The SPAC Fad Is Ending in a Pile of Bankruptcies and Fire Sales(bloomberg.com)
bloomberg.com
The SPAC Fad Is Ending in a Pile of Bankruptcies and Fire Sales
https://www.bloomberg.com/news/articles/2023-02-28/spac-era-ends-as-companies-that-ipo-d-struggle
94 comments
To add to that list of factors: it's also the end of the decades-long ride in Technology stocks which drove a lot of FOMO sentiment that made that money so easily available... nobody wanted to miss out on the next Facebook, the next Uber, the next Airbnb, the next Theranos--wait
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
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
Uber and Airbnb have made money?
my understanding is that Uber has a knob they can turn to just be profitable, and have chosen not to because they keep on wanting to grow and have access to more money.
Many firms have been saying this for a long time… it’s unclear how easy it is to turn this knob.
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.
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.
Folks who have spent time working in SV tech companies know that for many companies (AirBnB is absolutely one) there is a knob which can be turned. The cost structures have a lot... fat. The spending in many of these places is beyond belief.
Sure, but twitter is somewhat of a litmus test for this. When twitter started trying to cut fat they also crashed their revenue.
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.
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.
I think we shouldn't oversubscribe twitter's failures here. If "normal" vultures had come in and done layoffs Twitter would be in a very good situation. The problem with Twitter's financials now is that it was a leveraged buyout (so now their debt obligations are much higher than they were 12 months ago), and on top of that everything is happening in order to make it toxic to advertisers.
Even before the purchase Twitter was getting to profitability quite comfortably!
Even before the purchase Twitter was getting to profitability quite comfortably!
Additional tests will be Salesforce, Twilio, Docusign, Facebook - all have promised efficiency from here on out. My guess is they'll all start putting up very good numbers.
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.
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.
Salesforce has >30% EBITDA margins and annual revenue growth of 10-15%. They're massively profitable... if anything they are the aspirational benchmark nearly everyone else is trying to reach
No, they don't have those EBITDA margins.
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.
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.
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Airbnb had an adjusted EBITDA of ~$230m in Q1, so Airbnb has turned a profit once. Not sure about Uber
Adjusted means you made a profit if you ignore the fact that you made a loss.
Especially when servicing interest on debt (the I) isn't nearly as cheap as it used to be, unless the debt is locked in at a lower interest rate. Even if it is, but the term ends, a rosy-sounding EBITDA can turn ugly.
"Adjusted" EBITDA is frankly a sign that the company is making "magic" (read: misrepresentations) on its balance sheets. It's not surprising that Airbnb, Lyft and Uber are the only prominent companies using them.
Uber has been adjusted EBITDA profitable since 2021 and is close to GAAP profitability (might reach it this year or 2024).
They did for the early investors >:^P
I'm looking forward to companies that actually have viable product ideas.
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 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.
After the last couple decades of our tech industry, I'm wondering who's going to be capable of executing on those viable product ideas.
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.
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 am. I've spent my entire adult life, shipping software.
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.
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.
If we want to market some of us more, uh, battle-scarred engineers, for the emerging business environment, "old" could use an image makeover.
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.)
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.)
Well, I understand (but disagree with) the reasoning behind the current ageism.
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.
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.
Greybeards and Greybuns (hey, us old ladies in tech need a catch-all)
Isn't the average age of founders of successful startups 40+? I don't think being old is really an issue.
> successful
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.
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.
Well, people not trying is a self defeating mindset, is how I see it at least.
"Not trying" is not the same thing as "not dancing in a minefield."
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.
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.
Not sure how anything I said contradicts what you said, as I'm not even talking about "not dancing in a minefield." I am more so talking about this:
> 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.
> 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.
There are a lot of bootstrappers making profitable businesses, hell the entire website IndieHackers is all about them. I know people making 1MM USD ARR just with the single founder working.
Absolutely, but there's an elephant, in this room.
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.
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.
