Should You Invest in SPACs? (Part 2)
July 15, 2021 – By Simon Erickson
Special purpose acquisition companies — commonly known as “SPACs” — are becoming increasingly popular in recent years as a way for companies to reach the public markets. While there were only 59 companies that chose to do a “SPAC IPO” in 2019, more than 360 have already taken place thus far in 2021. The total value of funds raised from those SPAC IPOs this year has exceeded $112 billion, and there are reportedly more than 300 more SPACs that have raised funds and are looking for a target.
But what will the modern SPAC Race mean for investors? Is this indeed a more capital-efficient way for companies to raise money and go public? Or are investors throwing money at an unproven and potentially dangerous new trend?
To answer those questions, 7investing Lead Advisors Simon Erickson and Steve Symington are digging deeper into the recent SPAC craze. In part two of their two-part podcast series, Simon and Steve dig deeper in the way that SPACs are structured and present the important factors that investors should consider. They also take a look at four SPACs that have gained a lot of attention this year — SoFi, Ginkgo Bioworks, OpenDoor, and Rocket Lab — and evaluate each of them as potential investment ideas.
Publicly-traded companies mentioned in this podcast include Bayer, OpenDoor, SoFi, Vector Acquisition Corp, and Virgin Galactic. 7investing Lead Advisors may have positions in the companies that are mentioned. This interview was originally recorded on July 14th, 2021.
00:00 – Review of important factors to consider when evaluating SPACs
10:34 – SPAC review: SoFi $SOFI (Steve)
23:09 – SPAC review: Ginkgo Bioworks $SRNG (Simon)
33:18 – SPAC review: OpenDoor $OPEN (Steve)
45:05 – SPAC review: Rocket Lab $VACQ (Simon)
Simon Erickson 00:00
Hello everyone and welcome to today’s episode of our 7investing Podcast. I’m 7investing founder and CEO Simon Erickson joined by my colleague 7investing lead advisor Steve Symington. Steve, how are things up there with you in Montana today?
Steve Symington 00:14
They are great. It’s still smoky, we’re surrounded by wildfires, which is the only bummer I think, at the time of maybe living in Montana at the moment.
Simon Erickson 00:24
Well, one thing, one other thing that’s been on fire lately, Steve has been SPACs. We’ve been talking a lot about special purpose acquisition companies. We had a SPAC chat part one a couple of days ago. And we realized we had more than enough material to make this into a two part podcast, I see probably enough material to make this into a 13 part podcast, but.
Steve Symington 00:44
I was gonna say 10, 15, 20 however many parts you want, we could talk about this and make its own podcast, maybe. But
Simon Erickson 00:51
Oh, for sure. But we decided on the first part was really an introduction to SPACs. And a couple of things that we were looking at. And we’re going to come back for the second part and dig a little bit deeper into the trenches. Talk a little bit about some of those metrics we introduced in the first podcast. And then we’ve also got a variety of SPACs. That we’re gonna look closer at. We’re gonna actually look at some of the deals that have been done or are about to be done, and offer our investing perspective on this. Steve, are you ready to get started? I think we’ve got a long podcast ahead of us here.
Steve Symington 01:22
Yeah, absolutely. We’ll see if we can grind through this and not make it three hours, I think we’ve got plenty to talk. But yeah,
Simon Erickson 01:28
Grab a cup of coffee. If you’re tuning in for this one, it’s one that you’ll want to be caffeinated for. But to kind of start, maybe not at the highest level, but a layer that’s still sufficiently high in altitude. We defined a couple things that we look for in SPACs the last time, and I want to drill down to a couple of the specifics of what might be important when you’re looking at these deals. And the reason for that is SPACs are not just the same as IPOs are not just you go public and you buy into the equity of the of the business, you’re buying into at least if you’re buying before the merger takes place, you’re buying into a shell company that raises a lot of money, and then merges that with an existing privately traded company that creates a consolidated entity at the end of the day.
Simon Erickson 02:15
And so if you want to think about this, in terms that might make sense, think about a giant swimming pool. And the overall allocation of the swimming pool gets split up between different groups in this transaction, that’s known as a SPAC. The first part of the pool is owned by the people who already had the pool in the first place, right the private ownership of this business before it was publicly traded in the first place. But then over time a SPAC emerges, it raises public funds from from investors, and then they get an ownership of that business over time as well. And so there’s a portion of the pool, that’s for the people that buy into the SPAC itself. And then there’s even a third portion of the pool too that are the financial sponsors, the deal bakers, that actually make this intro entire transaction take place as well. There are ways of rewarding them through equity, so they get a portion of the pool, as well, at the end of the day. So I don’t know if that analogy worked or helped at all, but that’s kind of how I think about who owns the SPAC at the end of the day.
Steve Symington 03:13
Sure, yeah, that works perfectly. Three different pools, it’s it’s like the little dividers in between, but they all come out owning parts of the company, and everybody gets a little something for it. And, and, of course, the, the SPAC sponsors should get a piece and be rewarded for their effort and bringing this company public, because that’s what SPACs are, it’s an alternative method to bring your company public. And rather than going through a traditional IPO, or even a direct listing, you just merge with this, basically shell company and you find a relatively streamlined, comparatively simple way to to bring a business to the public markets.
Simon Erickson 03:54
Yeah, absolutely Steve. And the first thing that I think that’s important for investors to consider is, what is the size of the swimming pool? You know, what are the gross proceeds that are being raised in this SPAC shell vehicle that we just discussed? And then what is the overall valuation of the company after it’s going to go public? And so are we talking about a SPAC that’s raising $200 million? And then it’s going to have a public valuation after the merger of $6 or $7 billion? Or are we talking about a SPAC that might be raising two or $3 billion in initial proceeds? And then that might have a enterprise value down the line of $15 billion or more? I think the first consideration that I look for is, is how big of a deal is this going to be? And kind of, what kind of valuation are we talking about for the final company?
Steve Symington 04:44
Yeah, yeah. I mean, well put, that’s that’s a great way to put it. I mean, we also want to look at who gets what pieces of it. I found myself kind of looking into lockup expirations, like when can these insiders sell their shares if they want to, because that can put some pressure on the stock, and what are the the the economics? Do they benefit from economies of scale? Do they have operating leverage as they build up? Is it super capital intensive? You know, one of the businesses we’ll be doing digging into soon is, but yeah, lots of stuff to look for with these businesses kind of in addition to and in, in common with, existing IPOs.
