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How the rocket business launched a wave of blank check acquisitions

Richard Branson, center, celebrates Virgin Galactic's first day as a public company.
Reuters/Brendan McDermid
Richard Branson, center, celebrates Virgin Galactic’s first day as a public company.
  • Tim Fernholz
By Tim Fernholz

Senior reporter

In 2019, Virgin Galactic took the first small step for a space company—and a giant leap for global finance. It became a publicly traded company through a merger with a special purpose acquisition company, or SPAC.

The transaction kicked off a trend, with risky private ventures of all stripes arriving on public markets through the same mechanism. In 2019, there were 87 SPAC transactions, with an average value of about $390 million, according to the financial data firm Refinitiv. In 2020, there were 163, with an average value of $965 million. And in the first two months of 2021, there have been 72 SPAC transactions, with average value of over $2 billion.

Companies in the space sector are taking advantage. We’re still waiting for the first traditional space IPO, but seven SPACs have made deals to bring space firms public at a cumulative value of more than $20 billion, driven by investor lust for anything akin to Elon Musk’s SpaceX, one of the largest and fastest-growing private companies in the world.

Virgin Galactic, founded in 2004 as one of the first “new space” start-ups, had in 2019 edged closer toward flying paying tourists to the edge of space after overcoming tragic failures and technological challenges. While it lacked the clear success demonstrated by SpaceX at launching rockets, or the promise of disrupting an already successful space business model like satellite communications, its main backer, British billionaire Richard Branson, kept the company funded and in the news.

Chamath Palihapitiya made the deal happen. A year before, the former Facebook executive’s venture firm Social Capital had collapsed, but the SPAC it sponsored in 2017 continued to exist. A SPAC is sometimes called a blank check company because a sponsor founds it and raises money on a public stock exchange with the explicit purpose of buying a yet-to-be-determined private firm. SPACs are not new, but had typically been a sketchy province of Wall Street. Their profile has risen in recent years to meet the needs of an era with more demand for new stock than interest in scrutinizing it. Palihapitiya marketed the idea as “IPO 2.0.”

Palihapitiya said his SPAC would target a technology business valued at $3 to $20 billion, hinting that it would aim for a unicorn like Slack, the productivity firm where he was a prominent early investor. Instead, his SPAC acquired Virgin Galactic, taking the firm pubic in a transaction that valued it at $1.4 billion.

Two years later, Virgin hasn’t hit any of the revenue projections that justified that value. It has yet to fly a paying passenger, and its last flight to space nearly ended in disaster. But today shares in SPCE are trading at $27 a share, valuing the firm at $6.4 billion. The share of stock the sponsors received as a fee, for which they paid $25,000, is worth $388 million at that price.

The pandemic has delayed judgment, but the question of how long corporate performance and market values can diverge hangs in the air. ARK, the trend-setting investment fund, says it is skeptical of SPACS. And this week, Palihapitya disclosed the sale of his entire personal stake in Virgin Galactic, earning more than $200 million. The flamboyant investor says he’ll plow that money into climate change technology. Will the space sector be left holding the bag for a bubble—or rocket into relevance on a geyser of public capital?

Why SPACs?

New space start-ups are high risk: They require more capital than almost any other firm, their business models are often unproven, they can depend on military or government contracts that can change with an election, and they compete not just with each other but with billionaire enthusiasts and the leading lights of the military-industrial complex.

But public markets, at least in our current moment, have an unusual craving for risky bets. And with large private firms experimenting with other alternatives to the traditional public offering, like direct stock listings, blank check companies are seen as a route to give investors what they want. The SPAC approach lends itself to doing so in part because it hands much of the risk to these investors.

Most notably, because the deal is technically an acquisition, securities regulators allow SPACs to include projected future revenues in their investor pitches, shifting focus away from actual business results. The SPAC’s sponsor and the company it is acquiring can publicly hype their stock in ways not allowed during a typical IPO. And the deals typically include a large investment of private capital that allows management teams to be more selective about which big investors they bring into their company.

SPACs address some traditional complaints brought by owners of private firms about raising capital through the usual IPO process: The “pop” seen as the price of the new stock soars in early trading after the company has sold its shares. Some see this resulting in money left on the table by the company going public, though investment bankers tend to argue that it is a natural consequence of market structure.

In contrast, SPACs are a more ownership-friendly way to go public, because they pass the costs along to the shareholders of the blank check company. In the course of a SPAC acquiring its target company, three things happen: The sponsor takes 20% of the post-IPO shares as a fee. The sponsor also offers a good deal to investors handing over their cash in the first place, who can redeem their investment at a profit before the merger has concluded. Finally, there are fees to the banks and lawyers involved.

