The hype surrounding special purpose acquisition companies (SPACs), may be cooling off after a year in which they were the hottest new thing on Wall Street. But the companies—which are designed to merge with or acquire a promising startup that needs quick access to a lot of capital without the expense, time, and regulatory hassle of a traditional initial public offering—are well-suited to tackling the climate change crisis. SPACs are just beginning to heat up for climate tech.
Phyllis Newhouse learned that first-hand this month. After a two-decade career working on cybersecurity in the US military, Newhouse decided to take a stab leading a tech company in the private sector. She joined forces with venture capitalist Isabelle Freidheim to launch Athena Technology Acquisition Corp., an all-female-led SPAC that went public in March with a value of $250 million.
Newhouse wasn’t picky about the type of company Athena would target. She combed through two dozen startups in sectors like cybersecurity, fintech, and direct-to-consumer retail. “We just wanted to look for a company that had an innovative, game-changing solution in their industry,” she said. “But our criteria was very strict. We were looking for innovation, we were looking for readiness to go public, and a great management team.”
The company Athena eventually chose was the only one working on energy or climate change: California-based Heliogen, which was founded in 2013 by longtime solar energy entrepreneur Bill Gross and received early seed funding from Bill Gates. Heliogen builds concentrating solar-thermal arrays, in which a field of mirrors directs sunlight toward a tower where the heat (reaching up to 1,800 degrees Fahrenheit in Heliogen’s technology) is collected and either converted into electricity or funneled directly into a factory furnace.
The basic technology has been around for decades, but Newhouse was impressed by two of Heliogen’s innovations: an algorithm that directs the mirrors to achieve maximum efficiency, and the plant’s small footprint which allows it to be sited alongside energy-hungry industrial facilities rather than in remote deserts.
Athena merged with Heliogen on July 7, raising $415 million in cash and taking the solar company public with a $2 billion valuation. The money, Gross said in an interview, comes at a time when the company’s target customer base—carbon-intensive sectors like steel or cement manufacturers that lack many options for decarbonization—is banging down his door in response to mounting pressure from lawmakers, investors, and the public to demonstrate action on climate. ArcelorMittal, the world’s largest steel producer, is a shareholder and anchor customer, Gross said.
“The market wanted more than we could deliver” as a private company, he said. “More financing allows us to be the leader in this space.”
Heliogen isn’t alone. At least 28 climate tech startups have been acquired by SPACs, and since the beginning of 2020, these have raised at least $7.5 billion, according to data compiled by Silicon Valley Bank (SVB). Most are in the business of low-carbon transportation. Recent examples include electric bus manufacturer Proterra, EV battery maker SES, and rooftop solar financier Sunlight Financial. According to the accounting firm CohnReznick, at least 50 more SPACs are currently hunting for climate-related acquisitions.
Despite the number of climate SPACs dropping from nine in the first quarter of 2021 to just three in the second quarter, SVB projects that around $37 billion could flow to climate tech startups through SPACs in the next 24 months.
“Climate tech is leading the march into SPAC world,” said Kelly Belcher, a managing director focused on energy at SVB. Belcher cautioned, however, that private investment in public equity (PIPE) financing, in which a public company sells shares at a special price directly to specific investors as a way to raise money for acquisitions, seems to be reaching a “saturation point” and slowing down, which could temper expectations for SPACs across the board. PIPE funds are commonly employed to sweeten SPAC deals; in the Heliogen case, it amounted to 40% of the deal.
A SPAC’s success largely depends on the ability of founders, such as Heliogen’s Newhouse, to spot future market trends and opportunities that other investors miss or aren’t ready to fund. In a rapidly warming world in need of complex new solutions, investors with subject-matter expertise are sometimes best suited to find the next blockbuster company on the edge of a new technology.
“What SPACs do is allow industry experts to raise money and go find a diamond in the rough,” said Travis Wofford, vice-chair of mergers and acquisitions at the law firm Baker Botts. “Why are so many of these clean tech? It’s because high-growth industries focused on new technologies require smart people who can see the potential in a technology and a business. It doesn’t matter if you have the cure for cancer if no one will give you the money to develop the drug.”
Climate tech startups are also particularly likely to benefit from a SPAC, Wofford said, because they tend to require a large amount of capital to build expensive hardware like a solar farm or a vehicle factory (compared to, say, a piece of app software). Startups tends to secure a higher valuation through a SPAC than they might through a conventional IPO, Wofford said.
In the future, Wofford said, SPACs could even become a useful tool for legacy fossil fuel companies to speed up their transition to cleaner sources of revenue. Climate startups that are just launching today could find themselves merged with SPACs sponsored by the very companies they’re aiming to up-end. ”A large oil and gas company,” he said, “would have even more opportunities to bring expertise in evaluating these cleantech targets.”
For now, climate-related SPACs are performing well compared to other sectors. Share prices of climate startups that went public through a SPAC in 2020 rose 131% on average between the merger and the end of the year, compared to 50% in all sectors.
There was a notable outlier that vividly illustrates the perils of going public too early: Lordstown Motors, a maker of electric trucks that went public through a SPAC in October 2020. Aiming to rival Tesla, the company is foundering after its share price collapsed, investors sued and the federal government began investigating its former CEO for misrepresenting sales prospects—all before it produced a single truck.
The Lordstown debacle was precipitated by premature hype, immature technology, and a SPAC whose leader was under immense pressure to ink a deal but had little expertise with the clean-tech sector. But even for companies that are performing well so far, the real test won’t come for another decade or two until the global energy transition is further along.
If today’s clean tech SPAC sponsors made good bets, the companies they acquired will be titans of the new economy. If not, they could be a colossal waste of investors’ money.