Simon Erickson 05:26
Yeah. And I think one of the things that’s interesting about these specifically, is, instead of just looking at business fundamentals, we’ve got to look at the deal specifics, as well. Steve, you mentioned the sponsors, the people that are raising the money and doing these deals in the first place, are rewarded for making deals happen in the first place. You know, we see that a lot of times, if you’re a financial sponsor, you have the clock ticking of two years to actually make a deal happen. But then, in addition to that, there are awards for making the deal happen. We think of these in terms, we call these kind out earning out shares over time, we call this in lingo, the “sponsor promote”, where you can buy shares at a very, very low price, if you close the deal, you can actually exercise those at a much higher price. And then there are also things called “earnout provisions”. Where of that portion that you get as a sponsor, you might actually give a sweetener, a sweetheart deal to the company that closes the deal with you, where you say, Hey, we’re going to award you additional shares in the future, if your stock price hits a certain threshold when it’s publicly traded in the future. So there’s a lot of considerations right for the financial sponsors piece of this SPAC thing that’s taking place.
Steve Symington 06:38
Absolutely, yeah. And I’m anxious to kind of dig in. So maybe we go there.
Simon Erickson 06:46
Yeah, absolutely. You know, just kind of one thing to look at as well is a lot of SPACs initially will start trading at a price of $10 a share. That isn’t a meaningful number, though. Right, Steve? What does that $10 a share actually mean for us? Yeah.
Steve Symington 07:00
So we mentioned during part one of this podcast, that $10 per share, is basically a function of how many shares they want to issue right. So don’t get too hung up on the fact that it’s $10 a share. That doesn’t mean that this company trading at $10, a share is valued the same as another SPAC that is starting at $10 per share. You know, you look at the actual enterprise value and look at the debt, they’re they’re bringing with them, look at the cash balances, and look at trailing revenue and growth rates. And that $10 per share taken in isolation means nothing. So don’t get too hung up on that, at this stage, just remember that that’s a starting point, but needs to be considered in line with, in conjunction with, with the other metrics to actually make share prices meaningful.
Simon Erickson 07:51
Yeah, absolutely. We have to look definitely at the number of outstanding shares that would be involved in this transaction, right. So even if everybody’s getting it at the same price of $10 per share, how many shares are going to be allocated to the existing business that is privately funded right now, how many are going to be are going to be warrants that are available for the sponsors? How many are warrants are going to be available for the investors in the SPAC itself? And then the one thing we haven’t even talked about yet Steve, is a lot of these deals are bringing in private investments from other companies, right? They’re larger corporations and sometimes want to get a piece of this pie. You call that PIPE funding, right, where we’re bringing in other people, other corporations that want to be involved in the SPAC IPO as well.
Steve Symington 08:35
Yep, Private Investment in Public Equities, right, is what the PIPE stands for. So you’ll see, you’ll, when you see them announced SPAC deals, they’ll say this is a SPAC deal that comes with this much held in trust by the SPAC sponsor, as well as a PIPE investments of $1.2 billion from these various investors. And these can be corporations, they can be retirement funds, they could be individual kind of investors, institutional investors rather. So PIPE investments are also kind of important to the amount of proceeds that these companies are bringing with them to the table when they are officially public business.
Simon Erickson 09:12
Yes, that’s right. And so we’re going to look at a couple of specific deals here. And the Steve, I’ll have, you kick this off here in just a minute with the first SPAC that you’re looking at. But set the scene again, of what we’re looking at. A SPAC is a little different than a traditional IPO. Because what you’re doing is you’re raising money in a shell company, and as an investor, you can buy into that shell company before it actually has a target in mind before it actually announces the company that it wants to merge with. If you do that, you’re betting on the jockey here saying that, hey, this financial sponsor is going to find a good target and be a good steward of my capital.
Simon Erickson 09:48
Or you can actually always later on if you don’t want to get in before the transaction takes place. You can always wait until the combined company does go public. It typically will change the ticker that it trades in, later on. And then that is when it’s actually just a regular publicly traded company that can issue new shares. And everything that we’ve gotten used to still applies.
Simon Erickson 10:08
So we’re going to be looking at a couple of things, we’re gonna be looking at who the sponsors during the deal makers are, who are the private companies that are being acquired? How do their fundamentals look? How large of a pool are we pulling from from of capital? There’s a whole bunch of considerations, which is I think what makes SPAC investing so interesting, is there’s a lot of things for us to dig into, like we love to do as investors.
Simon Erickson 10:29
And so Steve, how about if we look into the first one of these. What’s the first company that you’ve been looking at for our podcast?
Steve Symington 10:35
How about we start with with SoFi (NASDAQ: SOFI), it’s Chamath SPAC, right? That’s one of those. So we asked for feedback on some of the businesses you wanted us to look on into on Twitter. And I got SoFi several times. So let’s dig into this. And it was a company that was already kind of on my radar as well. But SoFi, if you’re unfamiliar with it, let’s let’s talk about the business first, before we dig into some of the specifics of the SPAC, right. So SoFi is a next gen financial technologies platform, they essentially want to be a one stop shop for financial services. And they say their mission is to help people reach financial independence and realize their ambitions, which they make a point is not the same as simply becoming rich, right? They want people to be able to manage their money effectively. And they want to be able to provide them solutions to do any part of that.
Steve Symington 10:54
So they’re entirely digital roots, right? So it’s a completely digital experience. They don’t have physical branches, like a normal bank, they’re not even a bank yet, by the way. So they want to do everything from borrowing, to saving to spending, investing, they have brokerage accounts, protecting your money kind of budgeting, they have solutions for all of this. So this kind of comprehensive suite of products should really, basically they have a huge advantage as an integrated digital platform, right. And they’re built from the ground up that way.
