India’s stumbling unicorns a sign of things to come for SPACs

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India is a few months ahead of the USA when it comes to dealing with the fall-out of easy money, as its once highly sought after “unicorns” are scrambling to conserve cash sending a clear sign of what is to come next in the ongoing SPAC crash.

Forty-four companies in India managed to achieve a valuation of more than $1 billion last year as excess liquidity chased limited equity. But now the market has turned a full 180 degrees.

Swiggy, a food delivery company that raised money last year at $10.7 billion, is shutting some of its divisions and laying off staff stating a need to get to profitability (read: positive cash flow).

Both Cars24 (which raised at $3.3 billion) and Meesho (which raised at $4.9 billion) are also cutting staff in an effort to stem the red ink.

Unacademy and Vedantu both in online education are also cutting hard, with Vedantu admitting that cash will be hard to come by going forward.

The list goes on and on, but it is always a story where companies have raised at ridiculous valuations and gone on an expansion spree, to then be hobbled by liquidity drying up and the need to raise more money. This is not a new story, and I have seen this happen a number of times over the last 26 years.

Inflation and rising interest rates have undoubtedly hurt demand as Indians focus their spending on the essentials. Furthermore, the investment mood has soured with prospective investors now demanding to see profit multiples when they invest, as opposed to the revenue multiples that were commonplace last year.

This is the problem with raising money at a nonsensical valuation – if things go wrong, one may have great difficulty in raising any more. This is why the golden rule of raising money based on a narrative and hot air is to raise enough in one go to see one through to cashflow break-even so that one does not have to come back for more.

Unfortunately, most of the SPAC crowd have not done this, meaning that most of them are now in dire trouble and are likely to follow the Indian companies down the same route.

Even the companies that have something, like Lucid Motors, are in trouble, as this company needs to raise another $6 billion or so before it will make a single dollar in cash flow. Fortunately, despite falling hard, Lucid is still above its IPO price and so it will have far less difficulty in raising money than many of its peers.

Rivian, Faraday Future, Nikola, Embark, Wejo, Otonomo and so on are all trading more than 50% below the price at which they issued, meaning that raising equity will be difficult and very dilutive for existing shareholders.

This is why I expect that the agonies of the SPAC crowd are only just beginning and that, as they begin to run out of money, we will see them start to cut back staff just as the Indians have done.

This is unlikely to be enough, and I suspect that it will then be followed by a round of brutal consolidation, ending finally with a number of these companies being acquired by larger vehicle makers in search of good EV technology. In this scenario, the acquirers are likely to pay a tiny fraction of the original IPO price to acquire these assets. So I am not thinking of hunting through the SPAC wreckage for acquisition targets.

Instead, I am interested in companies that have financed themselves to cashflow break-even and can therefore survive, regardless of where the market pushes their shares.

Ouster – which makes solid-state lidar and has real revenues – is one of these, which is why it is the only EV/autonomous-related company that I hold in my portfolio.

For the rest, the worst is far from over.

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