The revenue from a scooter rental app is expected to be less than 20% of what it was projected to be this year. An electric bus company that planned to grow revenue faster than any other startup in the United States warned investors to disregard its projections.
Dozens of startups that went public during a pandemic-fueled stock market frenzy are falling short of the projections they used to attract investors, many by large margins and only a few months after making those projections.
According to a Wall Street Journal analysis, nearly half of all startups with less than $10 million in annual revenue that went public last year through a special-purpose acquisition company, or SPAC, failed or are expected to fail to meet the revenue or earnings targets they provided to investors in 2021.
The underperformance of these nascent companies, the majority of which are tech startups, confirms one of the major concerns raised by many investors and others about the SPAC boom of the last two years. Critics of SPACs argue that the loosely regulated going-public process allows startups to attract investors with optimistic financial projections despite having little or no revenue history.
On an earnings call with investors in November, eight months after Arrival SA went public through a SPAC merger, Chief Executive Denis Sverdlov provided an update. "We withdraw our long-term forecasts," he said, adding that the company would take a "more conservative approach."
It was a different tone than the company's pitch to investors when it went public in March: its revenue would grow from zero to $14 billion in three years. It was an astonishingly fast pace—five years faster than Alphabet Inc.'s Google, the fastest U.S. startup ever to reach that level of revenue—especially considering Arrival hadn't yet produced any vehicles.
The company did not respond to requests for comment for this article. Its stock has dropped roughly 85 percent since its initial public offering.
Investors and academics have criticized the use of projections by speculative companies, claiming that they are used to generate buzz and attract investors. The Securities and Exchange Commission has indicated that it is considering new restrictions on the practice, and some federal lawmakers have introduced legislation to do so. While traditional IPO regulations strongly discourage companies from making forecasts about future performance, companies that list publicly by merging with SPACs—also known as blank-check companies—have freely used forecasts, frequently presenting investors with charts showing enormous growth.
"Perhaps the practice was being abused," Amy Lynch, a former SEC regulator who now advises investors on regulatory issues, said. Some of the companies' projections, she said, were "starting to get outside the realm of feasible outcomes."
The Journal's investigation focused on the 63 companies that went public through a SPAC deal last year and had less than $10 million in trailing sales at the time of their listing. According to the Journal's analysis of data provided by Jay Ritter, a University of Florida professor who studies public listings, and FactSet, at least 30 of those 63 failed to meet their projections. Last year, 199 SPAC transactions were completed.
The revenue cutoff was designed to capture companies that produce no or very little commercial output. The Journal compared the company's initial projections to FactSet analyst estimates, updated company forecasts, or earnings reports.
The companies in the Journal's analysis that are on track to miss their revenue projections for 2021 fell short by 53% on average. Companies that are falling behind on their earnings projections have estimated losses that are roughly 40% higher than what they projected at the time of their SPAC deal.
Proponents of the SPAC process argue that projections allow stock market investors to bet on startups by estimating their future potential, providing the opportunity for massive returns that are typically limited to investors with access to private markets. Many early-stage startups would find it extremely difficult to go public without providing projections because they do not yet have a track record.
Some businesses have followed through. Analysts expect battery company Solid Power Inc., indoor farming startup Local Bounti Corp., and healthcare software firm Pear Therapeutics Inc. to meet or exceed their revenue projections for 2021; each company has revenue of $4 million or less.
Professors who investigated the issue discovered a link between ambitious forecasts and poor stock performance. In a 2021 working paper, Michael Dambra, an accounting associate professor at the University at Buffalo, and two co-authors examined SPACs from 2010 to 2020 and concluded that high-growth revenue projections are likely to be "overly optimistic and misleading to uninformed investors."
"The more aggressive your revenue, the more likely you are to underperform," said Mr. Dambra in an interview.
When one Silicon Valley battery maker announced a SPAC deal a year ago, it was met with skepticism. Enovix Corp. had been in business for 14 years and had yet to sell its product commercially.
"We have to build the company and hit our numbers," CEO Harrold Rust said a year ago to The Wall Street Journal.
Analysts predict that Enovix will miss its revenue targets. Analysts estimate that its 2021 losses before interest and depreciation, known as Ebitda, will be nearly double what the company previously projected to investors. A spokeswoman for the company declined to comment.
Another battery manufacturer, Romeo Power Inc., told investors in November that it will miss its 2021 revenue projection of $140 million by up to 89 percent. In a January filing, the company warned investors that it had "substantial doubt" about its ability to continue without additional funding. Two of its customers have signed deals with another battery manufacturer, and its stock is down more than 90% since its initial public offering.
Management, according to Romeo, is working on a solution but cannot guarantee that "our plans will be successfully implemented or that we will be able to curtail our losses." A request for comment was not returned by the company.
Helbiz Inc., which operates apps for renting electric bikes and scooters, streaming live sports, and ordering food, also has low expectations. Analysts predict that the company will earn less than one-fifth of the revenue it forecasted for 2021. It had also told investors that it expected to make a profit on an Ebitda basis, but analysts predict that it will lose about $41 million on that basis. A spokesman for the company declined to comment.
The stock price declines of many of these startups demonstrate how serious investors have become in demanding that companies deliver on their growth promises. According to FactSet, Morgan Creek Capital Management's exchange-traded fund that tracks SPACs and the startups that merge with them is down more than 49 percent from a year ago.
"It's been a really bad year," Chief Executive Mark Yusko said. "Expectations have fallen, and valuations have fallen."
The average stock price for the 63 companies studied by the Journal is around $5. The initial stock price of companies that use SPACs to go public is $10.
Companies that fail to meet their financial targets face a difficult situation, according to venture capitalists. They must either slow their spending, which will stunt their growth and make meeting projections more difficult. Or they could raise more capital, which will be difficult given their low stock prices, and lenders are less likely to lend to companies with limited income, according to venture capitalists.
Enrique Abeyta, editor of investment advisory Empire Financial Research, predicts that half of the companies that went public with a SPAC last year will be out of business or delisted within five years. He is looking for market opportunities to short their stock.
"I feel like we're in a world right now where SPAC is a four-letter curse word," Mr. Abeyta said.
The SEC hinted at new rules last year when it added SPACs to its regulatory agenda, but no details were provided. The SEC's chairman, Gary Gensler, has warned against "misleading hype" in the sector, while the agency's former general counsel has stated that companies face more legal risk for financial projections than is commonly assumed.
Before leaving the SEC last fall, John Coates, who served as general counsel and worked on SPAC regulation, said he began paying closer attention to the projections after companies with little or no revenue began publicizing revenue projections five or six years in the future.
"Even mature, well-run companies are hesitant to go out five years," Mr. Coates explained. "I'm not sure why a brand new company that's never sold anything would feel at ease with that."