In startup land, 2021 was the year of the SPAC.
A SPAC, short for special purpose acquisition company, was supposed to be a quick and efficient way for startups to raise money and go public. And it was used for some of the biggest local tech deals of the year: Ginkgo Bioworks in life sciences, Berkshire Grey in robotics, Markforged in 3-D printing. In all, 10 area companies used SPACs to raise more than $5 billion and become publicly traded last year.
A modern twist on the blank check company, a SPAC is organized by sponsors who — at least in theory — have the expertise to find a promising startup to take public. First, the SPAC raises money from investors and lists its own shares on a stock exchange. Then the sponsors find a private startup and merge it with the SPAC, converting it into a public company without the lengthy hassles of a traditional IPO.
Sponsors have included famed AOL cofounder Steve Case, whose SPAC took Berkshire Grey public, and former MGM CEO Harry Sloan, whose SPACs took DraftKings and Ginkgo Bioworks public.
But now SPACs are under fire. Critics say too many immature businesses went public without the usual scrutiny that accompanies an IPO. They also point out that SPACs are structured so the sponsors can make a profit even when ordinary shareholders get crushed. And the Securities and Exchange Commission is investigating whether some companies going public via SPAC mergers made outlandish forecasts of future profits.
While SPAC money has fueled the tech economy, ordinary investors who bought shares in these companies have suffered huge losses. Of the 10 local deals last year, every one is trading below the $10 share price that investors paid to buy into the SPACs, as of Tuesday’s closing prices. The average loss: 50 percent.
Investors who bought in later, after the mergers closed, lost even more. For example, Ginkgo Bioworks completed its SPAC merger and started trading on Sept. 17 in one of the biggest public debuts in Boston history. Its stock price hit a high of $15.86 in November but has since plummeted to $5.30 at the end of trading on Tuesday, a 67 percent loss. On average, the 10 local stocks are down 67 percent from their highs.
“It’s been shown that SPACs are terrible for investors, yet people keep buying them,” Stanford Law School professor Michael Klausner said. He’s urging the SEC to impose stricter disclosure requirements on SPACs, making clear how sponsors can make money at the expense of ordinary investors.
The controversy has spooked some investors and could make it harder to complete future SPAC deals, jeopardizing the steady stream of funding that startups have relied on in recent years to fuel their growth.
Last week, Boston biotech Gelesis completed its SPAC deal and went public, but with new funding of less than one-third the amount planned when the deal was announced in July. And at least a half-dozen other local companies have SPAC deals pending that could end up raising less money than planned, or be called off altogether. That’s what happened to drug-discovery startup Valo Health’s deal, which was announced in June but canceled in November.
The six pending deals were expected to raise a total of over $3 billion, in hot fields like cryptocurrencies, climate monitoring, and battery technology. While venture capitalists and bankers expect the deals will be completed, there are signs that the dollars raised might be lower than expected, as investors are less willing to pony up given all the losses on last year’s transactions.
Although SPACs had been around for years, a few successful deals in 2019 and 2020 ignited an explosion nationally. Some 301 companies completed SPAC deals worth $623 billion in 2021, almost triple the 2020 totals, which were also record levels, according to financial services firm Dealogic.
To be sure, SPAC investors aren’t the only ones suffering in the current stock market. Many investors in companies that went public last year by traditional methods also lost money, amid fears that higher interest rates coming from the Federal Reserve could hurt all kinds of fast-growing, money-losing companies.
The Renaissance IPO Index, which is made up of about 100 recent initial public offerings, is down 28 percent since peaking in October. In another big local deal, restaurant tech company Toast debuted in September at $40 per share. It hit a high of $69.93 in November but closed on Tuesday at $24.30, down 39 percent from the IPO and 65 percent from the high.
Still, there is a longer game to be played with SPACs.
The boom and bust cycle is similar to what happened in the Internet bubble and other times when the market got overexcited about a new trend. “Just like with all innovations, it takes time for the market to learn what works and what doesn’t,” said Ivana Naumovska, a professor at INSEAD who studies financial markets.
The Boston companies that merged with SPACs have used some of the billions of dollars raised to expand and fuel the local tech economy. Markforged, the 3-D printing firm, used the $361 million it raised in a July merger to hire more than 100 people, bringing its headcount to over 350, and move to an expansive new headquarters in Waltham that has room for 500 people.
Ginkgo Bioworks is using the $1.6 billion it raised in September to advance its lead in synthetic biology, developing a catalog of molecular building blocks that customers can use to create new drugs, foods, and materials.
“I spent half a billion dollars on things already and we’re going to keep spending,” Ginkgo CEO Jason Kelly said at the J.P. Morgan Healthcare Conference last week. Building the technology platform may be expensive, but thanks to the SPAC merger, “that money is in the bank,” he said.
Indeed, it’s too soon to declare that the newly public companies have failed, said David Ethridge, the US IPO services leader at PwC who previously headed the New York Stock Exchange’s IPO efforts.
“It’s a longer-term thing that’s got to play out,” Ethridge said. “Not just one quarter, but maybe the next year. Let’s see how they do over a four- or five-quarter period.”
Which brings us to the future of the Boston tech scene.
Gelesis, the weight-loss device maker that went public last week, raised $105 million from its deal, less than one-third the $376 million it originally hoped for, as many SPAC investors exercised their right to bail out before the merger was completed. “The initial excitement about SPACs as a vehicle has shifted,” Gelesis chief executive Yishai Zohar conceded.
Among the remaining SPAC deals pending, crypto company Circle Internet Finance, battery maker SES, and biotech GreenLight Biosciences had each said that they planned to close by the end of 2021 but didn’t make it.
More recent deals by wireless Internet service Starry, weather and climate tracker Tomorrow.io, and warehouse robotics maker Symbotic are also still pending.
Starry chief executive Chet Kanojia remains upbeat that his SPAC deal will be completed successfully. “We feel pretty good,” he said. “We’ve been talking to a lot of investors and . . . they understand that we’re in the earliest stage of growth.”
Given the poor stock performance so far, however, the SPAC market is starting to adjust and offer better terms to investors and more limits on the profits of sponsors, according to Jay Ritter, a professor at the University of Florida who has been tracking the IPO market for decades.
“The market has been evolving,” Ritter said. “SPACs are a viable option for [some] operating companies thinking of going public,” though most companies will still use a traditional IPO, he said.
Jeff Bussgang, general partner at Flybridge Capital Partners, would agree. “SPACs will continue to be a pretty useful vehicle,” he said, particularly for local companies that are based on cutting-edge science and technology and are looking to go public.
Among the existing SPACs still looking for a merger are some with Boston ties. For example, local venture capital firm General Catalyst raised a combined $1.3 billion for three SPACs that don’t have deals yet. The firm declined to comment.
Epiphany Technology Acquisition Corp. raised $402.5 million about a year ago with backers including Boston venture capitalist Peter Bell and local retired tech investment banker Paul Deninger, who is active on the boards of multiple startups.
The Epiphany SPAC is constantly researching possible merger candidates, Deninger said. “It’s taken longer than I expected,” he said. “I’m still very optimistic.”