Steve Symington 12:05
They note that, and this is something I can relate to that, the top 10 banks hold around 50% of all consumers bank accounts, there’s 500 million bank accounts in the United States, I believe, and the top 10 hold half of them. And half of all Americans use more than one bank for their financial services. I know that’s true for me, right? You know, I’ve got different credit cards with a couple different companies. I remember opening in an American Express (NYSE: AXP) card forever ago, because it was the only one Costco (NASDAQ: COST) would take. And I’ve got a couple different brokerage accounts in different places. I have different checking accounts at two different organizations. And part of it’s just because certain organizations work well. They do really well at certain things, but not really well at other things. And SoFi wants to kind of streamline that.
Steve Symington 12:51
So really interesting business in that sense. It was only founded in 2011, which is also interesting in and of itself, like did I know SoFi existed in 2011? No. And part of that’s because they were founded as a student loan refinancing company. That was kind of how, it kind of reminds me of an Amazon (NASDAQ: AMZN) being founded as a book selling company, right? So student loan refinancing. But man have they grown and expanded their reach since then, they’ve got all these products from money, to Relay, which is the budgeting thing, their invest segment, which is like brokerages, they have home loans now, still have in school loans, they have a credit card, they have ETFs, they have rewards programs, and actually most of them were launched in the last two and a half to three years, which is kind of bonkers as well. They’ve just sort of supercharged their growth.
Steve Symington 13:42
Kind of just mind boggling to see how quickly they’ve grown. And to that end, looking at their most recent quarterly results, they say their member count was up 110% year over year to 2.3 million. Their growth has actually accelerated year over year for each of the past seven quarters. They said they’re on track to reach 3 million members by the end of 2021. But they also have even bigger plans going forward. They acquired a company called Galileo for $1.2 billion last year just prior to going public. Galileo is a banking infrastructure technology platform. It’s basically comprised as a financial services API for programmers, the payments platform, which has 70 million linked accounts, and actually SoFi Money, apparently, they’re checking and savings solutions were already tightly integrated and they said hey, we should probably just own this. But it also gives them additional relationships with both consumers and business to business links.
Steve Symington 14:39
And then maybe one more thing before we kind of move on to SPAC specific details, cash raised and such. Earlier this year, SoFi spent about $20 million, tiny little acquisition to acquire Community Lender to speed up the process of obtaining its own bank charter. Recall Square (NYSE: SQ) actually just received their bank charter approval, I think in March. And SoFi, which is, make no mistake, a Square competitor, when it comes to being kind of a one stop shop for all things financial is expected to receive its own bank charter by the end of this year, that should basically allow them to enjoy lower cost of capital, higher lending growth, operating leverage, as a result, significantly improved their financial profile and their ability to increase their lending business. So that is something to watch, and also a big risk. Like if they hit a hiccup in that, big part of the bull thesis is their ability to secure a bank charter and really kind of even further supercharge their growth. So Alright.
Simon Erickson 15:39
Interesting. I mean, it’s such an interesting company, I think that they really benefited from what I maybe we refer to it as the commoditization of capital, right? If you’re taking out a loan, like you start out, you’ve got a student loan, maybe at 6%, 7% or 8%. Good Lord, I know I was there and had those, you don’t really, really care in these days, if it’s your neighborhood bank that’s right down the street, or if it’s some other lender that’s online, only, that’s going to give you a much better and more attractive rate. And it seems like SoFi wants to be the platform, the relationship, with those people over time, that kind of benefits with a whole bunch of lending facilities all across the country.
Steve Symington 16:11
Yeah. So they want to say, okay, we don’t want you to have a checking account with Wells Fargo (NYSE: WFC) and a brokerage account with Robinhood, and your student loans with Student Assistance Foundation, and on and on and on, they say we’d like to be able to do all this with us, right. So, but now they’re public. And, they kind of had access to additional capital to help fund this because a lot of this is very capital intensive, especially, bank charters and stuff, they need to be able to take deposits, they’d like to be able to, and and earn interest on them and reduce their their cost of lending.
Steve Symington 16:45
So, through the process, through the SPAC itself, they raised about $2.4 billion in cash, pretty hefty rates, right. And post money valuation at the time of the SPAC was about $8.65 billion. The amount that they raised included a fully committed PIPE. And again, that’s that private investment in public equity, as we mentioned before, of $1.2 billion, those PIPE investors included Chamath, they included his Social Capital Hedosophia fund $275 million from them and another $950 million from a variety of other investors, BlackRock (NYSE: BLK), Altimeter Capital Management, Baron Capital, several other big name investors, but all together about $2.4 billion in cash that they pulled in as a result of this.
Steve Symington 17:35
They also one of the things that I kind of stumbled on a little bit was they had a very interesting lockup structure, right. And there’s been some criticism of Chamath for his. He’s got so many irons in the fire I take Virgin Galactic (NYSE: SPCE) for example, people were just really annoyed that he basically sold his entire personal stake to fund other investments but their lockup structure at SoFi was really interesting, because none of the PIPE investors were subject to lockup expirations at all. And remember, this is a really fresh SPAC, a freshly public company. This only went public first day trading I think was June 1st, so month and a half ago. And the other lockup expirations hit I think a month later, they were tied to the performance of the stock. So if the stock was trading 20% above certain tranches where lots were trading 50% above, 80% above. So I think around 80% of their insider shares were actually the lockup expiration expired at the end of last month. So we’ve seen a little bit of selling pressure and we’ve seen some analysts commentary about what to do around the lockup expirations and everything but one of those things with a lot of SPACs is that you’ll normally see longer lockup expirations to kind of prevent these guys from selling if they really want to.
Steve Symington 18:52
But there weren’t a lot of limits in this case. And not that that’s not necessarily a big deal. But I think we keep our eyes on who’s willing to sell in these early stages who just wanted to cash out and who’s hanging on for the long term. That’s not entirely clear at this point. But I think we should get more clarity on that over the next couple of months couple of quarters and see who’s willing to hang on and and ride this out and enjoy potentially the fruits of a longer term investment. So I haven’t seen any great dump from the PIPE investors who weren’t subject to any lockup expirations at all. So that’s encouraging. But keep your eyes peeled.
