When it comes to going public, do the slow and steady still win the race? Or should you consider (de-)SPAC?
10 min.
In order to grow, companies seek funding or investment from various sources that are appropriate for the particular stages of maturity of their products or services and the company itself. This article provides an analysis of scaling through public listings. After some general context, we’ll focus on the SPAC trend, and how it has already affected and might continue to affect downstream European EO companies in the future.
The year 2021 has been yet another good year for the space sector in terms of growth and public and private investments. Euroconsult estimate saw a 6% increase of the global space market in 2021 compared to the previous year, reaching US $337 billion.
Public investment prospects are very optimistic for European space companies. Indeed, the announcement of the €1 billion CASSINI fund has brought about a lot of excitement. The CASSINI facility was officially launched earlier this year, and it targets companies at different growth stages (go to cassini.eu to see launched actions and open applications).
Moreover, in line with a long-term trend of increasing private-sector space investment, 2021 broke yet another record for venture capital investments. According to Seraphim, the value of the whole year of 2020 – $7.7 billion in global space tech investments – was already reached in September 2021. PitchBook and NVCA Q4 ’21 Venture Monitor estimated the yearly VC investments for space in 2021 to have reached $8.3 billion.
However, when it comes to investment, the year 2021 will most likely be remembered as the year when the SPAC (special purpose acquisition companies) craze started to slow down among US investors. In 2021 more than 600 of these “money vehicles” were formed globally, raising more than $162 billion which can be spent for mergers with companies willing to use this “fast track” in going public. “SPAC-what” you wonder? Keep reading to discover this investment trend and how it is relevant for European Earth Observation companies.
Certain businesses choose the path of becoming a publicly traded and owned entity in order to raise capital and expand further. In 2021 this was the case of 2.682 companies globally who raised €608 billion, another new investment record. This initial public offering (IPO) or so-called “going public” can have many advantages, including easier acquisitions, diversifying ownership and increasing prestige. However, the path is very restrictive, both in terms of regulations to follow, including public disclosure, and loss of control of decision making.
When it comes to the European companies across all sectors, the IPO route is not as popular as among US-based companies. Indeed, while there are examples such as namR (French green-tech using EO data which went public in 2021 to meet the needs of a quickly scaling-up business), they are quite exceptional when it comes to space and Earth Observation (-related) companies in Europe. Experts note that this is due to the availability of state subsidies and government grants; European companies have not been so keen on facing the burdens of IPOs. However, as companies reach the appropriate maturity, there might be a more important move towards IPOs by European companies in the future. This is especially true for the tech companies and for the space sector – EUSPA’s recent GNSS Investment Report concludes that “market inefficiencies are the most prevalent at the scaling up stage, where companies are most dependent on R&D expenses to speed up their development.” Judging by the numbers, despite being less impressive than the US market, in 2021 the European IPO market gained momentum, confirming the willingness of European companies to grow through public listings. According to experts, this is specifically the case for the tech sector, as well as consumer, e-commerce and financial sectors.
Should your company consider going public? Some indicators showing that this might be the case are the revenues (>$100 million), growth (>30% year-to-year) and profitability of your company. However, many more aspects need to be taken into account, notably the willingness to actually hand over important parts of decision making, and administrative, financial and operational readiness to become public (an example of a checklist available here). To support such decision, a company might consider hiring experts who can survey the market and forecast potential outcomes of various exit scenarios (acquisition, going public via IPO, SPAC, direct listing). Furthermore, in case of European space companies, other aspects such as scaling up thanks to initiatives such as CASSINI should be added to the considerations.
Recent years have seen the rise (and fall?) of the SPAC trend, with its attractiveness to US investors questioned both by regulatory concerns and valuation issues. In contrast, Europe seems to pick up the trend, even though it is happening more slowly than some had hoped or predicted. In 2021, records were broken with Europe counting 39 SPACs (compared to only 4 in 2020) who secured US$8.56 billion (compared to US$496.05 million in 2020). Amsterdam is the most attractive financial centre for SPACs due to its regulations mirroring US market. Nevertheless, London, Paris and Luxembourg are also important players with Switzerland announcing regulatory adjustments in December 2021 to join the SPAC race. Other activities such as the establishment of European SPAC data company SPACBook in 2021 or the SPAC conference Europe going to London in December 2022 indicate that the SPAC trend is here to stay.
