The Rise of Climate-Tech SPACs in the Global Pandemic
During the pandemic special acquisition companies, or SPACs, have been a point of controversy for some. For others, it has been a means to propel climate technology into the future.
One of the hottest trends of 2020 was the rise of the Special Purpose Acquisition Company, or SPAC. A SPAC is a shell company created for the purposes of raising money via an IPO in order to later acquire or merge with a private company, taking the targeted private company public in the process. SPACs allow private companies to expedite the process of going public by avoiding tedious IPO or direct listing processes. This has been an especially helpful tool for private companies as the COVID-19 pandemic in 2020 created a breeding ground for high degrees of market & economic uncertainty. From 2019 to 2020, the value of SPAC deals rose 251%, climbing to over $32 billion raised last year. In fact, the trend was so hot that NBA Hall of Famer Shaquille O’Neal started his own SPAC. Many experts, including those at Deloitte, believe the SPAC craze may be slowing down, but the climate technology sector appears to be the exception. Climate tech has been gaining a lot of attention within the SPAC community, and investors should pay attention.
Since the beginning of 2020, 28 climate technology startups have been involved in SPAC deals, raising over $7.5 billion USD. With this SPAC activity, climate startups saw an average 131% increase in share price from the time of their merger/acquisition to the end of the year, compared to an average of 50% across all other sectors. While there has been a slight dropoff in SPAC related climate tech deals in 2021, Silicon Valley Bank (SVB) projects that up to $40 billion could be raised by climate tech startups through SPAC deals over the next 24 months. “Climate tech is leading the march into SPAC world,” remarked SVB managing director Kelly Belcher, “more investors and entrepreneurs have turned their attention to climate tech.”
One of the main reasons for this successful adoption to the SPAC is climate tech’s inherent high risk, high cost requirements for becoming an economically viable business. Climate tech is an area that requires significant capital, and demands more hardware, especially with projects like building a solar farm or creating direct air capture plants. Because of this, it is often challenging for climate tech startups to secure private investing or meet the requirements for an IPO. Additionally, many companies in this sector have reached only the conceptualization or basic prototyping stages of their technology, and need capital to fully build out scaled solutions to deliver fully realized proof of concepts; this results in a chicken and the egg situation for many companies looking to secure funding. SPACs allow institutional investors to make more “hype driven” bets as opposed to using typical private equity practices. Before the uptick in SPACs, the risk of investing in many climate tech startups was seen as far too risky in many cases.
The SPAC route may seem like a no-brainer in many ways, but like any means of growth or mergers it comes with drawbacks and dangers; SPACs should not be seen as a perfect concept. While one of the upsides for companies is that they are able to come up with their own valuation, as opposed to one given to them by the market in an IPO, this can also be an extreme downfall. It is easy for companies to overvalue themselves and even mislead investors. As an example, this year, American company Nikola, which specializes in zero emission vehicles, had their founder indicted on three counts of fraud for lying about financials & many other aspects of the company, in order to drive up their valuation for their recent SPAC deal. Lordstown Motors, another American EV company, is currently under investigation by the SEC after they announced they are running out of cash and could collapse by the year’s end, despite going public through a SPAC last year. The list goes on for such SPAC related flops and controversies, raising serious concerns from experts, especially the potential of a SPAC bubble.
Bubble or not, the SPAC boom on Wall Street continues. Accounting firm CohnReznick expects 2021 to finish as another record-setting year for climate tech and SPACs. With 28 climate tech SPAC deals as of Spring and with a median market cap of $1.1 billion, this forecast seems more and more likely to hit its mark. The potential for new economic opportunity for green companies that previously struggled to attain capital has never been higher. As a result, we are approaching a new decade of climate revolution; the impact of SPACs and alternative investment strategies allow innovation on the very frontlines combating climate change.