Steve Symington 19:27
And, looking at going into the SPAC I think that the sponsor ended up owning about 20% of shares outstanding SoftBank’s (TYO: 9984), another big investor. When we look at that, I think around 15% of shares outstanding, I expect those numbers have dropped. I think maybe SoftBank was down to like 8% so the cashed out a little bit. Lots of moving parts to this though. Lots of stuff to watch, and, it does have warrants in place. I think I saw the value of the warrants, they just changed it. So that’s a little confusing as you dig into some of the more recent documents because the SEC issued new guidance on how they needed to account for SPAC warrants. So you saw a lot of companies kind of restate financials. But I did see I think it was $21.8 million in warrants on their balance sheet as of the end of last quarter, but I expect that’s going to kind of be a moving target, depending on how they’re forced to actually account for those in their accounting. But those I don’t believe are exercisable for at least a year after the merger. So perhaps some impending dilution in 11, 10 and a half months from now that we need to keep our eyes on, but definitely an interesting business and one that has raised more than a few eyebrows for reason. I think exceptional growth.
Simon Erickson 20:47
Yeah, they raise a lot of money too Steve, I mean, $2.4 billion. Now, this is a this is a big time. This is one of the largest SPACs out there, right? You’re talking about in terms of Chamath being on board, and I believe that SoFi’s CEO came from Twitter (NYSE: TWTR), right? Wasn’t he COO of Twitter before. So this is one of those change the world kind of companies, certainly makes sense that banks have fallen behind in digital technology. Even all the big banks, I would I would go as far as to say they’re behind a lot of other apps that are out there in terms of mobile and just kind of getting everyone’s attention. I think that this is a great chance for a guy who knows Twitter and kind of knows, how acquisition costs below are very important for banks. Getting people on the platform is super, I mean, it’s it’s certainly intriguing. Now, this is de-SPACed Steve this is not actually waiting out there for a merger to take place. This already happened you can bind into SoFi with the ticker (NASDAQ: SOFI) today, are you intrigued as an investor? Is this one on your radar of any interest to you at all?
Steve Symington 21:41
Yeah, I definitely am, after digging in, I’m looking more closely at this company. And and one of the interesting things, you look at post money valuation a little under $8.7 billion, I think, right out of the gate. Seems Whoo, that’s a lot of money. And now, even just looking at its market cap quick glance, is over $12 billion today. But also look at big competitors, like Square, Square i think is over $100 billion. Wells Fargo’s market capitalization is $185 billion. And the argument goes, why can’t, once it achieves once it gets approval for its own bank charter, why can’t a new company, however young and fresh, a new next generation financial technologies company rival the size of them over time, those big competitors that are, plus $100 billion, nearly $200 billion market capitalizations, massive enterprise values, there’s potential that doesn’t mean that its returns will follow suit. And like I mentioned, we were probably gonna have some dilution along the way. And, and there is going to be, a lot of capital that it’s going to need in the process, but, but it has some interesting operating leverage that it can realize, especially as a digital only platform, right, that’s a that’s really intriguing. So definitely. higher up on my my level of interest as I dig in closer than I was before I took a closer look at it. So most certainly really interesting.
Simon Erickson 23:09
Yeah, definitely a good one, Steve. SoFi again, the one that see look at really closely here, I’m going to I’m going to go with another big one here, Steve, I’m going to put another one on our list to keep to keep an eye on and that is Ginkgo Bioworks, who is going to be merging with Soaring Eagle Acquisition Corporation, the ticker on the SPAC for that is (NASDAQ:SRNG). Now, again, this is pre-transaction. This is, we’ve announced the merger to take place. This is not as far along as SoFi as you just mentioned Steve, its that’s already taken place. This is one where we’ve raised the funds into the SPAC and it wants to merge with Ginkgo Bioworks. And this is another very, very large raise $2.5 billion in gross proceeds $1.7 billion of that would be coming from the Soaring Eagle trust of cash, they have an additional $775 million in PIPE funding. And they’ve also got the financial sponsor. So overall consideration, this would be a $15 billion enterprise value company, that’s extremely high for a transaction in this space.
Simon Erickson 24:09
And so why would it be worth that much? Well, it what Ginkgo Bioworks wants to be is they’re calling themselves the “organism company”. What they are doing is they are kind of combining biology with computation. They want to program life, they want to program cells to do specific things that could have commercial activity out there. And so this was founded by four MIT PhD students with their professor Tom Knight, who has been doing this for several decades. And they just said, hey, if we can engineer if we can do the computation engineering, for a cell, just the same way that we would do the engineering for programming a computer, we can use cells to create several things that could be very useful in the future.
Simon Erickson 24:51
And so some of the initial proof of concepts of this would be microbes for enhancing the fertilizer and nitrogen uptake of crops. There’s definitely a lot of crops out there that row crops across the entire world, we got to feed more people every year. What if you could be more efficient in absorbing the nitrogen by controlling at the DNA level, the microbes that are that are enhancing the nitrogen uptake for that. We’ve seen it for fragrances, we’ve seen it for several different synthetic chemicals, this kind of new field of synthetic biology needs to be printed at the DNA level up. Rather than do the best you can in chemical plants to control things. What if you could design and engineer cells specifically, and that’s what Ginkgo Bioworks wants to do.
Simon Erickson 25:31
This is an incredibly disruptive company, just like we saw Moore’s Law continuing to drive down the cost of transistors that are going on to integrated circuits and being used for processes of computers. We’ve seen Tom Knight’s law is what Ginkgo Bioworks likes to follow too, where they have seen a decrease of 50% per year in the in the cost of engineering a single cell. And then also the number of designs that they’re testing is tripling every single year. So Steve, when I look at that, I think immediately of disruptive innovation, I mean, you see something incredibly, exponentially improving in those kind of terms. This is one that shooting for the fences, this is a really big opportunity out there.
Steve Symington 26:12
Yeah. The first thing that pops in my mind is is what kind of competitors, if any publicly traded does this have on the market? Like who? Who does this?
Simon Erickson 26:24
Well, and so much of it right now is is still in the R&D phase, right? Like you look at maybe one, I don’t know if it’s concern yet, but something that raises an eyebrow for me with Ginkgo, which is that they’ve got a $15 billion enterprise value, that’s really expensive Steve, and the company as a whole is still doing less than $100 million in revenue every year. So you’re talking about almost a 200 Price-to-Sales ratio as of today. But the way that, to answer your question, of who are the competitors out there, they’re structuring these relationships with customers to be either a chunk of royalties in the future. Where they say, hey, we go out and we help you design this, we want a percentage of future revenue, or we want a percentage of equity in your company as we grow this up.
