How Not to Go Public
By Robert J. Uek, CFA
Co-Portfolio Manager, Essex Environmental Opportunities Fund
There has been much debate about whether the best way to bring a company to the public markets is via the traditional IPO process or via a merger with a Special Purpose Acquisition Corp (or “SPAC”). Both processes have their pros and cons, but historically, SPACs were seen as the seedy underside of the capital markets providing a route to market for companies that weren’t quite up to the standards needed for the traditional IPO underwriting process. This changed recently with more respectable market players becoming involved in sponsoring, underwriting and investing in SPACs and related financings and indeed, there has been a huge increase in capital committed to SPACs in the past 24 months. Within this trend, we have seen a plethora of clean energy and clean technology companies come public via the SPAC route over the past couple of years. We have been busy analyzing them.
No doubt, a bit of the shine has come off the SPAC market recently as investors grapple with unrealistic company projections, high valuations, and secondary offerings from selling shareholders. It is evident that a number of these companies just aren’t ready for the public spotlight. But regardless of whether a company is brought to the market via the traditional IPO process or via a merger with a SPAC, we believe that Velodyne Lidar, Inc. (ticker VLDR) is a great example of how a company should not be brought to market.
Velodyne is a developer of Lidar technology and came public via a merger with a SPAC in September 2020. Lidar (which is short for Light Detection and Ranging) is a technology that uses pulses of light to determine distances and help create 3D images of objects. Although the technology is quite expensive today, forecast cost declines will allow Lidar to capture a $20+ billion market opportunity (per New Street Research) by 2030 with applications in autonomous driving, consumer electronics and industrial automation. While the opportunity is large, there are many competing Lidar companies that have come public in the past year in addition to Velodyne: Ouster, Aeva Technologies, Luminar Technologies and Innoviz Technologies.
Making an investment in Velodyne is hard enough given the nascent technology and competitive landscape, but management is making it near impossible to be confident enough to commit capital to this company. Since going public:
- the founder of the company stepped down as CEO in January and then was ousted from his position of Chairman of the Board a few months later. He has been increasingly vocal and critical of the company;
- a key strategic shareholder, Ford Motor Company, sold nearly it’s entire investment;
- the company reported poor financial results in its first quarter out of the gate along with a meaningful guide-down in future expectations (Velodyne now expects 2021 revenues more than 40% lower than projections given at the time of the merger with the SPAC); and
- resignation of the new CEO in July 2021 after a mere 6 months in that position. The company will now be run by an “Office of the CEO”. As a Boston Red Sox fan, we know the unhappy ending to the season when management tried to go with a “bullpen by committee” and fear the same for Velodyne.
Clearly this is not a good trajectory for a newly minted public company. Not surprisingly the stock is down nearly 75% from its high earlier this year. Unfortunately, there are a number of other clean technology companies that have come public in recent months and also have been underwhelming in their market debuts. Not many have had the same level of corporate drama as Velodyne, but it is obvious that many of the SPAC cohort were not ready for the public markets and traded at unreasonably exuberant valuations. But within this turmoil, there is opportunity. We believe that there are a number of companies with interesting clean technologies that have been unduly tarnished with the stains of the SPAC weaklings. It’s time to sharpen your pencils on some of these companies that may show long term promise. We are.
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
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Top ten Fund holdings as of 6/30/2021: Raven Industries Inc. (5.00% of portfolio), Aspen Aerogels Inc. (4.46%), Sunrun Inc. (3.51%), Generac Holdings Inc. (3.29%), Hannon Armstrong Sustainable Infrastructure Inc. (3.27%), Enphase Energy Inc. (3.07%), Amyris Inc. (3.04%), Cree Inc. (3.03%), Kingspan Group plc (2.98%), and Kornit Digital Ltd. (2.88%). Current and future portfolio holdings are subject to risk.