Category: Market Trends

Why SPACs are (Sometimes) Better than IPOs

Posted on by io-fund

SPACs offer retail investors the ability to invest early in a company’s life cycle. In the case of Snowflake, a company that went public via a traditional IPO, retail investors did not have this opportunity. By the time Snowflake debuted on the public markets, the share price had soared over 200% from its indicated opening price.

Many pundits and analysts have claimed that the IPO process is broken due to examples like Snowflake and AirBnb. Wall Street institutions and a select group of their top clients can buy shares at discounted prices before they hit the open market.

SPACs allow investors the ability to buy equity in companies going public before the initial price surge. This allows retail investors to participate in some of the same opportunities that have traditionally gone to institutional investors and preferred brokerage clients.     

Why would a company want to go public via a SPAC?  One of the main reasons is that SPACs provide companies with fast cash and the ability to bypass the regulatory hurdles of a traditional IPO.  SPACs allow companies to get to the public markets a lot quicker.  Many of the SPACs we are currently seeing are still pre-revenue or have very little revenue and are mostly unprofitable.  SPACs are ideal for companies that want to get to the public markets as quickly as possible and not have to deal with a long, drawn-out traditional IPO process.

This also happens to be one of the main risks as these are mostly newer, unprofitable companies with not a lot of revenue.  The SPAC method of going public may entice companies in need of fast cash because their financial situation is not fit for a traditional IPO.

SPACs had a bad reputation in the past because the industry was not as regulated and therefore open to more fraud.  In the 1990’s, SPACs would take small companies that were destined to fail public for a large fee. The SEC, however, has cracked down on it, and the regulation on SPACs has undoubtedly ramped up. Many more companies are now exploring alternative methods to going public and SPACs have been a key beneficiary.

Source: Bank of America

The SPAC route gained notable popularity among companies in the 2nd half of 2020 and has continued its torrid pace into 2021.  We are currently on pace to see over $200B in US SPAC capital raised in 2021, representing well over 100% growth year-over-year.

What are SPACs?

SPACs are special purpose acquisition companies, sometimes called blank check companies, formed to raise capital to acquire an existing company and bring them public.  They are traditionally formed by investors with expertise in a certain industry, who are looking to pursue deals in that industry.  The SPAC management team can be a value add for the target company over traditional IPOs as they can partner with an experienced leadership team for guidance.

After a SPAC raises money for its potential acquisition, the funds are placed in an interest-bearing trust account.  The SPAC company then enters a timeline where they look to make a deal.  Once that deal is complete and approved, the SPAC combines with the business they are merging with and starts trading publicly under a new ticker.  If the SPAC fails to acquire a business by the closing date, and the shareholders do not grant an extension, the shares are redeemed for a portion of the cash in the trust account and returned to the shareholders.

In the IPO, a SPAC typically offers units to investors for $10.00 per unit.  These IPOs usually take place at a net asset value of $10.00, although there are some exceptions. 

The bottom line for investors is that SPACs are an increasingly popular method for companies to reach the public markets.  SPACs do not come without risks, but they represent an area of the market that growth investors can no longer ignore.  In some cases, there are notable opportunities for investors to buy equity in promising young companies.    

Silicon Valley is Losing its Entrepreneurial Spirit

Posted on by io-fund

This past week, I wrote about how Silicon Valley is losing some of its entrepreneurial spirit as venture capitalists shifted their attention to later stage deals with higher valuations. In the analysis, I pointed out that 2019 was the most lucrative year for exits in more than a decade, with $200 billion in exits generated from venture-backed IPOs.

For context, I went back to the golden years of Silicon Valley – 2006 to 2014. During this period, venture capital that was invested in deals below $5 million grew by 290%.

However, things changed in 2015, when early stage deals from below $1 million to under $100 million began to decline at a rate of 20% to 36% per year. Early stage software companies suffered most from the reallocation during this period, while early stage deals declined from 388 in 2018 to around 279 in 2019.

So how did this happen?

I identified two culprits behind the trend – Silicon Valley’s declining entrepreneurial culture and the increasing attractiveness of late stage investments.

Startup pitches and dynamic innovation have been replaced by a relatively closed circle of investors who are only targeting high valuations. In fact, we are seeing an aggregate all-time high for 180 private companies with $1 billion-plus valuations, and they have undermined the attractiveness of seed and Series A round companies.

Moreover, the IPO window is shifting from a range of six to eight years to ten to twelve years, which drove several startups to go public at valuations of over $10 billion this year. Consequently, this has made late stage investments more attractive due to their longer duration and higher valuations. The downside is that it has suppressed early stage investments (defined as deals below $5 million), which only further hampered Silicon Valley’s entrepreneurial culture.