All this adds up: Researchers at Stanford University and NYU recently assessed that 50.4% of the cash raised in the median SPAC transaction goes towards costs, rather than around 22% in a traditional IPO. When the median SPAC deal is complete, shareholders who paid $10 per share wind up with a claim on $6.67 of cash.

SPAC backers argue they are still doing investors a service by providing access to dynamic growth companies at an earlier stage in their development. Rather than waiting for a company worth $20 or $30 billion to IPO at a much higher price than $10 a share, small investors can get in at a stage when shares would normally be restricted to wealthy individuals or venture capital firms. In an era where raucous retail traders see themselves as Davids battling the financial industry Goliath, it’s a seductive message.

What makes a good space SPAC?

Venture capital has been pouring into the space sector over the last decade, as SpaceX’s success in revolutionizing the launch business and the development of powerful new small satellites convinced investors that there is real opportunity in orbit. But unlike other popular Silicon Valley sectors—social media, productivity software or, god help us, ride-sharing—there has yet to be major “exit” to reward the investors in a private space firm. Google’s $500 million acquisition of earth-imaging firm SkyBox in 2014 turned out to be an outlier.

With Virgin Galactic’s sustained success in the market, however, and the rise of meme stocks that benefit from any exciting narrative (or proximity to Elon Musk), SPAC sponsors have come hunting for acquisition opportunities. Start-up CEOs tell Quartz they are swamped in offers from blank check companies seeking to take them public. This week, a new SPAC called Space Acquisition Corp 1 announced it will raise $300 million on the public markets with plans to buy a private space firm, TBD.

The result is a passel of space companies heading to public markets, some more prepared than others. Momentus Space is developing “orbital transfer vehicles” to accelerate the deployment of satellites, a novel line of business. In October 2020, it announced a merger with a SPAC operated by Stable Road Capital, the family office of entrepreneur Ed Freeman. Momentus had yet to actually deploy satellites on its spacecraft, but it had a successful test under its belt and planned its first mission in 2021.

However, a Quartz investigation revealed the company’s Russian CEO faced a federal investigation into whether he could access space technology legally. After he resigned, the acquisition has been delayed while the company undergoes a federal review of its ownership structure, to see if it will be allowed to launch its spacecraft on US-regulated rockets. Though the SPAC’s stock fell on the news, it still trades over its break-even price at $16.94.

Other space SPAC targets on more solid ground still face steep competition. BlackSky, a remote-sensing satellite firm, will go public through a SPAC with a valuation of $1.5 billion. So too will Spire, which is building a satellite platform to collect data on earth, at a valuation of $1.6 billion. Both firms are competing with more mature start-ups like Planet, a leading private earth-imaging company, and a slew of other remote-sensing firms either aiming at more specific niches or at creating platforms for space entrepreneurs. For them, hundreds of millions of dollars in new capital might not have been forthcoming from private investors, but could make them immediately more competitive.

AST SpaceMobile plans to complete a SPAC transaction this year. The four-year-old company was founded and financed by Abel Avellan, who previously started and sold a satellite communications firm. Avellan’s new company wants to build satellites with antennas large enough to connect directly to mobile phones on earth, in contrast to other satellite firms focused on connecting custom terminals to smaller, cheaper satellites.

Avellan’s firm is partnering with the mobile phone giant Vodafone in what he describes as a business-to-business strategy to expand the reach of existing cellular networks. In the past, this kind of business might have been initially financed by a private equity firm. Now, it will go public.

“The SPAC market was something that has changed a lot,” Avellan says. “[It] is a new way to finance disruptive and game-changing technologies.”

Can SPACs launch the next great rocketmaker?

What everyone wants to invest in, of course, is SpaceX. The leading rocket launcher has marched up the value chain into human spaceflight and satellite manufacturing, becoming a vertically integrated space firm. The next best thing would be another rocket company positioned to make a similar climb. And soon, public market investors will have access to two that say they will.

Rocket Lab is perhaps the most successful private rocket company after SpaceX, and the only one regularly launching payloads to space—97 satellites so far. It recently announced plans to make its Electron rocket reusable, develop its own small spacecraft called Photon and a larger rocket called Neutron. The company’s CEO, Peter Beck, ate a hat as part of the announcement—he had sworn to do so if his firm ever developed a reusable rocket, originally seeing that innovation as a distraction from developing a reliable low-cost launch vehicle. It announced it will go public though a SPAC this year, valued at $4.1 billion.