Simon Erickson 27:11
And so when you look at these projections, they’re very small today, I think it was $69 or maybe $70 million last year in terms of the foundry revenue that they were doing. But this is the hockey stick, right, it’s okay, in SPAC world to talk about things kind of growing on the S curve. And the expectations of something like this growing really quickly over time. Certainly, that worked out that way, with Moore’s Law in the world of computing and IT. It looks like based on the data that they’re showing, we’re in a similar situation, where we could be engineering life, and engineering cells just like we engineer computers. But again, Steve, this is one that you’ve got to have a lot of faith in the manager because of such lofty expectations and their projections.
Steve Symington 27:52
Yeah, I mean, I feel like it feels a lot like some of the biotechs that Maxx pitches, like, do we have sort of these, binary events where there’s their technology proves? You know, what happens if if something disrupts them or their technology proves not as effective as it was previously? Like, what, do we have any sort of, kind of catalyst events they could actually say, this is this is sort of a watershed moment for us.
Simon Erickson 28:26
Yeah, it’s got to be a really big win with commercial customers, right? And then for one of the joint [inaudible] that they had was with Baird. Joyn Biosciences, where they were actually doing it for the nitrogen uptake. I mean, if you get a hit, it’s going to almost certainly be a proof of concept at first. Baird is not going to back the entire truck up of their global business and say, hey, you get everything now. You start small, you show that it works, you do a kind of a scale up and you show that something even larger works. And then all of a sudden, if you keep proving your numbers, and it works out the way that a large corporation would want it to, you suddenly get a really, really big hit that’s worth billions of dollars. I think that’s the answer that if you want to justify these valuations, you have to take management at their word for it, but you also kind of have to keep an eye on the developments of how they’re working with their commercial partners.
Steve Symington 29:12
Yeah, so I guess that leads to the next question, who is the SPAC sponsor that decided this was worth pursuing and why, and at what valuations, the market opportunity, etc. Yeah, go on, please.
Simon Erickson 29:26
Soaring Eagle Acquisition Corporation. I’m so glad you asked Steve. This is the same team that always has Eagle in the name right they’ve had Diamond Eagle. I think it was Flying Eagle before that. Now it’s Soaring Eagle. So we’re moving on to keeping the same theme in place. This is the same team that brought DraftKings (NASDAQ: DKNG) and also Skillz (NYSE: SKL) both public right. DraftKings is helping with online sports betting. Skillz is as allowing for eSports these are kind of platforms that are appealing to either online gaming or online betting, sports betting.
Simon Erickson 30:00
DraftKings was a huge success Steve. If you remember this, this is one of the kind of raise a lot of money and middle a pandemic, this team saw the opportunity to raise some money and I think it was a $2.7 billion valuation at that time. Now, if you’re looking at DraftKings, today, it’s around $20 billion. So this was very successful, even after the initial SPAC IPO for that company.
Simon Erickson 30:20
Skillz, similar situation raised a lot of money did very well for itself, and for its investors, the director, the leader of the founding sponsor, the financial sponsor, was previously CEO of MGM (NYSE: MGM), kind of interesting, he has no problem raising a lot of money. He’s got a great Rolodex of people that want to put a lot of money into his ventures. And it’s been interesting to see him now going after a really, really big fish here with Ginkgo.
Simon Erickson 30:47
To review some of the numbers. Soaring Capital raised $1.7 billion into the trust, that’s the cash had actually raised from their individual investors. They put another pool of money into this from their own financial sponsors, let me see if I can catch that number. I’ve lost it again real quickly. But they had their own shares as well for the financial sponsorships for that. And $775 million of pipeline incentives, this is big fish that are on board for this thing, big expectations, the thing that caught my eye, was the idea, they’re giving away 30% of the sponsor promote for an earn-out provision. So what that means is 30% of the shares that the financial sponsor could earn, if they if they actually close this deal, they would give away if Ginkgo Bioworks hits a certain threshold of a stock price in the future.
Simon Erickson 31:49
And that’s incredibly high Steve. We typically are used to seeing like 10% to 15% of those earn-out provisions. This is an aggressive one, that they say, hey, if Ginkgo hits $18, a share or $20 a share, we’re going to give away a good portion of our own provisions. That’s a lofty goal, when you’re already saying, hey, this is worth $15 billion enterprise value. But again, it’s kind of saying, hey, Ginkgo, do you think you can do this? That hockey stick of your projections, can you think you can actually pull that off? And the stock price would follow suit and be worth $20 a share? Everyone has a lot to win in that situation, not just the financial sponsors, not just Ginkgo Bioworks, but also us as individual investors that bind to the SPAC this is one of those kind of swinging for the fences, go-big-or-go-home. It’s lofty, it’s expensive. You got to know there’s a lot of risks that you’re getting into as an investor for this one. But on the other hand, if they do knock it out of the park, you can be handsomely rewarded for something like this.
Steve Symington 32:44
Yeah. Really interesting. I knew exactly zero, about this company before you started digging in. And so I’m along for the ride here.
Simon Erickson 32:53
It’s a tricky one. It’s (NASDAQ: SRNG) again, right now, that is the pre-transaction SPAC that’s taking place. This deal is expected to close in the third quarter of 2021. Steve I think it’s one we definitely should keep an eye on especially if you’re a fan of life sciences, and computation and genetic engineering. It’s all pretty fascinating stuff. So that’s Ginkgo Bioworks. What’s the next one on your radar though Steve, you got another one you want to take a look at?
Steve Symington 33:18
Oh, yeah, I got a lot of requests for Opendoor (NASDAQ: OPEN). And, I am also a shareholder in Redfin (NASDAQ: RDFN), and Zillow (NASDAQ: ZG). So hey, right up my alley. Really interesting company here Opendoor. They call themselves a leading platform for residential real estate. And yeah, that holds they are the market share leader in the “iBuying” market, so companies that come directly to you, and buy your home and resell it. Like you could call it house flipping. I don’t think they like that term when you bring it up. Because it indicates they’re buying these rundown houses and fixing them up. That’s not the case, really. But it is interesting, because, they were only founded in 2014. So seven year old company, really, really interesting. They went public also by way of a Chamath SPAC in December 2020. So less than a year they’ve been on the public markets. This is kind of again, kind of like SoFi, but a little bit more distance between us and that officially going public.
