The SPAC Fad Is Ending in a Pile of Bankruptcies and Fire Sales
bloomberg.com
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Arguably numerous “new” financial constructs only worked with free money. Meme stocks, crypto, SPACs and very large VC funding may have needed all that free money to “work”?
So maybe we’re just returning to more traditional financial investment patterns?
Some or all of those financial constructs probably still have their place on a much reduced scale in more specific contexts. But it’s no longer guaranteed free money.
I’m assuming that there are quite a few PhDs and other books in the works that will analyze those connections/dependencies in considerable detail.
The quality of the assets for these moonshot unicorns declined over time (IMHO partially because they were increasingly moving away from pure-bits to bits-and-atoms, making business cases much harder to execute and expensive to fund) and then the macro backdrop soured and here we are
Bonus: here's what StableDiffusion drew for "A dream of moonshot unicorns, 4k trending artstation" because why not... https://i.stack.imgur.com/sFxIw.png
Investors seem to be demanding cash returns from mega caps now. At a minimum - if Uber has to raise money again, we’d expect it to be in worse terms.
Organizations love to accumulate fat, I don’t think anyone really has a clear idea of what is necessary fat and what isn’t. Your best bet would be getting consultants in to figure it out… who probably don’t know a heck of a lot about running a tech company.
Somewhat fair point. But there are entire areas (like product initiatives) that are extremely speculative and just pet projects which can be cut at many places. Google for example wasted a billion here or a billion there like it was nothing, on things that made little sense, years ago.
They report an "adjusted" (ie, fake) EBITDA number in the 20's. It's bs and investors know it's bs. It doesn't include stock based comp.
Even before the purchase Twitter was getting to profitability quite comfortably!
When money is tight, you are less likely to throw it at an AI-powered cheese-straightener, just because the founder did a great TEDx talk.
When the goal isn't "growth" and IPO/M&A exit, but to provide a product that people want, in a viable business model... and to do it without huge hiring... a lot of us will have to recalibrate/relearn how to think about everything we do.
I know there's lots of folks like me, out there.
The problem is ... how do I put this ... It's really embarrassing ...
You see, we're all old.
The reason is, AFAICT, the current ageism started with dotcom startups, and by now might have enough inertia to linger long past when the VC-growth-appearance party is over.
(I'm thinking we saturate the streaming services with new shows glorifying people with graying hair. Elite military commandos, brilliant business strategists, heartthrobs, revolutionaries, etc. In the shows, they should frequently draw upon their experience -- wisdom, as well as surprise esoteric skills -- to save the day. They should also have excellent taste in some of the better style of past decades, such as by driving classic exotic cars, and listening to timeless great music. They should be admired and loved by all.)
There’s definitely a “personal” element to it, but that’s the age-old disrespect for our seniors that has haunted humanity since Oog ignored his parents, and poked the scorpion with his finger.
The newer part, is the “cargo cult” mentality, that only young people can be creative, and that process can replace experience, thus, freeing these creative young people from the chains of negativity, imposed by their elders.
I don’t think it’s working out so well.
That's the key. We're not really talking about "successful" ones, here...
> I don't think being old is really an issue.
I keep hearing that, then I get another "OK Boomer" response, and realize that it's B.S.
There's a difference. Folks try to make it seem as if there isn't, but that changes nothing.
I have often been called "negative," and a "naysayer," because I say really bad stuff, like "You know, we tried that, a couple of years ago, and it didn't work. Here's why..."
People think that I'm saying "We shouldn't try." Instead, I am saying "This way won't work. What should we do differently?".
There's that famous quote, attributed to Alexander Graham Bell, where he has had 10,000 failures, and he's asked why he doesn't give up, and he answers "Well, I now know 10,000 things that won't work."
What you get, with experienced people, is folks that have a map of the minefield.
I can tell, you, from my own perspective, that I have spent my entire life, Making It Happen. It's my job to ship, not make a bunch of noise, like I'm doing something, and nothing is happening.
I am currently working with a designer, on an app. He can't believe how quickly I'm implementing his vision. That's because I designed the app structure, to allow easy access to the chrome.
Wait until he finds out that I'll be able to implement his help overlays, using the voiceover (accessibility) text.
> I am currently working with a designer, on an app. He can't believe how quickly I'm implementing his vision.
That's good, because my point is that most people don't even try building their own products yet somehow want to have a successful company.
Successful people (especially young ones) make a great deal of noise. Everyone is aware of their success.
Unsuccessful people, on the other hand, kind of die quietly in the corner, unless you have major blowouts, like FTX.
For every SV unicorn, prancing around the Bay, there's a charnel pit, filled with the corpses of ten thousand goats and donkeys, with horns tied to their foreheads.
