Weekly Brief: Auto Start-Ups Suffer Fall-Out from SPAC Attack

Commentary By Andrew Tolve

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9th August 2021

At the height of the pandemic in 2020, a number of start-ups across the industry, particularly those in the EV and AV space, went public through complicated reverse mergers with companies known as SPACs. These mergers typically involved obscure funding corporations whose names few had ever heard of before, such as SPAQ_u.N, short for Spartan Energy Acquisition Corp, which completed a reverse merger with EV start-up Fisker in July 2020. Nikola completed a SPAC with VectorIQ Acquisition Corp that same summer. Lordstown Motors went public through a SPAC with DiamondPeak Holdings Corp. The goal in each of these situations was for the SPAC to serve as a blank check that would open up Wall Street financing without the normal time and scrutiny required for a traditional public offering.

That’s great in theory but is proving problematic in practice. Last Monday I documented the problems at Nikola Motors, which has lost 76% of its value since going public and whose former CEO and chairman, Trevor Milton, now faces multiple charges of securities and wire fraud from the US Department of Justice owing to shady dealings around the SPAC. Likewise, Fisker soared to a peak value of $8Bn in February 2021 post SPAC; now it’s plummeted to about $4Bn because of concerns that it won’t be able to achieve profitability even if it manages to bring its Ocean electric crossover to market by Q4 2022. Lordstown Motors was the darling of the Trump administration when it revived a shuttered Ohio factory and went public with a valuation over $4Bn. Now it’s down to roughly $1Bn and just went crawling to a hedge fund for an additional $400M in investment to help its cash-strapped operations.

Part of the problem is timing. Each of these start-ups is trying to succeed in a fledgling market where consumer interest is still lagging and it’s difficult to reach economies of scale, as Tesla has finally managed to do after 18 years at the office. At the same time, in the face of regulatory mandates and growing public concern over global warming, major automakers are finally putting their marketing and manufacturing might behind the EV revolution, which doubles the squeeze on EV start-ups. Every week now, it would seem, we see a new EV reveal from a mainstream automaker. Last week the GAC Group and Huawei announced a pure electric “smart SUV”. Volkswagen unveiled a near-market-ready, all-electric, midsize SUV version of the ID.5. Tack on the fact that many EV start-ups are now beholden to stakeholders who demand profitability today, rather than on a more gradual, start-up friendly trajectory, and you start to understand the growing investor concern.

There’s something more at play here than just timing and shifting market dynamics. It’s also a matter of the SPAC structure itself, as a second quarter earnings call from Velodyne made clear last week. Velodyne is one of the world’s leading suppliers of LiDAR technology. Its investors included Ford, Baidu and Hyundai when it went public by way of a SPAC named Graf Industrial Corp in July 2020. The SPAC succeeded in injecting Velodyne with $150M in fresh investment, at a market value of $1.8Bn. Yet, last week, the company revealed that it’s mired in corporate dysfunction that’s costing it dearly in legal fees and equity compensation. Specifically, the SPAC’s new board opened a $3.7M investigation into Velodyn’s founder, David Hall, and his wife, Marta Thoma Hall, and ended up controversially stripping both of their positions within the company. Hall fired back that his company’s struggles were down to the SPAC’s new board members and its SPAC-appointed CEO, Anand Gopalan, who then resigned three weeks ago with an $8M payout.

The turmoil has seen Ford sell its shares of Velodyne and announce plans to produce LiDAR internally with Argo. Couple this picture of SPAC disarray with an equally tumultuous window into SPAC life at Nikola and Lordstown, and a sad portrait of desperation and dwindling prospects begins to appear across the automotive SPAC universe.