Steve Symington 34:20
So they’ve had a heck of a ride with their valuation, they immediately soared to about an $18 billion enterprise value. Even though the SPAC value I think it was $4.8 billion net of cash, it was like an enterprise value, like $6.3 or $6.4 billion. Now its current market cap sits around $8.7 billion. I think I agree more with its valuation today. Even then, that seems a little bit rich. But people are rewarding them for their scale in their market leadership is kind of an early mover in this iBuying market. So they were previously focused solely on iBuying, right. So they will come to you. You could go to their website, request an offer on your house and get it in minutes. But the problem, I guess, maybe not necessarily that much of a problem is they’re only available in 27 markets at the end of the quarter. Big Metropolitan markets. So it’s not like, I’ve typed mine into Missoula, Montana here. And just as expected, it said, nope we’re not available there yet here, go ahead and in request it if you want, but this is kind of how iBuying is right, it’s still this very nascent market very sort of in its infancy.
Steve Symington 35:25
And, part of iBuyers strength kind of relies on their ability to capitalize on this large market with economies of scale. And, can they efficiently price homes? Can they sell them predictably? Can they make the experience as smooth and predictable as possible, and that is kind of what, what people who are selling their homes to companies. And now there is a little bit of optionality, I’ll give them credit for that. Right? They they just launched, there’s cash offers that they have, they have a mortgage service now. So you can actually finance with Opendoor, in some cases, not everywhere yet. And you can list your house with an Opendoor agent. It’s a partner agent thing, but it’s still a really, really tiny piece of their, business. So it’s kind of the opposite of Zillow, which started with real estate listings, advertising, and is muscling into the iBuying market now. And, they they’ve been pretty efficient with that scale early on. They boast that over 700,000 people have already requested quotes from them. The vast majority of those quotes can’t be fulfilled, unfortunately. But I think they’ve helped something like 90,000 people sell their houses this way, since they were founded. So pretty impressive start.
Steve Symington 36:42
Similar SoFi, it’s entirely digital. So that’s also kind of nice. People have some semblance of certainty, they don’t have to go through and do any repairs on their house. Opendoor is interesting, because they’ll charge you something like a 5% commission, slightly lower than a normal real estate experience. But if there’s any repairs that need to be done, they just take it out of your selling price, and they tell you. So you just kind of list it with them, they say here’s our offer, might take a little bit out from you. And here’s here’s an allowance for repairs. And people don’t have to do much. It’s not the stressful real estate experience of the past. So kind of interesting.
Steve Symington 36:48
For perspective, looking at their latest quarterly results, they bought around 3,600 homes last quarter, that was up 78% sequentially, and 24% year over year, as they re-ramp from kind of this COVID route, everybody kind of put everything on hold during COVID. And so up 78% sequentially from last quarter just because they’re kind of re-ramping again. So, bought 3,600 homes roughly. Sold almost 2,500 homes that ended with about $841 million in homes, on their inventory on the balance sheet. That equated to about $747 million in revenue last quarter. And obviously these are large transactions, it’s not high margin revenue. And that’s kind of what really matters in the case of the iBuying market. Right? So unit economics.
Steve Symington 36:59
Now what’s interesting is it seems like Opendoor’s enjoying a little bit of operating leverage as they kind of re-ramp again, which is nice. So adjusted EBITDA was just negative $2 million last quarter was about 0.3% revenue narrowed significantly, I think it was something like minus $26 million quarter before and minus $20 million, same year ago, quarter was about minus 10.9% of revenue three months ago. And so anyway, they lost a little more than $900 bucks a home that they sold, which doesn’t sound great. But what happens is, is you see this, eventually you want to be adjusted EBITDA positive and that was actually close to where Zillow was, as they started to ramp. I think Zillow lost about $1,500 a home a quarter ago as they’re kind of starting their own ramp. So as they scale, one would expect their ability to enjoy operating leverage should increase in their ability to effectively price homes should help.
Steve Symington 36:59
So my big concern with Opendoor is competition. Right? there’s really four big iBuyers on the market today. You have Zillow, which I so let’s let’s take this in terms of market share Opendoor I think last year was like 50% of the market. But that was down pretty significantly. Then there’s Zillow, which had that like 26% market share, and they’ve significantly scaled. I think in 2018 Zillow only had like 3% so Zillow is coming up hard and they want to scale this I think they said to like a $20 billion annual run rate. So Zillow might overtake them and that headline won’t be pretty, but they will try and stave them off. There’s Offerpad which is right behind Zillow at about 23% last year and Redfin which holds only like 1%. So Redfin is kind of the baby in the market. But hey, Zillow was only 3% a few years ago. Redfin is also a significantly smaller company, but something to watch, I guess this is kind of those market share numbers as they fluctuate. And remember, these are companies, when a company can hold 50% of the market and only be available in 27 large metro markets, that’s a lot of room right, for multiple winners. And I think there’s room for all these companies to kind of grow. And it’s going to be years and years before they really start kind of butting heads. And yes, they’re all starting in these larger metro markets.
Steve Symington 36:59
But I think the the bigger losers in this case are kind of your legacy, mortgage brokers and your your legacy real estate companies that kind of try and do things the old way. So these digital platforms are taking share from everybody else in the process as they grow. So, and also, I guess the other thing that I’m a little concerned with, with Opendoor is it’s kind of lack of a network effect from its actual platform like Zillow, people go on there to look up details on their house. They look up details on everybody’s house, they have maps, they have Zestimates they have Trulia, a couple big old platforms. Opendoor doesn’t have that kind of leadership, but they still, nonetheless, I think, have more demand than they can handle. So it’s not really that much of an issue at this stage. But over the longer term, that’d be something I’d definitely be watching.
Steve Symington 41:15
So as for the SPAC itself, to move forward that way, Opendoor went public, with the aid of around $414 million in cash from Social Capital itself, PIPE of about $600 million, $200 million of that PIPE came from Social Capital, the rest from a variety of shareholders again, including BlackRock and I think there was a retirement foundation. And, interestingly, I was digging in I was like, Okay, what are they got for warrants? Just I think it was June 6th, so like, a month and a half ago, they announced the redemption of all outstanding warrants. So I think they forced them to redeem, and said, we’re gonna pay these and get them off our books, so we don’t have to worry about that so much. So that’s not an issue going forward.
