Podcast: AAM, New Space Face Financial Wilderness

For new space and advanced air mobility startups, the past two years have been a heady experience of investment, mergers with special purpose acquisition companies and high-risk plays into segments of the aerospace and defense industry that were mere dreams a decade ago.

In this week’s Check 6 podcast, Aviation Week veterans Carole Hedden, Michael Bruno and Graham Warwick look at what has worked to the benefit of these startups and what they face moving forward … in an economy that sees rising interest rates, higher risk, and more careful use of the cash available.

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Rush Transcript:

Carole Hedden:

Hi, and welcome to the Check 6 podcast. I'm Carole Hedden, executive editor for custom content at Aviation Week. And joining me today are Michael Bruno, Aviation Week's senior business editor, and Graham Warwick, our executive editor for technology. Over the past year, the AAM world, or Advanced Air Mobility world, has been blessed with unbelievable investment. That investment has come from corporations, equity funds, and a particularly nuanced version of investment, the Special Purpose Acquisition Company, or SPAC. SPACs don't take part in the operations of the company, but are designed to identify target opportunities. They bring together a group of investors and the money is then placed with new companies that are competing in new or vastly changing markets. It's called the reverse merger and takes the startup into the public market. The individuals who contribute to the SPAC can choose to keep those shares in the new public company or they can redeem their shares and pull their investment out.

    This process allows the startup or private company to go public without the drawn-out and complicated processes normally associated with an IPO, or an initial public offering. The money generated through SPAC mergers is no small matter. Billions of dollars are raised to help startup companies finance their new products. This has occurred both in the AAM world, but also in the space sector. The space sector has benefited particularly, with heady levels of investment going into all new technologies and services to be offered for the space sector. But today is a different day. We have seen the stock market plummet in the past six months due in part to the invasion of Ukraine by Russia, but also to the lingering hangover of the COVID-19 pandemic, increased inflation and higher interest rates. So, Michael, there are changes afoot in terms of what special purpose acquisition companies can do going forward. Can you help us understand exactly what will happen by year end?

Michael Bruno:

Yeah. There are darker clouds emerging over the launchpad and the bears are gathering in many senses of the way. When it comes to the investment community, it's amazing that even just six months ago, at the end of 2021, you still had relative optimism about the SPAC land and particularly space companies SPACing, if you will forgive me for making that a verb. But things are changing now, and I think the place to pick up is where you left off, Carole, is talking about the change in interest rates, the change in inflation, the macroeconomic conditions that enabled SPACs to be so successful from about 2019, 2020, 2021, to suddenly not being very successful in many different ways. It has to do with these larger macroeconomic conditions where the money used to be free-flowing. All you had to do was put your hand out and money just dropped into it from the air.

    So, you had all of these investors emerging and they all needed to put their money somewhere. Everybody had an appetite for high yield, high risk, big growth, and space was the epitome of that. We've talked about the reasons why before. Obviously Elon Musk, Jeff Bezos, the whole emergence of new space, the plummeting costs of launch have helped enable a whole new commercial sector in orbit. The problem is that all of these businesses need a lot of upfront money. There's a lot of infrastructure and a lot of development costs that go into it. And so it was recognized they need a bunch of money and it had come from various groups, but usually private sector. It was private equity venture capital that was going into these things. And then SPACs reemerged not quite out of nowhere, because Iridium was a SPAC about 20 years ago. People forget that.

    And it's a space company obviously, and it's had a torturous experience ever since then. And it is going to serve as a bellwether for probably a somewhat torturous experience that the current SPACs are going to experience now for the next probably two years, at least. And I don't want to babble on too long and get over to Graham for more commentary, more of your questions, but I will just say that the big thing that's changing that you asked me is, you are not going to see such ready, willing, and able investors to go make a new SPAC happen as there used to be. And suddenly when something goes from popular to you don't want to touch it with a 10-foot pole that changes the whole environment.

Carole Hedden:

Graham, what about the situation with the Advanced Air Mobility sector? Is that also seeing a slow down in SPAC activity or overall investment?

Graham Warwick:

Well, yeah. So, Michael brought up there that it was really the space industry that took off with this SPAC wave and that we saw some really big deals done in the space industry. Well, after that came the AAM or particularly the eVTOL, electric vertical takeoff and landing SPAC. So, 2021 was a busy year. We saw four, maybe five if you count one operator, but we saw Joby, Archer, Lilium, and at the end of the year we saw Vertical go public through SPACs. And then at the beginning of this year, well, in May, we saw Eve, Embraer's spinoff, go public through a SPAC. So, the Joby SPAC was in August last year. And pretty much the writing was already on the wall by the time that Joby did its SPAC, because they did than anybody else.

