The $ 900 billion pile of cash that inflates startup valuations

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Investors are braving a share price plunge for new public companies to put hundreds of billions of dollars at the disposal of startups, a stack of cash that promises to inject a torrent of money into early-stage companies in 2022 and beyond.

Special-purpose acquisition companies, which make startups public through mergers, raised about $ 12 billion in each of October and November, roughly doubling their clip from each of the previous three months, data from Dealogic shows. . So far, three SPACs have been created per day in December. While it is below the record pace of the first quarter, it brings the total amount held by the hundreds of SPACs seeking private companies to go public over the next two years to around $ 160 billion.

Money committed to venture capital firms and private equity firms that focus on fast-growing but not-yet-spent companies is also skyrocketing. According to Preqin, the so-called dry powder reached about $ 440 billion for venture capitalists and about $ 310 billion for growth-oriented PE firms earlier this month.

Despite billions of dollars in market value loss for publicly traded startups, cash reserves represent brisk demand from investors with near-zero interest rates and stock indices at or near record-breaking. They show how SPACs and private markets have been more resilient than many analysts expected, particularly with regulators stepping up scrutiny of so-called blank check companies. Many analysts also expect interest rates to rise in the years to come, potentially making moonshot bets on early stage companies less attractive.

Startups currently have multiple paths to access money, investors and executives say, particularly as a large chunk is flooding companies working to decarbonise the economy. SPACs and other lenders often engage in bidding duels known on Wall Street as “Spac-offs,” helping to keep the money flowing into startups.

“There is so much money in the world chasing growth and returns,” said Bill Gross, who founded the Idealab startup incubator.

Sometimes confused with famed bond investor Bill Gross, Idealab’s Mr. Gross is CEO of concentrated solar power startup Heliogen Inc. Heliogen, which does not expect substantial revenue until 2023, will go public on a $ 2 SPAC deal. billions. Another Idealab company, Energy Vault Inc., filed a $ 1.6 billion SPAC merger in September.

Outside of SPACs, cash is piling up in startups at unprecedented rates from venture capital firms and hedge funds like Tiger Global Management LLC which traditionally were more focused on public companies. Nearly 340 new unicorn startups, or about one a day, have privately raised funds with valuations above $ 1 billion this year, more than triple the total from last year, PitchBook data shows.

At the end of the summer, Mike Xu, CEO of food distribution startup GrubMarket, he has begun seeking $ 50 million in new funding for his business, which he says is profitable. In November, demand turned out to be so high that it ended up securing $ 240 million from investors, which in itself was less than what many wanted to pledge. This included a $ 40 million commitment from Tiger Global that met about a week after discussions with the New York-based investor began.

“It just moved extremely fast,” he said of the investment round that valued the company at over $ 1.2 billion. “It was a lot more than we expected.” GrubMarket also secured funds managed by BlackRock Inc.

Carbon Capture Inc., a startup working to remove carbon emissions directly from the atmosphere, also backed by Mr. Gross’s Idealab, recently raised $ 35 million in its first round from investors including venture co- Salesforce Inc. CEO Marc Benioff.

Many startups have also found enthusiastic investors in large tech companies, pension funds, and sovereign wealth funds.

The fundraising frenzy continues even as sentiment towards new public startups has cooled. An exchange-traded fund that tracks companies that went public through SPACs is down about 25% for the year. Meanwhile, a company ETF that recently made traditional initial public offerings has plummeted about 15% in the past three months.

SPACs are the focus of attention for many investors because they have taken Wall Street and Silicon Valley by storm as a new way to quickly raise money and go public. A SPAC is a shell company that collects money and shares on the stock exchange with the sole intent of merging with a private company to make it public. After regulators approve the deal, the private company replaces SPAC on the stock exchange.

One reason for the sudden ubiquity of SPACs is that startups can make business projections when they go public, which is not allowed in traditional IPOs.

Private companies are flooding special purpose acquisition companies, or SPACs, to bypass the traditional IPO process and get a public listing. WSJ explains why some critics say investing in these so-called blank check companies isn’t worth the risk. Illustration: Zoë Soriano / WSJ

Many have struggled to achieve those goals or have encountered obstacles in business, causing stocks to collapse. Of the nearly 200 companies that went public through SPAC deals this year, about 75% have share prices below the SPAC listing price, according to SPAC Research. Almost 40 companies they have lost more than 50% of their value.

Regulators have investigated several companies that went public in this way after short sellers claimed they had committed wrongdoing, while several CEOs of newly listed electric vehicle startups resigned. Many analysts say SPACs allow startups to go public before they’re ready.

Yet investors continue to pour money into emerging companies in every possible way, in search of the next DoorDash Inc.

or Airbnb Inc.

, whose early supporters have been well rewarded. Many deals are tied to fighting climate change, with investors also riding momentum at Tesla Inc.

and others related to the energy transition.

“I expect valuations to continue to rise,” said John Carrington, CEO of clean energy storage company Stem Inc. “It’s an industry that needs a lot of capital, for better or for worse.” Stem’s market value nearly doubled to $ 2.8 billion after completing a SPAC deal earlier this year. The company reported sales of approximately $ 40 million in the third quarter.

Moving forward, some analysts expect a large gap between winners and losers from the boom.

“The availability of SPAC capital and private capital gives companies options, but ultimately the problems are caused by publicizing the wrong company or the wrong valuation,” said Mike Ryan, CEO of Bullet Point Network, an investment firm. financial analysis. A former Wall Street equity investor, Mr. Ryan is also an Alpha Partners venture partner and chairman of the board of a SPAC that Alpha Partners launched this summer.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com and to Eliot Brown at Eliot.Brown@wsj.com

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