Steve Symington 41:55
But I mean, all in all really interesting company, growing quickly, able to scale probably some operating leverage in there. Somewhat, potentially steep valuation for currently thin margins, but something worth watching and I’m not totally convinced that I want to sell my shares of Zillow and Redfin yet to go buy Opendoor, but it’s definitely an option for kind of enterprising investors who are looking for potential portfolio candidates.
Simon Erickson 42:21
Steve, I know you’ve followed real estate for a long time now as an investor, and you talk to people about how real estate looks right now, the climate for real estate. The typical reaction is, is kind of a combination of, it’s bonkers, or it’s crazy, or they raise their eyebrows or people are going nuts. I mean, like it used to be that you go, you’d hire a real estate agent, you look around, you’d find a good deal out there a neighborhood you want to live live in, and then you’d say, Okay, let’s do that. And then we’ll fix the air conditioner needs to be fixed. And now it just seems like more recently, people are accepting offers that are 20% above their asking price, just on the very first day that it was listed. And people think that this is crazy. But do you think that this is just kind of a short term spike in the market or real estate? Or is this kind of the new way that this whole market is gonna look like?
Steve Symington 43:07
I don’t think this this current craziness is totally sustainable at this point. It’s kind of funny, I saw a press release from Redfin, earlier today that said something to the effect of demand for vacation homes, second homes, fell for the first time in over a year, this might be the end of one of those big spikes. I don’t know are people buying second houses. That’s what you’re using. But yeah, demand is crazy. And that’s another kind of risk right is that these companies kind of need to move a little bit fast because if we do have kind of this upheaval in real estate prices, and you’re carrying $800 million plus in home inventory on your, your balance sheet, you’re going to need to be able to move that pretty quickly.
Steve Symington 43:48
But if anyone can, they can, and I think it takes them less than a couple of months to turn these houses and a lot of cases they’re allowing people to sell their house and buy another one simultaneously. It’s just like, here’s a nice even-across swap and they’re they’re pretty efficient that way. So you do need to kind of keep the ability to slow things down or move things up. And if COVID taught us anything, it’s that. It’s that these companies can can pivot pretty hard if they need to, down and and scale things back and scale them back up. But those ebbs and flows are going to be something that you really need to watch especially in a market as crazy as today’s as far as real estate goes. So.
Simon Erickson 44:33
That’s stuff we want to keep an eye on Opendoor. Steve ticker on that one if we wanted to get into Opendoor.
Steve Symington 44:38
Yes, (NASDAQ: OPEN) is the ticker on that one.
Simon Erickson 44:42
Yep, good deal. And then one more that I want to throw on to the consideration too is Steve, I know that you are a big fan of Virgin Galactic (NYSE: SPCE). You and I both watched on Sunday, Richard Branson get fired up into space, which is pretty exciting to see him kind of float around in zero gravity and then come down and then talk about how exciting it was.
Simon Erickson 44:57
So I had to give another space themed SPAC for you here, which is Rocket Lab, right Rocket Lab has now announced that it wants to come public through SPAC it would be merging with the SPAC vehicle, which is Vector Acquisition (NASDAQ: VACQ) is the ticker on this one. Again, one that’s announced and planned and in the works right now, Rocket Lab is kind of what they’re trying to do, is in is an end to end provider of the commercial space economy. So if you need to get into outer space, Rocket Lab wants to be the partner of choice for you to get up there. They can do a couple of different things, they can create the rockets themselves to launch your payloads up into space. They can actually do the launch for you completely end to end, and you get whatever you’re wanting to bring up there and put it up into orbit for you. And then they can also do the applications, the monitoring, the analytics, anything that’s actually being run from satellites in outer space.
Simon Erickson 45:49
And this is really, really interesting, Steve, because we’ve seen the cost of launching to outer space fall by an order of magnitude in the last couple of years, the cost per kilogram of payload that’s launched outer space has fallen significantly. Largely because of just the computing that’s being done for those micro satellites. And then also, in addition to that, just reusable rockets, you don’t burn the rocket up and then fall back down to the ocean, you can actually now reuse rockets that are finely tuned and created from 3D printing, and some pretty cool electronics that are going into them over and over again. And that just kind of redefines the entire economics of space and of launching things in outer space.
Simon Erickson 46:25
And so Rocket Lab is is one of those companies that has benefited from this. Peter Beck is the the CEO of the company. He’s kind of been an aerospace engineer, his whole life really was obsessed with this for decades. He says this is the time to start a company that that he wants to do this. They are merging with Vector Acquisition, which is a tech focused financial sponsor. The deal itself would raise a total of $320 million from the SPAC itself, the cash in the IPO that we put into the SPAC vehicle. The shareholders of Rocket Lab themselves would be worth about $4 million in equity, and then an additional $467 million in PIPE equity. So interesting, Steve is a different deal than the last we just talked about free Ginkgo because you’ve got more money coming in from commercial organizations than the individual investors that are going into the SPAC kind of shows there’s a lot of commercial interest in the commercial space race, as you would expect for something like this.
Steve Symington 47:21
Right. And it is really interesting is definitely not the only one in the space that’s looking at going public. It reminds me a Virgin Orbit, which is maybe worth a bonus mention right. They’re actually reportedly in talks the last several months to get to have like a $3 billion deal of their own. I think the sponsor SPAC that is speculated to be that is like NGC. It’s NextGen Acquisition Corp. (NASDAQ: NGCA). But yeah, Virgin Orbit, it’s interesting. And one of the things that could apply to Rocket Lab too is potential optionality for this business. Right?
