Almost half of all SPAC startups with less than $10 million of annual revenue that went public in 2021 will fail to meet the earnings targets they promised to investors, reports an article in The Wall Street Journal. Many of the companies are tech startups, and are now expected to miss the projections they advertised to lure investors—some by wide margins.
Critics of SPACs say the going-public process was too loosely regulated and that lack of oversight allowed the companies to make wildly optimistic financial projections in order to attract investors, without having the revenue history to back it up. The SEC put SPACs on its regulatory agenda last year, indicating that new rules could be coming down the pike, and some policymakers are advancing bills to curb the practice and bring it more in line with traditional public offerings, which are discouraged from predicting future performance.
The Wall Street Journal analyzed 63 companies that went public through a SPAC deal in 2021 and held less than $10 million at the time of their public listing. At least 30 of those 63 failed to meet their projections. One such SPAC is Arrival SA, an electric bus and van maker that was forced to withdraw its long-term forecasts in November after putting forth a projection that it would grow from $0 to $14 billion in 3 years when it went public in March. Its stock is now down about 85% since that listing.
But supporters of the SPAC practice say projections give investors the chance to bet on startups by estimating their potential and gives those investors the opportunity for the kind of big returns that usually only investors who can access the private markets get. And because these startups don’t have a track record yet, they have nothing else to offer beyond projections. Indeed, some of the SPACs that went public last year have delivered on their promises, such as battery company Solid Power Inc., healthcare software firm Pear Therapeutics, and Local Bounti Corp, an indoor farming startup. All 3 of these companies have $4 million or less in revenue and are on track to meet or surpass their 2021 projections, the Journal reports.
Analysts did find a correlation between incredibly optimistic forecasts and poor performance: the more ambitious the projection, the more likely the SPAC will underperform. And companies that miss their numbers are in a tough spot. They either have to slow down their spending, which could stunt growth, or raise more capital, which would be difficult given their low stock prices. But even taking one of those routes, it would be very difficult for a SPAC to get its numbers back up, and analysts expect that at least half of 2021’s SPACs will be out of business or delisted in 5 years.