Sure, but that's any endeavor. You simply cannot get away from the power law. The truth is though that it's much easier to get to, say, $5k or $10k and support yourself than it is to have a Silicon Valley level success, so that's what I advocate people try for. If the business is successful enough, one can always try raising money afterwards, like Carrd did, or sell for X multiple and get a good chunk of change, if not set for life.
Or if that's too much work, work at a FAANG, stack cash in VTI and retire in 20 years.
Or if that's too much work, work at a FAANG, stack cash in VTI and retire in 20 years.
The folks who just got laid off from the bottom of the org chart.
Meme stocks are the weirdest part of it for me. GameStop is still priced several times the pre-meme value.
The company is also in a much better financial position than it was pre-meme. They took advantage of their insanely valued share price in mid-2021 and performed an at-the-market equity offering which allowed them to pay off loans and improve their balance sheet significantly.
> GameStop is still priced several times the pre-meme value.
As long as it keeps going on its current trajectory, it won't stay above the pre-meme value for much longer.
As long as it keeps going on its current trajectory, it won't stay above the pre-meme value for much longer.
AMC is almost back to prepandemic levels though
Its a chaotic tipping point. The analogy for the market for lemons isn't as good as an analogy with 80s junk bonds.
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.
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.
Another worthwhile watch from the SPAC king Chamath
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.
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.
For these people it’s always someone else’s fault. Everything would have worked out if nefarious elites hadn’t interfered, or if some of their followers hadn’t been so weak-willed.
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.
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.
The really funny thing is, these guys hang out with and to a large extent are the nefarious elites. But that's sorta unsurprising; It's all based on capture and lock-in and bets on who will win the game of politics. Actual usefulness, financial solvency, and value-creation have limited effect here; Human decency is a direct liability.
Investing, whether in real estate or day trading, is inherently based on asymmetry, leading to an extremely uneven distribution where it can appear as if the smart money just dumped the bag at the top on retail.
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.
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.
Really unfortunate that a lot of crypto was just these rich dudes pumping and dumping, and all getting together to perform rug pulls on a bunch of 'retail investors'.
It should have been regulated from the start. We see this happening every time a new financial instrument comes out and the feds are slow to act.
> 'retail investors'.
AKA, bag holders. Towards the end of this last cycle, I even heard a couple of the bag creators use the term openly.
AKA, bag holders. Towards the end of this last cycle, I even heard a couple of the bag creators use the term openly.
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Of course they are. Let's not forget though that these same retail investors were the ones crying for deregulation and asking the government to leave them alone as they invested in crypto and SPACs hoping to get rich quick. I have zero sympathy for anyone in the ecosystem.
It's like in any other space. The majority of participants have no idea what goes on and are played for suckers.
The public is free to invest in SP500. I assume people buying into SPACs were/are hoping that a greater fool comes along and they will not be left holding the bag.
Its more like the sector fund argument.
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.
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.
Don’t forget to shame A16Z and Chris Dixon as well. Those guys were complete scumbags around the crypto space
There's a sucker born every minute.
-- P. T. Barnum
-- P. T. Barnum
Back during the first dot-com boom in the late 90s, these were called reverse mergers, and usually involved penny stocks. Before the internet came along, most were deals in the gold mining space.
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.
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.
I’m curious if anyone at OpenDoor still thinks their RSUs are going to be worth anything and how many people have left.
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This time it's different.....it never is.
2021 counts were huge, but low on value
https://www.spacinsider.com/data/stats
I'd like to know what the failure rate for the regular IPO path is as well, and the article doesn't include that comparison.
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.
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.
Not just a direct incentive for fraud, “speculative exaggeration,” and “being economical with the truth,” but an indirect one too. If you have a fairly reasonable business and want to go SPAC, you are competing for investor dollars with all the corrupt shills. You either stretch credulity yourself to raise money, or you won’t raise funds.
It’s a market for lemons.
https://en.wikipedia.org/wiki/The_Market_for_Lemons
It’s a market for lemons.
https://en.wikipedia.org/wiki/The_Market_for_Lemons
> https://en.wikipedia.org/wiki/The_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?
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 paper speaks to markets where there is strong information asymmetry, not all markets, and it doesn’t follow that no good can be traded, it simply says that in such a market, people will hold goods they feel have actual value and trade those that don’t.
