Businesses Burned through SPAC Money, Now They’re Running Out of Funds

The SPAC boom took hundreds of risky companies to the stock market. The next stop for many is bankruptcy court. 

Source: WSJ | Published on April 26, 2023

SPAC bankruptcies

The SPAC boom took hundreds of risky companies to the stock market. The next stop for many is bankruptcy court.

Dozens of companies that merged with SPACs are running out of cash, joining at least 12 that have already gone bankrupt after combining with special-purpose acquisition companies.

More than 100 companies, including electric-scooter firm Bird Global Inc., smart-sock baby-monitor maker Owlet Inc. and electric-car startup Faraday Future Intelligent Electric Inc.

are running out of cash, according to a Wall Street Journal analysis of the companies’ cash and cash flow from operations data disclosed in regulatory filings.

Shares of many of these companies trade under $1, more than 90% below where they did when they went public, and are in danger of being delisted. Those that have raised cash typically have done it on onerous terms. Bird extended its runway by merging with its Canadian partner.

Many of these businesses were worth billions when they hit the market and drew in small investors excited at the prospects of space tourism, cryptocurrencies and electric cars. Companies that went public this way have since collectively lost more than $100 billion in market value.

Richard Branson’s Virgin Orbit Holdings Inc is the latest big name to go bankrupt. The satellite-launch startup was valued above $3 billion and backed by investors including Boeing Co. when it went public at the end of 2021.

SPAC deals were supposed to provide a big lift for young companies, giving them cash and a stock-market listing. Instead, they put them under pressure to deliver and left them vulnerable to rising interest rates and the vagaries of public markets.

“That lifeline pulling them up was actually a hand on the neck to further their death,” said Julian Klymochko, who manages a SPAC-focused fund at Accelerate Financial Technologies.

First-quarter earnings reports coming in the next few weeks could be a tipping point for many companies. The reports are expected to show declining cash and little chance of turning profits quickly enough to avoid a bust. Many companies have already cut spending and are trying to raise cash.

Using figures from data providers SPAC Research and FactSet, the Journal analyzed 342 companies that did SPAC deals between 2016 and 2022 and filed a quarterly or annual report in the past three quarters with the Securities and Exchange Commission. Some 101 companies could run out of cash within a year based on how much they reported spending on operating activities, the Journal’s analysis shows. On average, they have enough cash and short-term investments to cover spending for about five months.

More than 90 companies in the analysis had positive cash flows from operations during their most recent reporting period, meaning they were likely accumulating cash.

Bird was once valued at $2 billion by venture capitalists shortly after its creation in 2017 and reached that mark again in its 2021 SPAC deal. The company has been hit hard by rising costs and warned in November that it could soon file for bankruptcy.

In early January, it raised about $30 million in convertible notes and money from top executives by merging with its Canadian partner. A spokeswoman said the recent funding should help Bird build a self-sustaining business.

Many of the companies can raise cash only by giving up some control, raising expensive debt or pledging their most valuable assets, bankers and advisers say. “The financings that are available to these failing companies are just going to accelerate their demise,” said Adam Epstein of Third Creek Advisors LLC, who works with startups.

Many of the companies are slashing expenses. Owlet cut roughly half of its 200 employees last year as it struggled to respond to a Food and Drug Administration warning letter about its marketing of its smart-sock baby monitors and cash dwindled. The company declined to comment.

Also called a blank-check company, a SPAC is a shell company that raises money from investors, then lists on a stock exchange with the sole intent of merging with a private company to take it public. After a deal is announced, it must be approved by regulators. Once it is completed, the company going public replaces the SPAC in the stock market.

SPACs have been around for decades but burst onto the scene in 2020 as a popular way for startups to go public. Merging with SPACs allowed companies to make business projections to individual investors that wouldn’t have been allowed in traditional initial public offerings.

Virgin Orbit told investors that by 2023 sales would surge above $300 million and operating expenses would fall, putting Mr. Branson’s company on the cusp of profitability two years after going public. Instead, a failed launch left the company with few options to raise the cash it needed.

Faraday Future is also in need of funding after repeatedly pushing back the delivery date of its initial electric vehicle, including another delay in mid-April. The company had about $30 million in cash as of April 11, it said. The luxury-car maker previously promised it would grow sales at a record pace, faster than tech giants such as Google parent Alphabet Inc. after it began making cars. A spokesman said the company is in talks with potential investors.

Electric-van maker Arrival SA made a similar sales-growth pledge but is also low on cash. The company said it would do a reverse stock split and try to fundraise by merging with another SPAC, two years after completing its initial blank-check merger. Arrival declined to comment.

Only about 15% of the companies that did SPAC deals during the record year of 2021 were profitable, compared with 30% of SPACs that went public from 2013 to 2020, according to data compiled by Jay Ritter, a finance professor at the University of Florida’s Warrington College of Business.

Many companies have been acquired or taken private at low valuations in recent months to stave off bankruptcy. Shell PLC said early this year it would acquire charging firm Volta Inc. at 86 cents a share, a price that is more than 90% lower than its SPAC deal valuation from 2021.

Others to file for bankruptcy in recent months include bitcoin miner Core Scientific Inc., grocery courier Boxed Inc. and sensor technology startup Quanergy Systems Inc. Companies that did deals with SPACs after the market peaked are among the most vulnerable. Investors in SPACs are allowed to pull their money out of such deals if they don’t want to hold shares of the newly public company. As markets reversed, nearly all SPAC investors began withdrawing their cash from the deals, leaving companies with little to show for the mergers, except for stock tickers.

“The era of excess, abundance, and zero interest-rate policy has come to an end,” SPAC creator and venture capitalist Chamath Palihapitiya wrote in his recent annual letter to investors. The chief executive of Social Capital Holdings Inc. made several hundred-million dollars thanks to the cheap shares that SPAC creators receive for taking companies public, but took modest losses when he shut down two blank-check firms last year after they couldn’t find deals.

Many other investors have lost money. Of the six companies Mr. Palihapitiya took public through SPACs, including Mr. Branson’s space-tourism firm Virgin Galactic Holdings Inc., shares have fallen about 60% on average from the blank-check firm’s initial listing price.