Or if that's too much work, work at a FAANG, stack cash in VTI and retire in 20 years.
As long as it keeps going on its current trajectory, it won't stay above the pre-meme value for much longer.
Groupthink is incredibly strong so if there's an underserved market, well, tough cookies for them, until the underserved market is so huge someone eventually takes the bait. Given that its been an underserved market for a long time, its pretty easy for the first entrant to make insane profits off the first couple deals. Then the usual suspects gather around and say they knew it all along that it was always the best idea ever and its going to be the new paradigm for the entire market going forward and only the best people have been in it from the start. By then even the slower retail investors are piling in, like an out of control crowd at a sporting event, and the crowd is starting to crush people. Of course its a very small market so returns seemingly instantly go from insanely high to insanely low because there's not many good deals in a tiny market, because its a tiny market, but the money is pouring it from the late entrants. Then when the new deals all collapse, the usual suspects lecture everyone about the inherent evils of capitalism and how they knew it was a bad idea all along, and everyone forgets about it until the cycle repeats.
There is a valid realistic market for SPACs which are kind of "headhunter for mergers with small companies" but the problem is there's too much cash sloshing around and ALL of it flows at the same time to whomever had the highest rate of return last year, even if the market of good deals in that sector completely emptied out last quarter.
Really the pity is its easy to see these situations develop but hard to "sell short" a fad. If I knew how to sell fads short I'd be a billionaire.
No doubt SPACs and other financial tricks don't help matters, but if people are really wanting to buy your widget then surely that's going to go long way to stopping you from going broke?
I mean, am I insane? Is that not the fundamental root problem here?
At a price they are willing to pay.
There are plenty of companies using all their VC money on subsidizing products few are willing to pay the full price for.
Once you manage to get VC money, there are endless way to loot it. The stupider the VC, the easier it is.
You can pay yourself, you can sell stock on the secondary market, you can do non-arm's-length deals, and so on.
Adam Neumann became a billionaire without selling to retail investors.
The product of a VC backed company is not whatever it sells; the product is its stock, to be sold in the IPO to make the VCs and founders shit tons of cash.
https://twitter.com/silvermanjacob/status/159505980620064358...
It seems insane to me these people dump on retail and their followers and continue to stand up in public.
But next time it’s going to be perfect. The establishment will be foiled and everybody on our side will have diamond hands. So get in now, be early on the next wave, buy now before everyone else discovers this, etc. Rinse, repeat… SPACs, penny stocks, crypto, MLM pyramids, it’s all the same story.
AKA, bag holders. Towards the end of this last cycle, I even heard a couple of the bag creators use the term openly.
If money can move faster than business, weird things happen.
On the micro level everyone should invest all their capital in the stock sector that provided the highest returns last decade / year / quarter / day. Nobody never took a class in school that said to list your possible investments and select anything except the highest return, all things being equal. The problem is on the macro level that sector may not be undercapitalized so dumping the entire financial market into whatever won last time, guarantees a bump followed by crash.
Carried to an extreme, imagine a stock market so fluid that every penny of capital in our entire civilization flowed all at once every morning at 9am to the company that provided the highest return yesterday, on the assumption that high returns yesterday means high returns tomorrow. It would be epic to watch, but would not be a very functional financial market.
Lets say SPACs are a $10B sized market. And they had essentially $0 investment a couple years ago, a very underserved undercapitalized market. The first investor willing to risk it, can pick the best deal in the entire market, and make absolutely insane returns. The problem is the rest of the world financial market sees that insane return percentage and here comes a tsunami of $100T. It's not going to turn out well when that amount of cash impacts a market that's only $10B in size.
My concern with your perspective is that it ultimately leads to the conclusion that the only way to prevent these situations is to prohibit retail investors from participating in certain types of investing.
This kind of thinking is what has led to modern America, where individuals are unable to invest in their friend's barbershop unless they meet certain net worth requirements or have worked on Wall Street.
-- P. T. Barnum
That said the failure reasons (cost of operations exceeding revenue, debt availability, excessively "optimistic" growth predictions, etc) are all things that do show up in the audits and financial documents go with an IPO, with the ability to file fraud claims on the company and execs if the financial documents and prospectus are false. The SPAC model removes the financial reporting requirements and seems to provide significant liability shields not present in the IPO path, so if nothing else it creates an incentive structure for actual fraud to use them.
Less liability shield than a lack of information for which to be liable. If I have a magic-bean startup and am asked if it cures cancer, an IPO forces me to say yes or no. A SPAC lets me shrug and wink and launch into a speech on why cancer is bad.
It’s a market for lemons.
Looking at the "Critical reception" section on that wiki page, meaning this part:
> while the reviewers for Journal of Political Economy rejected it as incorrect, arguing that, if this paper were correct, then no goods could be traded.
