% in the past three months.
PSPCs are the center of attention for many investors as they have taken Wall Street and Silicon Valley by storm as a new way to quickly raise funds and go public. A PSPC is a fundraising shell company that is publicly traded for the sole purpose of merging with a private company to make it public. Once the deal is approved by regulators, the private company replaces PSPC on the stock market.
One of the reasons for the sudden ubiquity of PSPCs is that startups are allowed to make business projections when they are made public, which is not allowed in traditional IPOs.
Many struggled to meet these goals or encountered trading issues, causing stocks to fall. According to SPAC Research, of the nearly 200 companies that went public through PSPC deals this year, about 75% have share prices below the PSPC listing price. Nearly 40 companies have lost more than 50% of their value.
Regulators have investigated several companies that went public this way after short sellers alleged wrongdoing, while several CEOs of newly listed electric vehicle startups have resigned. Many analysts claim that PSPCs allow startups to go public before they’re ready.
Yet investors continue to pour money into emerging companies in every way they can, looking for the next DoorDash Inc..
or Airbnb Inc.
, whose first contributors were well rewarded. Many deals are linked to tackling climate change, with investors also benefiting from Tesla’s momentum Inc.
and others linked to the energy transition.
“I expect valuations to continue to rise,” said John Carrington, CEO of clean energy storage company Stem Inc. “It’s an industry that needs a lot of capital, for the better or worse. ” Stem’s market value roughly doubled to $ 2.8 billion after entering into a PSPC deal earlier this year. The company reported sales of approximately $ 40 million in the third quarter.
Going forward, some analysts expect a large gap between the winners and losers of the boom.
“The availability of PSPC and private capital provides options for companies, but ultimately the problems are caused by the wrong company going public or the bad valuation,” said Mike Ryan, CEO of Bullet. Point Network, a financial analysis company. A former Wall Street equity investor, Mr. Ryan is also a venture capital partner at Alpha Partners and chairman of the board of a SPAC that Alpha Partners launched this summer.
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