Why can SPAC be a game changer for companies? To use the correct terms, growing companies are interested in the de-SPAC, which is the moment the “money vehicle” is ready to acquire a business, as the company becomes an IPO as a result of merging with a SPAC, through what is called the “de-SPAC” process. From the point of view of a company seeking funds, de-SPAC remains an interesting shortcut to public markets compared to the “standard” IPO (4- 6 months compared to 12-18 months according to S&P Global). Furthermore, a SPAC provides an abundance of capital to meet the needs of the growth of the company and allows sharing forecasts of income, which is interesting for frontier technology companies, including Earth Observation and space businesses.
As the outcome of a SPAC is the public listing of the company, all considerations like the classical IPO route should be taken into account when looking for the big SPAC cash. It is advised that prior to a merger with a SPAC, the company should already be effectively operating as a public company. However, if you consider going public and your company is small or mid-size, SPAC might provide you with more flexibility and better valuation upfront.
While the SPAC trend in Europe is growing, it is unlikely going to reach the heights of the US bubble in 2021 due to more regulatory constraints and shallower capital markets. Therefore, it is likely that the USA “money vehicles” formed in 2021 and willing to de-SPAC in 2022 could be looking towards Europe for their target acquisitions. In the race towards these funds, experts warn of the need to take into account what such a merger implies in terms of legal, reporting and other requirements.
Similarly, start-ups should take special care in assessing going public through a SPAC due to changes in business culture. Going public brings not only potential for a rapid growth, but also more structure, processes and regulatory requirements limiting the possibilities of creative risk taking.
So how has SPAC served the companies in the space industry until now? Similarly to other frontier tech companies, businesses in the space sector have benefitted from this opportunity for some time now (with Iridium in 2008). However, 2019-2021 saw an important surge of new space de-SPAC deals, starting with Virgin Galactic in 2019. Last year stands out with fifteen additional new space companies going public through SPAC. Nevertheless, this year also started with some finalised mergers (Satellogic in January, Terran Orbital in March) and newly announced ones (e.g. D-Orbit announced their SPAC deal to be concluded in the upcoming months).
Zooming in on the Earth Observation sector, 2021-2022 can count a handful of SPAC IPOs (Planet, BlackSky, Spire, Satellogic, and Terran Orbital) and clearly more are still on the way (D-Orbit mentioned previously). While some of the companies achieving SPAC are also providing downstream services, the SPAC path is perhaps unsurprisingly taken by the upstream sector – launchers, ground station services, constellations – as they are the most capital intensive players of the sector. Similarly to the standard IPO and to other sectors, with the large majority (12 companies listed in the latest Seraphim VC Index) of companies are coming from the US with Lilium being the only EU example from Germany (soon to be followed by D-Orbit from Italy), while ArQit, Vertical and Virgin Orbit represent the UK.
Unfortunately, many of the companies, and especially Earth Observation ones such as BlackSky, Spire, Planet, saw a significant decrease in their valuation as a result and some experts even question whether they have now become targets for acquisitions. Various reasons have been cited for this failure in valuations and they are different from case to case, however, some experts point out that high rates of redemption (backing out of investors of a SPAC) after mergers indicate that Earth Observation continues to have a bad reputation in terms of economic returns and profitability. Others point out the strategic acquisitions achieved by EO SPACs and the possible “first-mover advantage” that can be used by these SPAC IPOs to further establish and develop their market share and expertise.
So, could the SPAC trend have a long-lasting effect on the future investments in the industry? In a recent analysis published by London Economics, a few possible long-term effects of SPAC have indeed been highlighted. First, the quick increase in capital for the few companies achieving the IPO through SPAC could result in a change in the business plan and concepts of these actors who would aim to capture more value of the market. Second, this could bring more competition among these publicly listed companies and bring failure to those who do not manage to keep it up.
What is more, while the success of a few listings launched with zero revenue (Astra, Momentus Space) could encourage other zero-revenue companies to pursue a goal of becoming publicly listed, in the long term it might also deteriorate the confidence of investors in the sector. As pointed out by London Economics, the industry could see a long-term negative effect of SPAC in case the lost trust resulted in lower capital for businesses, which would actually be viable as public listings.
To conclude, investors and companies willing to grow through being publicly listed should keep SPAC or de-SPAC in their vocabulary in the upcoming years. As the SPAC fever cools down and both investors and companies come closer down to earth, new de-SPAC merger candidates should be prepared for more scrutiny and competition. Nevertheless, European SPAC market has warmed up and in general most de-SPAC money is still coming, thus we should expect to continue following many announcements of EO and space companies going public through this blank-check scheme. It is still to be seen though how this trend might be affected by more demand for companies selling to the defence or, on the contrary, the increased market volatility and decreased investors’ risk-taking readiness due to the war in Ukraine.