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.
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.
> A market for lemons is still a market, and it finds an equilibrium where the lemon-ness gets priced into transactions.
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.
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.
> Is there anything else that escapes me?
“The market can stay irrational longer than you can put off buying a car.”
“The market can stay irrational longer than you can put off buying a car.”
Wouldn't an investor want a company to be undervalued at IPO? Buy in early and low, and wait for the market to realize the true value.
I was speaking to the pressure on businesses to inflate their promises, which drives real businesses out of the market, leaving only unicorn dreams and pixie dust prospectuses.
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.
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.
> seems to provide significant liability shields not present in the IPO
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.
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.
Was there anything inherently bad about the SPAC approach or did it mostly just attract lousy users?
I think it better to ask, "what is the value-add of a SPAC over traditional IPO?" Because there's an existing channel to take a company public, why all this hinky backdoor runaround? To summarize what sibling comments illustrate, lots of bars get lowered (due diligence, et. al.) for a SPAC.
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.
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.
A combination of lower due diligence requirements and high (effective) fees meant that companies that could go a more traditional IPO path usually preferred that path. The leftovers were mostly the duds.
It was kind of a market for lemons: https://en.wikipedia.org/wiki/The_Market_for_Lemons
It was kind of a market for lemons: https://en.wikipedia.org/wiki/The_Market_for_Lemons
It was an initially very profitable but thin market, so returns went hard negative very fast once the market was cleared.
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.
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.
From my POV, it was basically a way to invest in early stage companies. Much like one could as an accredited investor via an early stage fund. It was extremely high risk, with a very long investment horizon.
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.
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.
This was one of the promises of SPACs. The idea was that large companies were IPO'ing too late (ahem... Stripe) and that there was no way for the general public to take part in the same kind of upside they could with previous IPOs like Google and Facebook.
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.
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.
It was faster to do a SPAC than an IPO.
For those curious in learning more about how SPAC's work and the associated costs & returns for various stakeholders, I found this paper to be pretty comprehensive: https://site.warrington.ufl.edu/ritter/files/SPACs.pdf
Wait! You can list a company without conducting any real business?
It feels like so much of the IPO class of 21-22 was just a 0 interest rate phenomenon. I did this analysis of fintech IPOs last year. So many of them are down by 80% and growth is slowing. https://yarn.pranshum.com/ipos_int
IPOs at least have to file their business model + documents (balance sheet, cash flow, and profit/losses) before taking investor money.
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.
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.
Isn’t this kind of the story of the stock market writ large though? I don’t recall the exact number but some researcher found that like 95% of the net gains in the market are attributable to less than 5% of companies.
Nice write up, would be nice to have full company names in addition to tickers.
Why doesn't anyone discuss the giant Elephant in the room - the need to have a product/service people actually want to buy?
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?
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?
> Why doesn't anyone discuss the giant Elephant in the room - the need to have a product/service people actually want to buy?
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.
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.
What's the end game, then? If something isn't sustainable to sell at a price people are willing to pay, is the goal to create a monopoly so people have to pay a higher price? Or to somehow bring cost down over time? Something else?
Once again the show Silicon Valley satirizes this extremely well: https://youtu.be/YZFTaEenaHM
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.
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.
Probably the same as any unicorn, hit their IPO and make a lot of money for the initial investors. You don't need to aim for long-term growth, just make money for whomever provided your seed funding and they'll happily invest in your next ~ useful ~ product too, repeat ad nauseam.
The goal is to sell the stock to fad-chasing retail buyers who don't do due diligence.
Selling to retail is a long con.
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.
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.
When you go broke, loot the office on the last day. Free home office furniture upgrades for everyone!
The SPAC boom was a huge success...for the people involved in setting them up. Company employees and retail investors were the ones left holding the bag, as intended.
Not too long ago, myself and many other long time employees left our startup after a SPAC announcement. As an individual contributor, I kind of felt insulted that I was expected to not really get what was happening. Upper management put on a celebration and equated it to an IPO.
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.
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.
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.