    I mean, they raised 1.6 billion total, including the SPAC. You mentioned redemptions. They had about 65% of the SPAC shareholders chose not to invest, which actually was pretty good performance for its time because it just got worse from that point on. And what we saw is that every SPAC deal that followed raised less money. It was harder for them to get what's called the PIPE, which is committed investment from outside companies that go with the SPAC. So, you've got the SPAC piece and then you've got this outside investment, which they call a PIPE. And as you go through the year, you saw that the SPAC piece got smaller, the committed PIPE investment got smaller, and the redemptions got bigger.

    So, you take Joby in August, one point something billion from the deal itself plus what they already had gave them about $1.6 billion in the bank. We went through Archer and we went through Lilium and we got to Vertical in the end of the year, and the SPAC essentially raised nothing. They had somewhere close to 100% redemption, which meant they got almost no money. When you take transaction costs, they got literally nothing out of the SPAC. All they got was a very small PIPE, less than a hundred million dollars in outside investment. They'd read the writing on the wall and they had taken out a 200 million in debt to cover it. So, they made their baselines $300 million, but they had to do some tap dancing to do it. And then we got to Eve. Now, Eve was merging with a company called Zanite Acquisition, which is led by Kenn Ricci. Kenn Ricci's one of the great names in aviation.

    He runs one of the most successful aviation investment vehicles out there, Directional Aviation. He owns fractional ownership. He owns helicopter operators, a whole sort of thing. So, they really thought they knew what was going on with SPACs. So, they tried to construct a SPAC that would appeal to the investors, to the shareholders. So, they pumped up the PIPE investment, which is the committed investment. Embraer put in half, 185 million itself, into that. So, it came out at about 350 million in committed investment. They went into the SPAC. They thought they'd got a good deal for the shareholders. More than 95% of the shareholders just said, "No, I'm not interested," and walked away. So, they came out with about $360 million, which they say is enough to be getting on with, but it just shows where the SPAC got to. We know of at least one that was canceled during the year, which was Volocopter was going to go public through a SPAC.

    And they just read the market and said, "That's not going to work." And we know at least one SPAC that still hasn't found a target. I mean, you've got two years, I think, to find a target after you create a SPAC. And there are probably a lot of SPACs out there that are really, "Look, the clock is running out." They can't find a target or they can't put a deal together. And I thought I'd heard the last of SPACs, but in the last month I've had conversations with two companies that have decided to go public through SPACs. One is Surf Air Mobility, which is a regional aircraft membership airline app-based mobility company that's going into hybrid electric aircraft. And the other one is a battery provider, Amprius. Sorry I'm going on here, but it's really interesting to look at those deals. One of the issues with SPACs, one of the reasons that they became a problem, was that the sponsors were allowed to give forward projections.

    They were allowed to put these glossy investor presentations out that said, "Our business can be billions and billions in five years," et cetera. You can't do that with an IPO. You could do it with a SPAC. You couldn't do it with an IPO. As a result of which they kind of inflated the investor's expectations. So, if you look at Surf Air Mobility, no forward projections. They're not saying who these strategic investors are. They're not giving any forward projections. They're treating it like an IPO in essence, but it is a SPAC.

    And then you look at Amprius, the battery manufacturer. The difference there is they are going with a company that's already done three SPACs and done them successfully in the battery space or in the electrification space. So, they feel that they are with a SPAC that knows what it's doing, that it has already had investors come on board that have stayed with it. They've had two very successful SPACs in vehicle charging and vehicle batteries. So, they feel that's their solution. But I would say that I would be really surprised if we see any more SPACs in aviation space, which leaves us to the question which we'll go into is, where's the money going to come from?

Carole Hedden:

Now, if I recall correctly, the amount raised by space is around $24 billion in the last, what? Two years, Michael, I think.

Michael Bruno:

A couple of years. Yep.

Carole Hedden:

And in AAM it's a much smaller number, around $7 billion in equity and SPAC deals, correct, Graham?

Graham Warwick:

Yeah. I put it about that. I mean, that is still a huge amount of money for a traditional aviation-based industry. I mean, the space number is mind-boggling, but for aviation, that's a lot of money to have come into aviation in a year and a bit, a year or two years.

