Several lifetimes of change have occurred in life and business since the explosion of dotcom stock flotations (and, for many, subsequent busts) of the late 1990s. Among those differences is how futuristic advanced air mobility (AAM) drone sector companies that inspire so much market excitement today are raising finances faster and easier on Wall Street than their Silicon Valley elders – and in ways tech vets may regard with a mix of envy and wariness.
Swiftly scaling drone sector companies look to Wall Street – and SPACs – to fuel approaching AAM revolution
The most recent example of that contrast between past and present in fundraising terms is the swiftly developing air taxi company, Joby. Last Wednesday, the Santa Cruz-based manufacturer and future operator of AAM services successfully carried out its stock market introduction, then sat back and watched its share price appreciate over 20% – all before the firm has transported its first passenger. That is an impressive sign of Wall Street confidence in an upstart drone sector youngster, indeed.
Joby’s flotation was achieved through a merger with a Special Purpose Acquisition Company (SPAC), which have become increasingly popular with drone sector businesses seeking maximal capital infusions through Wall Street relatively quickly. Other companies planning SPAC link-ups include Archer Aviation, Lilium, Vertical Aerospace, and Eve Urban Air Mobility Solutions. Most of those aim to raise several billion dollars through their initial public offering (IPO).
Though SPACs aren’t new, they have recently become all the rage on Wall Street – prompting critics to claim they’re being hyped as the financial market’s latest get-rich-quick scheme (too-good-to-be-true deals, they say, that are just that, and may wind up with investors losing a mint). They permit scaling companies to float their stock with far less work and disclosure than the long, laborious investor roadshows dotcoms of yore had to go through. Former Rolling Stone writer and financial sector expert and bête noir Matt Taibbi has called SPACs “a way to pay millions today, for the exciting investment idea someone promises to have tomorrow.” As such, Taibbi compares the schemes to dropping finger paints into the crib of a kid you hope will become the next Rembrandt.
Are they blind fliers?
Based on the list of the first drone sector AAM companies going the SPAC route into Wall Street, Taibbi’s general description seems harsh indeed. Joby and Lilium, for example, are both well-advanced in their development and testing of prototype air taxis. Even the companies mentioned above that are still in the conceptualization phases can’t be described as merely theoretical in their activities, much less ideas that have yet to be conceived. And they’ve all received hundreds of millions from institutional investors who believe in them, SPAC plans or not.
So why are critics wary?
For starters, SPACs – aka “blank check companies” – are for all intents and purposes shell businesses created for the single purpose of taking the acquired enterprises public (in this case, drone sector companies issuing stock on Wall Street). The SPACs organize flotations and attract investors to those, seeking the highest introduction prices possible, and thereby increasing their own take in the deal (which usually represents 20% of common stock). For AAM and their SPAC partners, the deal represents a relatively fast way of raising billions – especially compared to the long, hard slogs of dotcom era roadshows – for swiftly scaling tech businesses that need new capital to grow faster.
To critics, however, it still all looks like still largely unproven companies being hyped to investors for top dollar that will make SPAC partners rich, but – should they underperform or fail – threaten to leave shareholders shortchanged or worse. Sound at all late 1990-ish or 2008-y?
What are the signs SPACs are a bust-threatening bubble, or worse?
In the first seven months of this year alone, 301 SPAC introductions have raised $68.8 billion, compared to about $83.4 billion they generated in 2020 – itself a five-time increase over 2019. That kind of expansion raises concerns among skeptics about the recurring bubbles created by companies and investors rushing to get in early on all the lucrative action before the entire joint goes kaboom. And though the SPAC trend only began getting hot in 2019, lawsuits by individuals and organizations that bought stocks in what turned out to be emphatically disappointing young enterprises are starting to proliferate. Financial markets and lawyers: a mix only Gordon Gekko could love.
Again, it would be unfair – indeed obscene – to cast Joby or Lilium as another Webvan, eToys, or pets.com waiting to happen, much less a candidate to be the next AOL (which is another dreadful tale altogether). Yet doubters note that even those notorious dotcom-era IPO dogs – which raised hundreds of millions in capital before starting to loudly bark – had to prepare legal and financial documentation and disclosures to substantiate the viability of their business plans and win investors over. The SPAC option averts that almost entirely. In some cases, Taibbi writes, “with a SPAC, you’re investing in the reputations of its sponsors, i.e. names, not businesses.”
In other words, dotcoms at least had to walk the walk, talk the talk, dress the part, and razzle dazzle their way past the rope line to get into the VIP club (even those that swiftly got fall-down-drunk and were tossed by the financial bouncers). With SPACs, entry becomes nearly automatic by arriving with the beautiful Wall Street in crowd.
So are drone sector companies using SPACs to reach Wall Street suspect or likely to fail?
It’s too important not to repeat: Given the advanced development of AAM technology and their companies – not to mention the revolutionary effects in daily life they’re getting close to delivering – it would be unfair to look askance at sector businesses opting for the fast, relatively easy SPAC method of raising urgently needed capital. Still, there are some signs that trying to fly too high can produce somewhat singed wings.
Archer Aviation, for example, recently had to slash the $2.7 billion in IPO funds it initially wanted to raise in its planned merger with SPAC Atlas Crest Investment Corp. down to $1.7 billion. That came amid market jitters that the entire AAM market may still be too thick with futuristic promise and thin on actual craft in the sky to throw unlimited cash at. Archer’s pending flotation, meanwhile, also come as the general Wall Street SPAC trend shows signs of over-heating – and generating too much litigation for its own good.
Those concerns are valid, especially given multiple signs that financial markets learned nothing in the 2008 meltdown beyond needing to find other ways than now-notorious derivatives to keep casino capitalism booming. To critics, SPACs are just the newest iteration of the usual Three Card Monty, and “heads we win, tails you lose” rules favoring insiders.
But given the truly exciting transport vehicles and services the drone sector is quickly readying for launch, Archer’s Wall Street IPO revision is probably just a pragmatic response to spreading investor caution on SPACs in general – that is, adapting to changing market conditions – rather than a true blow to its flotation plans or overall worthiness. And in any case, if the world’s AAM future is as revolutionary and exciting as most observers believe it will be, the value of leading players are likely to seriously appreciate over the years, no matter what their initial share prices were, or the method they used to enter the market.
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