Steve Symington 47:52
I think right now, I was looking just before we came in knowing that we’d be talking about this a little bit, the market for space launch technology, or space assistance, this space launch assistance and such is like $8 to $10 billion or something right now, people expect over the next several years, it should be closer to $25 billion, but there’s multiple players and Virgin Orbit has said that they are planning a pretty expansive evolution of their company, I think are the words that they used into things like communication satellite arrays, they said they’ve been approached by a lot of small companies that have great ideas with satellites, but can’t get them up into space on their own with the funding. So they might take small stakes and the company, sort of investment vehicle in smaller companies themselves. But they talk about launch technology as a cornerstone of space access and this broader space ecosystem. And for Rocket Lab and Virgin Orbit. I think it’s really interesting because they, they’re sort of the the gatekeepers, so to speak, to a potentially pretty huge market that is still in its early stages. So Rocket Lab is definitely very interesting.
Simon Erickson 49:03
“Sponsor SPAC Speculation”, gold star for that one. I gotta remember that. Congratulations on actually getting that out.
Simon Erickson 49:11
I agree with you. This is a huge market. I mean, Morgan Stanley (NYSE: MS) is already predicting it’s a $1.5 trillion space economy by the end of the decade, you can’t have huge numbers like that without looking at, where are the applications? And it’s going to be all kind of the monitoring, the analytics, what are you, what is your what is the data that your satellite is collecting? And how are you using that? Steve, I know you have a lot of background in that you’ve been doing stuff like that, even straight out of college several decades ago, but I think that the interesting thing that you mentioned, too, is the gatekeepers. This has been the inhibiting step, so far. This has been the challenging part was actually getting on that launch, right because you typically in the past would have these kind of giant launches the huge payload you had to wait your turn.
Simon Erickson 49:48
Sometimes it might take you six months or a year even to get where you can piggyback on one of those large payloads. And that’s just not the case anymore. Space is becoming more accessible. And Rocket Lab has got too long. sites once in Virginia, the other is in New Zealand. Them and SpaceX are two of the only that are available right now, if you want to do ride share, you want to launch something up into space. The technology that Rocket Lab has is smaller and smaller rockets. So it doesn’t have to be massive. The largest rocket you have out there, it’s going to take, several 1000’s of kilograms of payload out there. It can be small cube sats that you want to launch and you want to ride share with somebody else, you can now book launches for space online. If can you believe that Steve.
Simon Erickson 50:31
We can send some of our 7investing advisors to space and maybe do some future podcasts up there, we can book it online if you really want to. It’s becoming so accessible. And Rocket Lab now has got more than 132 annual launch spots that they can actually get those payloads up into space. I think that when you see something like that you see the inhibiting factor being cost, or even accessibility, and both of those are becoming more economically achievable for a business, you start kind of imagining and brainstorming, what are the opportunities for outer space? And can this really be a $1.5 trillion market?
Steve Symington 51:05
Yeah. And I think also, we shouldn’t underestimate the ability for them to, it’s almost surprising, like, the more exciting thing for us at this point is like, wow, there’s a lot of commercial interest. But we shouldn’t forget, government and defense, and you’ve got NASA and you’ve got all the Armed Forces branches. Actually, one of the things that I saw Virgin Orbit talking about was, was defense applications, like, what if we have a bunch of satellites taken down, what happens if we lose those satellites? We can launch them quickly, again, get them back up and running. So that’s something where they could kind of pivot and sort of rapid response states.
Steve Symington 51:44
So Rocket Lab, Virgin Orbit, and peers could potentially be really useful in those cases, when, when you have these sort of Defense and Security satellites that are that are kind of up in the air. And, they get taken down, you can launch them pretty fast back up. So there’s a lot of interesting adjacent opportunities for this market. And I think people will be kind of surprised because you think, okay, how big is the market for for satellite launches? Well, really big payloads. So there’s a lot of different ways people are kind of dreaming up to take advantage of this. So that’s, that’s exciting.
Simon Erickson 52:21
Yeah, absolutely. And Steve, just kind of looking at the numbers really quickly, we did about $69 million of estimated revenue this year, when we consider the space systems and in the launches themselves. The equity value of the SPAC Pro Forma valuation, of course, is about $4.8 billion right now. So you’re still talking, what is that 70 times this year’s in revenue. This is another hockey stick that’s out there. You see the projections going up significantly, as we open up the commercial space economy. There’s some lofty expectations baked into that. But again, this is another swing for the fences that you get in early, it could be a really rewarding one for investors who are patient and have an iron stomach for risk to take on something like this.
Steve Symington 53:01
Yeah, I mean, but hey, you say lofty and I say that’s less than half the price-to-sales ratio of Ginkgo. Right?
Simon Erickson 53:07
Less than 200 times that’s right.
Steve Symington 53:10
Yeah, steep but it really interesting and exciting is this thing, scales. So.
Simon Erickson 53:16
And so we kind of wrap all this together, a lot of the things you were talking about are kind of these industries that are in flux, whether it’s real estate, whether it’s commercial space economy, whether it’s genetic engineering, these are things that are that are changing rapidly. And you’ve got now a more efficient way to raise money to put on the balance sheet of these companies that needed it, whether that’s for launching satellites into space, whether that’s for doing a foundry for genetic engineering, whatever it might be. There’s capital that’s needed, that is being more efficiently placed than we could get from the traditional IPO structure. And I think this is why why SPACs are so fascinating.
Simon Erickson 53:49
Not only is it a raise, but in looking at the fundamentals of the business, like like Steve and I always love to do, but also digging into kind of the nitty gritty of the deal itself. Who’s keeping what percentage of that of that swimming pool at the end of the day? Who is the sponsor? What’s the reputation? Who are the other commercial players that are on board, things like this, all of this factors into the returns that you’ll be getting as an individual investor who’s participating in a SPAC IPO? And so it’s a pretty exciting time, Steve, I’ve talked about SPACs quite a bit in the last couple of weeks. But I’m pretty encouraged by all of this. And I look forward to even more of these conversations in the future.
Steve Symington 54:25
Yep. Thanks for digging into this with me. This was fun. And I feel like we could make this a daily thing and still have way too much information to sift through, but it’s sure fun to be able to tackle a few companies that were requested.
Simon Erickson 54:41
Absolutely. And keep your eyes out. You know, this was SPAC chat, part two with my colleague Steve Symington and I. Look for part three, part four, maybe we’ll have part 25 in a couple of months here. It seems like there’s plenty of talk about for SPAC’s. But thanks for tuning in to this edition of our 7investing Podcast. We are here to empower you to invest in your future, we are 7investing.
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