The year 2020 has been an unusual year in so many respects. In business, no doubt it would mark as the watershed year for the electric vehicles industry; after all it is in 2020 that EVs have planted its flag as what would be the future of the car. Tesla has been on a tear and its success has indeed drawn enormous interest in the EV industry. This has become a stock market darling not just with the rocket-ship rise in the stock price but also unleashing SPACs (Special Purpose Acquisition Companies) as an investment vehicle to flush cash into EV ventures. SPACs have been looked down upon by the traditional investors in the past as a backdoor for companies that did not have the chops to go through the usual route of an IPO. But the record investments in SPACs have now been justified especially in the EV sector. SPACs are now seen as the perfect structure for companies that are ventures like with growth potential but without the credentials for a credible IPO. The reason why new ventures did not show up for an IPO in the stock market was because how do you put a value on a market that is an infant, company does not have a product ready, with no real business and only an expectation to growth in the future. SPACs, as it seems fit the bill very well. As an outsider, watching the markets and reading the press coverage, I am fascinated, even though I admit I don’t understand much of it. I have never done a SPAC deal so I know nothing more than what an armchair reader would perusing newspapers on this subject. There are three things that intrigue me the most.
1. Power of storytelling in justifying investments:Without any benefit of historical instances, all there is to justify valuation of a company is the power of the story. Everyone understands the building blocks to construct a good story and there are no qualms that investors are investing based on that. Companies weave the usual elements – a great team, a solid design, a killer platform and go to market all combined to drive hockey-stick sales and profit projections. In the EV market, there is a belief today that by 2030 there will 20-30M EVs, i.e., about 30% of the total vehicles. If we assume that Tesla which has about 17% of the market share will grow its production from 500K to 5M, which many believe is plausible, there still remains a sizable portion of the market for others. The mystery is of who is or are going to be the next Teslas. For now, whoever can tell that story is winning the investors over. Fiskars, EvGo, Nio, Li Auto, Xpeng seem to be doing that quite well.
2. How financial structures keep innovating? SPACs in particular have served the need to find a way for the EV ventures to access public capital markets. New ventures have to rely on venture capital in the private space, making prototypes and proving the market test, then sweat for quite some time to do roadshows for an IPO or find a willing suitor to acquire. Usually, these suiters are large public companies that make it hard to keep the process and due-diligence transparent, SPACs at least provide some visibility into what these companies are, and what they are doing. What is raising the eyebrows is the valuation of many of these companies. Most SPACs are trading above $10 pre-business amounts early this year. Venture investors are used to making such bets, but I wonder how familiar it is for the ordinary mainstream public investors. Perhaps it is not. So, it is not a surprise that big name investors and industry personalities are involved because absent any data, one has to fall back on “trust” and the credit of personalities like Bill Gates (QuantumScape).
3. How winners and losers will be determined? It will be awhile to find out who will be the next Tesla. Is it going to be one of the large traditional auto-manufacturer like VW ($86B for EV) or GM($27B for EV)? Or, is it going to be one of the upstarts that ended up with a SPAC? Tesla has shown how vertical integration and in-sourcing most of the components, and even more importantly taking a software-first approach have served its position. Traditional auto companies have already recognized the difference and have been setting up new factories that create new EVs from ground up. The earlier efforts to modify a gasoline mobile into an electric vehicle did not work for the early adopters – Nissan Leaf and GM Volt and even Toyota are living examples. Tesla has shown the way that sometimes building from ground up turns out to be a more efficient and a better solution. This approach has allowed not only to reduce the costs but also to increase the efficiency with more integrated design efforts. Many of the new companies are developing the cars in the Tesla fashion and promises aggressive growth targets. Fisker is another example where the expectations have driven high valuation and SPAC investment. Like many others, it remains to be seen how Fisker measure up to the expectations shared by these ventures.
Good storytelling can win over the hearts and minds for now, but storytelling and trust are closely related. As we have seen over the last couple of decades with companies like Amazon and Tesla that the stock market is patient, and will trust companies and cut some slack for the long term as long as the investors believe in the story – the story of their strategy and execution staying true to the strategy and delivering results that are consistent with the story. In due course, over the next 2-3 years after these companies have run its course for a bit to demonstrate the results – when they produce viable cars and sell to their customers, we will know the lemons from the real deal. Until then, simply watching a new industry emerge is a spectacle of our times, not worth missing.
© 2021 by Greenelectrons Consulting, LLC.