Michael Bruno:

Although there's one thing to keep in mind with those numbers, just a quick on the fly clarification. Those are the peak numbers of what was raised at the time that these companies went public. That money may not be there anymore. In fact, it's almost guaranteed not to be there anymore because of the share prices having plummeted, especially on the space side. Four of the past five months, they've been negative. And over the past three months, it's been double digit declines in the space SPACs. So, that 24 billion is not still sitting out there. It's just what was raised at the peak when everybody was public and nobody gave back any money yet.

Carole Hedden:

And the Advanced Air Mobility sector, the stock prices have been pretty wild as well, but EHang and Lilium are staying fairly steady in terms of their prices and in fact in the last three weeks have shown some pretty strong gains. The drops have slowed down in the past two months for Advanced Air Mobility. So, that particular sector has not followed the market quite as closely and it has been dropping in below 1% digits for the past several weeks. So, do we have enough money? I mean, I think the thing is, Michael, in the space sector, those are wildly expensive ventures. Is there enough money for these startup companies to actually make it,? Are they going to produce their products? Are they going to provide these services? Are they going to be the great next thing?

Michael Bruno:

The answer in a nutshell is no and yes. And what I mean by that is no. For all of the companies that have gone public through the SPACs over the past couple of years, cutting out the ones that went before like Iridium, but I'll come back to Iridium in a moment, there is not enough money and we're already starting to see companies have to do other actions. We've had warnings from a couple of these companies that they're going to have to raise more money. AST SpaceMobile, for example, wants to provide cell phone network connectivity from satellites. And they've admitted that they've got to raise even more funds in order to build a constellation. Their constellation, by the way, they're just about to start testing. It's not even a constellation. It's one satellite they're looking to send up in August. And then they're going to have to need hundreds of millions more to build the constellation for initial operation.

    And right now it's really hard to see them going back to the marketplace and issuing stock. You can. You can do that. But for a lot of these space SPACs, their shares are down in low single digits per share. And you get to be into some pretty illiquid environments when you try to raise a bunch of new money that way. So, you're seeing them do other things. It's a truism in the business world, especially in publicly traded companies, you want revenue. You want to be able to show investors that you've got a pipeline of sales that are occurring now. And in the space industry in particular, you want to show that you have space heritage. You have money generating capacity based in space. That you're already there. All you need to do is grow it. That's what investors want to see.

   So, for the few companies, I would point out one like Rocket Lab, for instance, which has real revenue-generating capability, companies like that are going to be able to potentially either issue more shares or they're going to be able to do some private placements. Graham brought up the term the Private Investment and Public Entity, the PIPE. You can definitely do more of those. You can also, for some of these companies who are producing revenue, you can actually start to take out debt funding that's backed up by the revenue that you're generating. I just saw an announcement that Spire Global is looking to raise about a hundred million, I think net, through new financing. They're taking out a new credit line, for instance. That'll help them provide a little bit more cash flow. So, there are avenues for some of the better situated companies to go bring in more additional money that doesn't include issuing new stock.

    But for several other of these space SPACs, they're in a pretty tight corner. They don't have revenue. They're pre-revenue, and that's a really bad place to be in the current market conditions. They can't apply any assets to go try to raise debt from. They have very little assets. They've probably got six people in an office somewhere working, tinkering, literally, on the test technology that they're working on. So, it's very hard to raise money any other way. And long story short, I don't want to get off on a whole other podcast, but we expect to see more mergers and acquisitions as some of these companies have to be folded into others. And of course, that's another way sort of to raise money, when you get assets on the cheap that help you complete your own business case. Well, that's another way to do it.

Carole Hedden:

So, Graham, you mentioned one of the battery companies planning to go public as well. And I think that's one of the things I always wonder about is the suppliers to these companies. Many of them are also startups or they are established companies that are all new to aerospace. How do you see the funding in that occurring? Or do you think that we'll see more or less, or how will the supply chain take shape?

Graham Warwick:

Yeah. The answer is, I don't know. I mean, as I say, we've seen a situation with Amprius. There's one that you've written about, Michael, Shield AI, which is an autonomy company. They've just done a big funding raise. So, if you look at the way that AEM stands at the moment, and again, we're looking at the vehicle level manufacturers, the Joby's et cetera, Joby is still sitting pretty safe at the moment. They came out of their SPAC with 1.6 billion. Here we are, they've got 1.2 billion left and they're pretty far along in developing their vehicle and everything like that. So, you look at them. But then you get down to the Lilium's and this. Well, Lilium's already gone out and raised or secured a $75 million equity line of credit, which is basically they're going to issue shares in return for credit as they need it, because they've made it clear that what they have is not enough to get to service.

