Venture Capital/Analysis/ Which of these 13 European tech SPACs are valued higher than Tesla? And can they possibly justify it? By Maija Palmer and Bill Leaver 8 July 2021 \Venture Capital Hoxton Ventures to add a new partner in April By Amy Lewin 17 February 2023 Venture Capital/Analysis/ Which of these 13 European tech SPACs are valued higher than Tesla? And can they possibly justify it? By Maija Palmer and Bill Leaver 8 July 2021 European companies are going public via special purpose vehicles — but with valuations that make Tesla look modestly priced. Investors are valuing some of these companies at more than 30x their 2022 sales expectations, which is enormous compared to most normal stock market listed companies — generally valued 2-8x times over those expectations. Even the hyped electric car maker Tesla is valued at only 10x projected 2022 revenues, and analysts grumble that it is overvalued. These valuations also assume that these companies actually hit their 2022 sales numbers, many of which are also ambitious. Many of these companies are projecting 5-10x sales growth within just two or three years. SPACs are an alternative way for companies to go public. In essence, a SPAC is a shell company whose sole purpose is to raise capital in an IPO to merge with an existing privately-owned company, which then becomes publicly traded as a result. For some, they are a great innovation in the capital markets, allowing fast-growing tech companies to list without the red tape of a traditional IPO. But for others they are a sign of dangerously overheated markets, with investors overpaying for speculative assets. Not all European SPACs are richly valued or come with big growth assumptions. The 13 European tech companies that have taken this route to listing — often via a Nasdaq-listed SPACs — are a truly mixed bag, and investors will have to do their due diligence carefully. Some of them are old software companies with a pedigree of solid revenue growth, like eToro and Genius Sports. Others are predicting nothing short of hypergrowth: Cazoo, founded in 2018 and a unicorn only 18 months later, is a case in point. The final bracket are capital intensive hardware companies, such as Lilium, the German flying taxi startup, which currently has no revenue to speak of, yet has forecasted $5.9bn in sales by 2027. But overall, as the SPAC craze looks to migrate from the US to Europe, investors are asking: is this all just insanity or just the new reality? And what should they be watching out for? Pay for growth Sometimes high growth is worth paying for. “It’s not a dressed-up Ponzi scheme — there is a reason for SPACs to exist,” says Victor Basta, founder and managing partner at Magister Advisors, an M&A advisory firm. “Public investors want access to high growth companies and there are limited ways for them to do that. There is a real gap in the market.” When interest rates are low and investors are struggling to find places to make good returns, it makes sense to pay — maybe even overpay a bit — for access to a scaleup that promises 20% plus growth. S&P 500 companies are currently growing on average at around 6-7% a year — and that average includes a lot of high-performing tech stocks like Amazon and Google compensating for falling sales in sectors like energy. So everyone is looking for a bit of new tech magic to take a bet on. Great for startups — especially deeptech businesses As well as investors, understandably willing to pay for growth in a low-interest-rate environment, SPACs are also great for startups and scaleups — particularly in deeptech. Stephen Chandler, partner at Notion Capital, whose portfolio company Arqit recently agreed a SPAC deal, says that big checks and lofty valuations are part of the reason founders and VCs are finding it hard to say no. Founders are offered many times what they would be able to raise in a further VC round, making the SPAC something of a no-brainer, especially for deeptech companies, he says. “SPACs make sense for deeptech companies because the commercialisation path is long and the capital needs are high,” he told Sifted. “There is less focus on the track record, although the SPAC investors do a lot of due diligence.” The whole SPAC process is light on track record and heavy on the forward projections — in sharp contrast to IPOs. Companies typically do not include financial projections in an IPO prospectus because they risk being sued over such disclosures. “In traditional IPOs you can’t share projections, but a SPAC will allow you to spend more time with investors and share more forward-looking projections. We are able to educate investors more about the company story,” says Elad Lavi, vice president of corporate development at eToro, which plans to go public via a $9.6bn SPAC deal. This makes a SPAC the perfect format for fast-growing businesses, which can tell a compelling story but often lacks historical proof points. But for investors? Whether they work out for the investors, however, depends on whether the strong growth forecasts can be realised. And some of these are much more extreme than others, especially for hardware companies. For instance, UK-based electric vehicle startup Arrival won a $13.6bn valuation when it went public via a SPAC in March this year. It is projecting some $14bn in revenue by 2024. These are aspirational numbers for a company that currently has no trucks in production yet — or even an operational factory — meaning there are quite a lot of assumptions