I can't see how that basic observation is not taken into account anymore. More exactly, 50 years from when that study was published we still have a well functioning used car market in pretty much the majority of the world countries, which would contradict the main point made by said study. Is there anything else that escapes me? Why did people in the economics profession fall for this study? Was it because of the maths?
“The market can stay irrational longer than you can put off buying a car.”
Even in such a market for lemons, that doesn’t mean no lemons will be traded, it means that buyers price everything like a lemon, and we still have a functioning market.
I don’t know about the whole world, but up here in Canada the used car market is exactly like this. Nobody trusts that guy with a small lot who operates out of a portable, so they won’t pay good money for anything he sells. So he has no incentive to sell good cars.
I bought a used car… From a dealer, and I have a factory warranty on it. That’s a market where there is less information asymmetry: I know the dealer was required to bring the car up to a certain level of service for it to qualify for the factory warranty, and I know that if it breaks down, I can get it serviced.
Cars that don’t meet this standard are sold by dealers too, but you can’t get a factory warranty, and they are priced accordingly. They might be good, but if a car meets the standard for a factory warranty, what dealer would offer it without that warranty, just to deal with customers who are skeptical of its reliability?
A market for lemons is still a market, and it finds an equilibrium where the lemon-ness gets priced into transactions. People certainly can and do trade lemons.
Yes, I agree, and I think that's related to the accusation of "triviality" made by some of the reviewers. If the "lemon-ness" is already priced in, then where's the thing that would make this theory special?
> I don’t know about the whole world, but up here in Canada
I'm from Eastern Europe where the second-hard market is relatively more important compared to Western countries for objective reasons, but as far as I can tell there are lots of people purchasing SH cars in North America from the likes of Craigslist and FB Market (more recently) without any mention of warranties and the like. Those markets are highly functional.
If you are raising funds, you are telling investors you have value, and that the IPO price is early and low. But if it’s a market for investments, then everybody else with a SPAC is saying the same thing, and if they’re selling pixie dust and unicorn dreams, they are promising even greater returns than you are if you’re trying to run a “real business.”
You either get in on the reality distortion field, or get washed out.
SPACs effectively raise money before they even find a business model. There is no balance sheet, there is no cash flow, there are no profits (or losses).
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So while yes, your discussion about "bubbly IPOs" is warranted, its also kind of off topic with regards to SPACs. SPACs are just another level of risk far beyond IPO.
I feel like a comprehensive discussion would compare IPOs in 2022 vs SPACs in 2022, and see how the two methodologies compared.
If they had come out and said, “we are out of money and options, so this is what we’re doing”, I might have been more inclined to stay.
It sometimes amazes me the kind of obtuse missteps so called “business people” will make. They effectively drained all their experienced engineers in one fell swoop.
Expect that the people you want to keep are paying attention, and you’re not going to pull a fast one on them. Seems pretty simple to me.
It was kind of a market for lemons: https://en.wikipedia.org/wiki/The_Market_for_Lemons
So the usual behavior, the first entrants make a ton of money, then the rest of wall street piles in behind them, although the market of "good deals" emptied out really quickly so returns rapidly went from very positive to very negative.
Its literally an inflation situation although instead of too much consumer money chasing too few consumer goods, its too much capital chasing too few good deals.
As an individual investor, ask yourself, "why would such a solid company need lower barriers to going public?" And after you answer that question for yourself, you stay the hell away from such things. Because those things are not meant to enrich you.
The problem seemed to be that this was not widely what people took away from SPACs. Also, all the insider stuff was very scammy. I still think it was a good thing that fell into "we can't have nice things" because of all the assholes.
But there really wasn't any reason why a successful, high-upside, company would choose to stay private but decide to go public because of SPACs. So you ended up with what seems to be 2 tracks of companies going SPAC: 1) companies that were not really high-upside and mostly had poor business models looking for exit liquidity during the retail boom -- Metromile, Opendoor, etc. and 2) high-risk, early-stage capital intensive companies that probably weren't going to do as well in private fundraising -- all the EV companies, health care companies, etc.
The fact that the insiders made out on all these deals further support the charge that these things were largely a grift on retail investors during a vulnerable time for retail investors.
There is still a lot of time for the dust to settle on these and see what the long-term batting average for these things are. I'd be interested to see how SPAC returns compare to returns on Series A, B, C, D rounds of the same vintage to see if this actually did bring comparable opportunity to the public or not. A lot of those rounds done in 2020-2022 are probably deeper underwater as well.
One of these reverse mergers acquired one of my sites. The whole company had 4 employees, no revenue and had a market cap of over $200 million which was huge at the time.