“Our original path was a more traditional trajectory to an IPO,” Beck told Quartz. “There are advantages with a SPAC and disadvantages with a SPAC, but I was keen to bring a high-quality asset into the marketplace. You can see that by our projections—no mining for diamonds on asteroids kind of stuff. It’s a solid history of revenue and backlog. The advantage with a SPAC is we can move faster.”

Matt Ocko, a member of Rocket Lab’s board and partner at the venture fund DCVC, says he’s “not in the tank” for SPACs, but that they can offer the right company more control over the transition to becoming a public company. Some SPAC sponsors are more educated about the potential of space businesses than typical investors in late-stage private companies.

Astra, another nascent rocketmaker with a SPAC in the works, has yet to put a payload in orbit. Its most recent attempt came very close, to the point that its engineers believe tweaking the software that mixes its propellant will deliver a successful launch expected this summer. CEO Chris Kemp, a former NASA CTO and enterprise software developer, just poached Benjamin Lyon, a senior Apple engineer, to lead its technology development. Its first vehicle to market retails at less than $4 million, and the company says it has sold 50 launches, but hasn’t disclosed how many deposits it has received. Its purchasers, a SPAC backed by the telecom mogul Craig McCaw, value the company at $2.1 billion.

Both rocketmakers have bigger aspirations—they want to accelerate the development of the satellite business. The firms have articulated a roadmap to building vehicles that allow entrepreneurs with no space experience to launch technology into orbit to preform remote sensing, communication, or other tasks. Rocket Lab’s Photon spacecraft has already been demonstrated on orbit to fulfill Beck’s goal of offering new satellite firms a platform to develop their business, while Astra’s next vehicle, the “four series,” could offer potential customers a similar ability to put their idea in orbit as frictionlessly as possible.

They are hardly the only firms aiming at this goal: Momentus, too, wants to carry other companies’ payloads, as does Spire, the launch-brokerage Spaceflight, and the satellite bus manufacturer York. The dream of the trillion-dollar space economy rests in no small part on discovering ways to make new businesses in space.

When the market says “go”

Another factor boosting space SPACs are the exchange-traded funds that seek to invest in bleeding-edge innovation. Cathie Woods’ ARK is planning to launch a new space-focused ETF, the news of which led many SPACs involved in space transactions to see their share prices rise. But Brett Winton, ARK’s head of research, told Bloomberg the fund is skeptical of SPACs.

“It seems in some ways backwards to how companies should come into the capital markets,” Winton said. “They should come into the capital markets when they are ready, not because there is a pool of money that is going around to find anything that could possibly go to the capital markets.”

With the interest rates unlikely to fall in the near future, SPACs may stay buoyant far longer than their critics. Still, recent equity sell-offs as bond yields rise have put pressure on popular tech stocks. Even ARK’s flagship innovation ETF has dropped more than 2% in the last month.

Space entrepreneurs, meanwhile, face a tough choice when presented with the opportunity to raise capital (and boost their own net worth) more cheaply and quickly than they might otherwise. That may be especially true for companies struggling to gain a foothold in the market that could see a capital boost as a major advantage. But some in the sector fear that if the flood of public investment into space start-ups looks like a mistake next year, it could have long-term consequences for the industry.

“Some space-related companies that I will leave nameless, are massively, massively speculative, right up to the point of being disingenuous,” Ocko says.

Payam Banazadeh, the CEO of a Capella, a start-up that operates a constellation of radar satellites, said last year he was concerned about the trend. “Until you get the company to a point where you have very stable revenue year by year, in my opinion it’s wrong to go public,” he told Quartz. “If that SPAC is going to be unsuccessful, it’s going to have some implications and reputation damage for the industry as a whole.”

“If it is successful at valuations that don’t pass the sanity check and projections that don’t pass the sanity check, it will fail to deliver on those revenue targets and it will poison the well for risk capital that might be available for more solid companies,” a space executive, granted anonymity to speak candidly, said of one SPAC target.

Some observers find the moment reminiscent of the tech bubble at the turn of the century, when satellite companies raised public money on hopes of a tech revolution, then faltered as the cost of building and launching satellites outweighed their revenue forecasts. Many of the firms entered or flirted with bankruptcy.

But all that investment still—eventually—led to profitable space companies, including Iridium and Inmarsat. Craig McCaw, the investor taking Astra public, famously saw his satellite firm Teledesic fail, but it inspired modern projects like SpaceX’s Starlink or Amazon’s Kuiper. Now, he’s back for another bite at the apple.

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