built into this forecast. The SPACs with software and marketplace models have lower valuations and revenue projections that are a bit less hockey stick-shaped. But some companies like Cazoo stick out. The company, which is creating a new marketplace for used cars, is forecasting sales to grow from $966m this year to nearly $3bn in 2022 and then $8bn by 2024. That’s clearly some wild growth projections, which is why big VC backers such as Stride.VC, Octopus Ventures and DMG Ventures have been backing it — and why it was valued at $7bn in a March SPAC deal. Meanwhile Arqit, the quantum-proof cryptography provider, forecasts a more than 10x increase in revenues — from some $14m this year to $153m by 2023, based on an assumption that the satellite component that it needs for its business model will have been successfully launched by then. So which are the 13 European SPACs over the past year? Here we take a closer look. Arrival The British/American electric vehicle company went public on Nasdaq via a SPAC last November, valued at $5.4bn. Rather than selling EVs to consumers, Arrival is focusing on the B2B market and on building electric vehicles extremely cost-effectively in microfactories. Although the move to EVs across the transportation sector looks like a certainty, Arrival itself has everything to prove. There are, as yet, no revenues and vehicles in production. Production of the Bus is due to start at the end of this year, a large and small van in 2022 and a car in 2023. It has four microfactories so far, and plans to build 31 more worldwide — starting in 2024. On the plus side, Arrival has “signed a purchase agreement with UPS,” including an initial order of 10k electric vans, with an option to purchase 10k more. This deal represents up to $1.2bn (€1bn) in revenue, including the option — but it could be changed or cancelled at any time. If their ambitious predictions come true, Arrival will peak beyond $14bn of revenue by 2024. On the negative side, Arrival has huge capital requirements, which its $660m of SPAC cash will struggle to cover. Wejo UK-based connected vehicle company Wejo announced plans to go public via a SPAC, raising more than $330m and valuing the company at $800m. The company is 35% owned by GM and has now added Microsoft, Palantir and Sompo Holdings to the roster, and has partnerships across the car industry, including Daimler and Hyundai. Wejo makes money from providing data services based on the data from some 11m connected cars in its system. It recently told TechCrunch that it could see 7% of all vehicles moving around New York, 6% around California and 20% around Detroit. This raises all kinds of interesting possibilities for the insurance industry, for example: in seeing exactly what happened during a crash, or for offering roadside assistance and remote diagnostics for car owners. Wejo’s valuation to sales ratio looks eyewateringly high for next year because net sales at that point are still projected to be a modest $23m. The following year they are projected to increase more than five times to $118m, based on the numbers of connected cars continuing to increase. Wejo is predicting that by 2030, 44% of all cars will be connected — but it remains to be seen whether growing connectivity can really multiply Wejo’s earnings fivefold in a single year. Wejo’s SPAC valuation is more modest than its closest rival, Israeli Otonomo, which is valued at $1.4bn. But even so, for both companies, investors need to accept a big assumption about market growth. Cazoo Alex Chesterman is considered a legend in entrepreneurial circles, having built Lovefilm and Zoopla, but even so, the $7bn valuation for his used car startup Cazoo looks steep. Cazoo had revenues of £162m last year but is predicting a rise to £700m this year, and then £5.88bn by 2024. It’s a huge leap, but revenues are growing fast at the moment — albeit from a low base — so it may just be possible. The company sold 9,762 cars in the first quarter, a 373% increase on the same period in 2020; and revenues reached £113.9m, 481% up from the £19.6m Cazoo made in the first quarter of 2020. Gross profit for the quarter was £3.7m. Cazoo, which for a time was Europe’s joint most acquisitive startup, recently bought Drover and Cluno, two car subscription services, as well as Smart Fleet Solutions, a vehicle refurbishment company. The car subscription service should add another strong revenue stream and in addition, Cazoo is planning to launch in France and Germany by the end of the year. If it can take just over 1% share of the £480bn European secondhand car market, the growth predictions don’t look so outlandish. Some of the company’s predictions still rest on the assumption that putting the car sales process all online will help streamline and scale it. Cazoo says it is expecting to make a margin of 13% on cars — this would be vastly more than the 4% or so margin that used car dealers will normally make. eToro In comparison, eToro’s proposed SPAC deal valued at $9.6bn looks to be based on much more modest assumptions. For a start, the social trading platform has a track record, having been founded 14 years ago. The company has around 20m users in 100 countries, and with a fairly stable monthly churn rate of 1.5% and growing average revenue per user, it is much easier to project what the company is likely to be making in the coming years. It still has a high growth profile, in part thanks to the strong recent interest in cryptocurrencies and the