Exciting early stage entrepreneurial stories have become rarer over the past few years, and many of the start-up tech events that I go to have either a noticeable lull or have moved overseas. The sad reality is that Silicon Valley’s entrepreneurial culture has faded, and entrepreneurs have a better chance at attracting capital from strangers on Kickstarter than from Silicon Valley angels and VCs.

Read the full article in MarketWatch here.

Image by Patrick Nouhailler

MWC 2019: A Dose of Reality on 5G, Those Foldable Phones and Bitcoin Has a Serious Competitor

Posted on by io-fund

The GSMA Mobile World Congress (MWC) is the world’s largest exhibition for the mobile industry and combines influential companies from Asia, Europe and North America in the central location of Barcelona. The grandiose 20,000 square foot booths come with the largest names in mobile, like Samsung, Ericsson, Huawei, Google, Docomo, Telefonica, Orange, Verizon, AT&T, Qualcomm, Xiaomi, and other big names with big marketing budgets.

MCW 2019 Event

5G Loud and Clear

5G, 5G, and more 5G is basically the best way to sum up the news from the event. Every operator, network and manufacturer had some angle on the 5G rollout. However, hold your investment pennies for now on 5G stocks. The capex bill that comes with it may be one of the biggest the tech industry has ever faced. The GSMA trade group, a trade body that counts over 800 telecom and mobile corporate companies as members, stated that carriers will be spending $160 billion on an annual basis to roll out 5G networks. In addition to network costs, trillions will be required to install the infrastructure needed for the content, applications and emerging tech that will rely on the 5G networks (i.e. smart cities, autonomous vehicles, virtual reality, etc). Think 5G makes for a good long trade? Again, don’t count on it for now as the GSMA also stated only 15 percent of all mobile connections will be on 5G by 2025. (As I mentioned, the GSMA is a fairly reliable source as it counts 800 of the world’s top mobile companies as members).

Qualcomm 5G

According to VentureBeat, the financing firm Greensill puts the total cost for 5G at $2.7 trillion through the end of 2020. The issue is that it’ll take a few years to see any returns, which will put networks in the red until applications catch up. This, of course, is the fine print to 5G that the lights, camera and action of the booths at MWC didn’t portray (view my Instagram posts here). In fact, there was a panel where Mike Fries, the CEO of Liberty Global, pointed out that carriers in Europe have not recouped costs on 4G yet. “You’ve had 10 straight years of declining mobile revenues in Europe with the biggest issue being price,’ he said.

Will Foldable Phones Drive Sales?

Foldable phones were the most talked about product at the event. Huawei’s Mate X and Samsung’s Galaxy Fold were both on display behind glass cases. The use-cases for the foldable phone include more productivity while on-the-go and new applications for cameras, such as seeing the photo before you take it due to the second screen. The price tag is high – over $2,000 is the anticipated number when the phone is released later this year. Following MWC, on February 28th, Apple Insider reported that Apple has filed a patent application for “Electronic Devices with Flexible Displays” with sensor and micro-heater technology to keep a foldable screens from becoming too brittle in cold temperatures. No doubt, mobile handsets have stagnated recently with iPhone revenue dropping in Apple’s earnings reports. Will foldable phones deliver enough ingenuity to revive sales? Time will tell, but it does seem like early adopters are taking a risk on the durability of the manufacturing as Samsung’s foldable phone is already reporting issues after being folded 10,000 times. According to Wired and ArsTechnica, the foldable phones from Samsung and Huawei are made of plastic polymers, which can scratch easily and cause the previously mentioned wear from folding the device. In the meantime, glass-maker Corning is “working on an ultrathin, bendable glass that’s 0.1 millimeters thick and can bend to a 5-millimeter radius” that may hit the market in about two years. (Wired’s article is less than obscure and is entitled “Want a Foldable Phone? Hold Out for Real Glass).

SoftBank Becomes Bitcoin Competitor

Blockchain was a more muted theme at MWC, one that was mainly talked about in sessions for Silver, Gold and Platinum pass holders. In one session, SoftBank had an interesting angle on how to transfer payments electronically in order to avoid the drawbacks of bitcoin. Their proposal is cross-carrier identification systems (CCIS) and payment systems (CCPS) technology that runs through telecom carriers. CCIS focuses on enabling identification and authentication, which reduces the need to have different usernames and passwords by using Zero Knowledge Proof cryptography and Distributed Ledger Technology (DLT) to issue, store and authorize for identification purposes without requiring detailed information. The goal is to prevent identify thefts while minimizing the current requirements needed to verify passwords by creating encrypted digital identities.

