Despite signs of a cooldown in the month of April 2021, the recent boom in special purpose acquisition companies (SPACs) public offerings has put this innovative financial mechanism under the spotlight, given its promises of renewed solutions in access to finance including within the space sector business ecosystem. But the sudden surge in SPAC investments also raises concerns on their viability as suitable financial vehicles and the associated dangers with regards to value creation and destruction in financial markets.
By definition, a SPAC is a publicly traded company with no real operation which aims at acquiring one or several companies to help them to go public by merging with an already listed company (i.e. instead of performing a regular IPO). While the financing mechanism has existed since the ’90s it has become highly fashionable recently, and $83 billion was collected through 248 SPACs in 2020, according to SPAC Research. 2021’s figures have already surpassed that, and $102 billion has been collected through 318 SPACs.
For the space industry, SPACs have recently raised a lot of interest when the merger between space transportation start-up Momentus and the SPAC Stable Road Acquisition Corp was announced in early October 2020, raising $310 million with a valuation of $1.2 billion. Between October 2020 and March 2021, six New Space players announced plans to merge with SPAC companies — Momentus, AST SpaceMobile, Astra, BlackSky, Spire Global, and Rocket Lab — leading to a record of $2.9 billion cumulative capital raised for these six companies.
But why would SPACs raise so much interest for investors in the space industry? The SPAC mechanism seems to offer a perfect fit between the need for startups to raise additional capital and to remunerate shareholders/investors (i.e. offering them a way to go out), without having to go through the long and complex IPO process.
Exit strategies can be quite long and complex for investors in New Space companies, as the “payback period” for space-related activities is generally long. SPACs, on the other hand, offer an easy way out for investors and a mechanism for the startup to raise a very large amount of capital by going public, attracting new investors and gaining exposure in the media. The money raised can therefore be used to fund capital-intensive projects like building a constellation, and scaling up activities in order to accelerate commercialization.
A SPAC is also based on the merger with another organization, so it brings with it the opportunity for the startup to access the talent of a board/management group that may have relevant experience in scaling up businesses. Finally, this boost of capital is an opportunity to quickly penetrate the market and create a first-mover advantage by being the first company operational on a nascent market (e.g. LEO constellation connectivity, in-orbit economy, etc.), building a key differentiator and competitive advantage when compared to competitors.
But if taking the SPAC route to go public offers interesting opportunities for both investors and startups, it also raises some issues.
First, if a successful SPAC is expected to be cheaper on the longer term than an IPO (i.e. post-IPO are generally very costly for startups), the process is costlier for the startup in the short term than a traditional IPO, as the company has to bear the cost of a merger and acquisition, plus additional costs/fees for the underwriter of the transaction. Underwriting fees vary between 1 percent and 7 percent for an IPO, whereas a SPAC typically has 5.5 percent underwriting fees, plus roughly 20 percent of the stock of the startup for the SPAC, leading to a cost of roughly one-fourth of the capital raised by the startup.
In addition, this type of mechanism requires way less due diligence than an IPO, which can impact the type of investors willing to invest. SPACs rarely raise interest from long-term investors that believe in the product or service developed or in the management of the New Space player, but it rather attracts short-term investors looking for a quick return on investment with no specific affinity or interest in the company and its projects.
Finally, the last concern raised by several experts of the field on the use of SPACs for the space industry is related to unreasonable market estimation and over-optimistic/unrealistic revenues projection. With the announcements of their merger with SPACs, the six New Space startups mentioned earlier have released market estimates of several billion dollars for market such as small satellite launchers, in-orbit economy or satellite services, with expected revenues ranging between $1.22 billion for BlackSky (Earth Observation) by 2025, to $16 billion for AST SpaceMobile (Global Connectivity) by 2030. These projections seem to be quite optimistic. Momentus Space expects to reach about $3 billion in revenues by 2026 with an EBITDA of about 60 percent, while reporting only $2 million in revenue for 2020.
When looking more closely at market estimate versus revenues projection, two companies among the six SPACs, Astra and Rocket Lab, are both targeting the small satellite launcher market with expected cumulated revenues over the next five years that exceed the entire value of the market over the next five years. The two companies expect to capture more than 100 percent of the market estimate globally for the period 2021 to 2026, without taking into account the possibility for larger launcher providers like SpaceX and Arianespace to grasp part of the market with rideshares on larger rockets.
SPACs offer an interesting opportunity and mechanism to help New Space startups raise money and remunerate early investors, offering a quicker and more flexible option than traditional IPO. But recent SPACs of very early stage companies like Momentus, AST SpaceMobile, and Astra, raise concerns about the long-term viability of the model to create solid and successful New Space companies capable of growing quickly on nascent or niche markets.
Iridium, which used a SPAC to go public in 2008, is a good example of a successful SPAC applied to the space industry. The company reported $583 million in revenues for 2020, and an operational EBITDA of about 60 percent, demonstrating that a SPAC can be a way forward for some New Space startups. It is worth noting that when Iridium went public through SPAC, the company had been active on the market for seven years and generating revenue, but looking for additional funds to finance its constellation.
In addition to questions related to the viability of SPACs as an appropriate financial vehicle, increased regulatory constraints and scrutiny could cool down the hype. Indeed, regulators including the powerful Securities and Exchanges Commission (SEC) are putting an increased scrutiny on SPACs with the objective of tightening disclosure rules. The recent public statement of John Coates, acting director of the division of Corporation Finance is a reminder of growing interest from the regulator. Already in the early months of 2021, the SEC tried to push SPAC investors towards a more thorough disclosure of vested interests in order to counter potential conflicts of interests resulting from SPAC activities, also reminding that SPACs fall under the regulation of shell companies and must abide by Exchange Act books, records and internal control rules. This paves the way to potential stricter regulations that might be triggered by possible future SPAC failures. Options on the table would include, for example, the obligation that a certain share of the funds raised be committed to identifiable investments. For regulators, the issue is to make sure SPACs do not push the market towards heavier speculations from investors that could destroy substantial market value.
As for any successful private venture, a SPAC can be a very useful and interesting lever for growth for New Space players if they have a solid and sustainable business model, and are capable of generating a solid stream of revenues without speculating on unrealistic market estimates. A SPAC is a way to scale up activities on the market to develop a first mover advantage and obtain aggressively large market share on nascent markets, but it should not be used at a very early stage to fund R&D without quickly generating revenues. VS
Mathieu Luinaud is a senior associate within the PwC Space Practice and his past experience covers a wide range of space domains, from upstream to downstream. He has worked extensively with satellite manufacturers and satellite operators on complex issues such as business model development and market assessments.
William Ricard is a manager in the PwC Space Practice and has worked for eight years in management consulting for public and private actors in the space industry. He works on the satellites' services market (EO, satcom, GNSS) including business strategies development, commercial due diligences, business plan development, or socio-economic impact assessment derived from investment in space activities.