growing popularity of hobbyist stock trading, as seen in the recent case of Reddit community r/WallStreetBets, which gave Wall Street hedge funds such a run for their money over GameStop. Last year, eToro said it added over 5m new registered users and generated gross revenues of $605m, representing 147% year-over-year growth. Monthly registrations have gone from an average of 192k in 2019, to 440k in 2020, and in January 2021 alone eToro added more than 1.2m new registered users. Similarly, trades have gone from 8m a month in 2019 to 27m in 2020. In January 2021 more than 75m trades were executed on its platform. Oh, and, here’s the best thing. eToro actually makes a profit — ebitda (earnings before interest, taxes, depreciation and amortisation) was $95m last year. Frankly, eToro looks like the kind of business that would be suitable to take to market via an IPO — so why bother with a SPAC? “We always knew it would be public and we evaluated both options,” eToro’s Lavi told Sifted. The costs of an IPO and SPAC were comparable, so the decision wasn’t based on those grounds. The main advantages of the SPAC, Lavi said, was partnering with an experienced sponsor like Betsy Cohen, who has taken nine fintechs to market via a SPAC so far. “They have been able to talk to us about how to be a better public company,” says Lavi . One of the biggest criticisms of SPACs is that the sponsors get outsized rewards. They typically get a 20% stake in the SPAC for a relatively small cash investment. However, in eToro’s case, the company struck a deal to make sure the sponsors’ shares will not vest unless the stock price goes up a certain amount following the deal. “When you are a strong company you can reach a deal like this. We have seen other SPACs doing this, and the market is evolving,” Lavi told Sifted. Arqit The UK quantum encryption company agreed a SPAC deal with Centricus Acquisition Corp, which values the company at $1.4bn — making it the first space sector unicorn to emerge from the UK. Arqit has developed a system of quantum-proof cryptography keys that can be used to secure networked computer devices against hacking — all delivered via a satellite link. It is this satellite link, Notion Capital’s Chandler says, that will make quantum encryption scalable. The SPAC deal allows the company to raise $400m in order to support the build and launch of two satellites by 2023. This is primarily a software play, with the favourable unit economics that come with the territory, yet still leans heavily on risky hardware. Arqit has been running a project with the European Space Agency, which is bringing in a little bit of revenue, but its main business won’t start until the first satellite is launched. Then the company is projecting revenues of $153m, rising to $660m by 2025. A partnership with BT might give investors some comfort that Arquit can win deals with major corporations. Chandler says that for Arqit, which has heavy capital needs coming up quickly, the speed of the SPAC process was the main appeal. “Founders don’t want to be distracted for nine months by an IPO process that might ultimately fail. I’ve seen IPOs from all sides, as a former banker and as a founder of Messagelabs, and they are a pretty painful process. With a SPAC you will know quite quickly if a deal will happen, or if you will need to think about an alternative form of funding,” he told Sifted. Caveat emptor — and we’ll keep tracking With a record amount of funding in the European VC landscape this year, it’s only a matter of time before more companies start to go public. At the current rate, many of these will be SPACs. More time will afford us better data about the performance of the European companies above, when their mergers are finalised, mostly in Q3/Q4 this year. American companies that have completed their SPAC listings are up, on average, 0.1% from their closing merger price. There is a lot of variance at play — from Playboy and Virgin Galactic, up 194.1% and 375.8% respectively; to Hyliion, the maker of hybrid and electric truck powertrains, down 72.2%. Given the big differences in the fundamentals and assumptions of these European market entrants, we’d expect to see an equally varied performance for them. Caveat emptor — let the buyer beware. We’ll keep tracking how they do, updating this article once the SPACs are completed and when new ones are announced. If you’d like to access the dataset we compiled, click here. Bill Leaver is Sifted’s analyst. He tweets from @BillLeaver_. Maija Palmer is Sifted’s innovation editor. She covers deeptech and corporate innovation, and tweets from @maijapalmer Related Articles Insider view: Bristol’s deep chip expertise By Maija Palmer Click here to read more North American investors are coming to Europe. Here’s why and what European tech founders need to know In partnership with Espresso Capital Click here to read more Backlash against “sauna parties” at tech conferences By Mimi Billing Click here to read more Daniel Ek commits to investing €1bn in European ”moonshots” By Mimi Billing Click here to read more Most Read 1 \Healthtech Is Daniel Ek’s new body scanner worth the hype? Sifted tried it out 2 \Venture Capital VC diversity needs to change — and white men need to take responsibility 3 \Venture Capital New €3.75bn European Investment Fund pot to back late-stage VCs 4 \Sustainability Counteract closes £15m fund for carbon removal solutions 5 \Mobility Was the $5bn that VCs plugged into escooters worth it?