Presentation on MWC 2019

The second part to SoftBank’s partnership with TBCASoft is a blockchain-based platform for global or cross-border payments. For instance, a user can make purchases in Japan with U.S. dollars through mobile-based Rich Communications Services (RCS). The official press release was in September of 2018. Here is some more information on how it works:

“The PoC enables users to make a variety of in-store, mobile and digital purchases directly from their device. For example, a mobile customer based in Japan can travel to the U.S. and make a purchase supported by SoftBank and Synchronoss via RCS. In addition, the RCS global messaging standard can be used to send a payment, while the CCPS blockchain API enables the recipient to use an RCS-based messaging app or legacy messaging service to receive person-to-person (P2P) money transfers through the RCS wallet app.”

CES 2019 – AI Assistants Are Multiplying, Are We Privacy-Ready?

Posted on by io-fund

To experience CES this year was to experience the sensation of exiting a large football stadium. You essentially walk in a continuous herd of over 180,000 people. There were many noteworthy displays and freebies, as long as you don’t mind standing in line for two hours or having hundreds of people blocking your view. (The only line I stood in was for Starbucks).

I’m also not one for flying taxis or the never-ending release of new television screens. At this point, if you buy an 8K television, it will take years for content producers to catch up to 8K content (which is why you won’t see me covering this as a trend). Although, standing under these curved OLED TVs from LG complete with a dramatic presentation was one of my favorite, personal highlights.

I’ve organized the stampede into a couple of important trends that will impact you as a consumer of technology and will also help to inform your tech stock portfolio. I’ll be covering the notable CES trends in a three-part series. These trends include the tipping point for AI-powered assistants, Level 2 vehicle automation and 5G (yes, it’s a big deal).

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CES 2019 Becomes Tipping Point for AI-Assistants

You may have heard the shocking statistics regarding daily mobile phone usage. For instance, the average person spends over 4 hours per day looking at their phone. The idea of touching your mobile phone to an obsessive level, especially while driving, will become a long-forgotten concept as we transition to AI-powered voice assistants. Google was clear with CES attendees – AI-powered assistants are the next frontier in technology and Google wants to win.

One of the bigger attractions at CES was a theme park ride that took riders through a Disney-like experience designed to highlight Google Assistant. The characters and landscapes prompted daily tasks through Google Assistant, such as turning off lights, taking selfies, and ordering birthday cakes. It was a costly display that got a lot of media attention.

Man Taking A Picture at CES 2019

source: Mashable

Here is a brief overview of the Google assistant-powered announcements from last week.

  • Google expects Google Assistant to be on 1 billion devices by the end of the month, up from 400 million devices a year ago.
  • Google Assistant will be on Google Maps for both iOS and Android
  • Google Assistant will be integrated with Android lock screens, Sonos Speakers, Samsung TVs, Dish set-top-boxes, Lenovo alarm clocks, IKEA blinds (yes, you read that right), Anker and JBL to retrofit your car, and has partnered with United to check you in on flights with more airlines on the way.

Amazon Alexa had 80% of the market in early 2018. When new numbers are released, you can expect market share to decrease as Google was growing at 483% growth compared to Amazon’s 8% growth. Here are a few of Amazon’s announcements from CES:

  • Alexa, in a partnership with JLB speakers, can be installed into your ceiling through a LED downlight.
  • Razer plans to integrate Alexa into its gaming platform
  • Amazon announced partnerships with Telenav and HERE technologies, which are both big players in the connected car space. Telenav is a connected car and location-based services provider and HERE sells and licenses mapping and location data, and works with companies such as BMW, Oracle, Facebook and Yahoo! Maps.
  • Echo Auto now has over 1 million pre-orders, which is a dongle that plugs into a car’s infotainment system to provide hands-free driving.

Home is Where the Privacy Is

Apple should have an answer for this at WWDC in June, if not sooner.  Siri was the original AI powered assistant released four years before Alexa. The only news we got from Apple during the show came from partnership announcements with HomeKit and AirPlay 2 arriving on non-apple devices such as Samsung, LG, Vizio and Sony TVs. (Apple does not make announcements at CES, rather Apple makes announcements at its own, proprietary conferences).

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However, Apple did make one very bold statement at CES. The statement was in the form of a large ad that stated, “What happens on your iPhone, stays on your iPhone.” Apple is correct to bring up privacy at a time when tech companies will have more data and information than ever before from AI-powered speakers.

Apple Statement at CES 2019

Takeaway:

The time we spend touching our mobile phones will define this past decade as a “thing of the past.” The practice of typing everything we are thinking onto a small screen will slowly be replaced by voice activated technology. CES 2019 was a turning point with tech giants revealing AI assistants are the central focus in their strategy moving forward.  However, there are serious privacy implications to having a speaker in every room of the house. Google’s Android operating system leaks more data than Facebook, even on Facebook’s worst day. The bottom line is that there are still a lot of questions to be answered before these assistants are in your ceilings, on your blinds and in your bedroom via the alarm clock. I’ll be looking forward to Apple’s privacy-driven answer at WWDC in June.