    So, we're already seeing signs that the AAM supply, other than, say, Joby, the AAM OEMs are already tapping other sources of funding to get to where they need to be. We are still seeing the more traditional private investment series A, B, C approach to that. So, we've just... Literally as we're recording this, Hanwha Systems, which is a Korean company, has agreed to invest in another $150 million in Overair, which is a US eVTOL startup. They're already an investor. They're just adding more in and they're a big corporate investor. We've seen that. Now, Lockheed Martin ventures has made some investments in this. Raytheon Technologies ventures has made some investments in this. Honeywell has made a lot of investments in this market. So, there are other sources of funding.

    Another one that's becoming important is these big sustainability-linked funds like Breakthrough Energy ventures, Amazon Climate Pledge. They are investing in this space as well. And these are new forms of funding. I mean, they're not really forms of funding, but they're new differently themed funding. So, these are sustainability themed funds that are specifically aiming at and investing at things that decarbonize. So, that didn't exist two years ago. So, that's somewhere you can go to with some of these ideas. But we are back, I think because of what's happened with SPACS, I think we are back into a more traditional round-by-round approach going forward. And that's fine, but it's very time-consuming for a lot of these companies. I will say that I think we have the five or six market leaders that have gone through whatever they chose, SPAC or private.

    They've got themselves to where they need to. Then we've got another five or six that are coming along behind. And I actually think what we'll see is that they will slow down and they will watch how the market evolves. And then what we'll see is, as the leaders prove the market, the followers will then have something to go to the investors and say, "There is a real market there." At the moment you've got a problem. You've got the technology that's not certified, and you've got a market that's not proved to exist. Once you get certified technology and a market that is shown to be there, then I think we will see another round of investment at some point down the way. But I think for the next year or two years, we're back into this incremental round-by-round.

    And we may see corporate players. The military's getting very interested in eVTOL so we are seeing some of the traditional defense primes putting down a marker saying, "We're interested." BAE Systems has put money into this market. Tilez is putting money into this market. So, they're beginning to see that the military's interesting, so they're sort of placing bets as we go forward. But we're back into this incremental step-by-step type of funding.

Carole Hedden:

So, just one last question, Michael, from your perspective. In the AAM we still forecast that there are going to be more startups, there's going to be more activity. What about in this space realm? Do you think the plethora of startups is over or are we going to see some more?

Michael Bruno:

No. Here's where I may sound a little incongruous, but I absolutely believe we are going to continue to see more space new entrants pop up. We may not see them at the same rate, and we're not going to hear them associated with terms like SPAC and public shares necessarily. But when I talk to people who work in and around the technology incubators, those houses that help startups get going and form a business plan and work with the founder entrepreneurs, when I talk to venture capital people, they are still busy. Graham had alluded to this. There are still seed round series, A rounds. All the rounds are going to be smaller. I was just reading recently in the VC World about how the downturn has come for the seedlings. They used to be pretty immune up until about a month ago, but even they are seeing smaller rounds getting announced. But they're still getting announced.

    There is a lot of what's called dry powder, which is the cash sitting in the investment world, sitting on the sideline, looking to go somewhere. It's left over. There's probably not going to be a lot more created in the next couple of years, but there's a lot sitting there and it's got to go somewhere or those funds have got to disintegrate and return the money to the original investors. So, there will be new space entrants, and we will see them in the second or third order type of space companies. There's a lot more interest growing in in-space activity, whether it's manufacturing, whether it's satellite servicing, communications, optical laser networking, these kinds of enabling technologies. In the space world, everybody wants to be a pick and shovel provider. That's a term that goes back to the old gold rush in California, where you didn't want to be one of the miners who tried to go out and pan for gold. Nobody was successful.

    You wanted to be the person selling the picks and shovels and the Levi jeans to the people who were, you could say foolish enough to go out and pan for gold. And everybody wants to be a pick and shovel provider. And there's a lot of, we think, opportunity for picks and shovels in space while other people figure out exactly how they're going to make money down to some specific end market. So, there will be new entrants. They're probably going to get more private funding, private equity, venture capital funding in the near future. Some funding will come from the legacy primes like Graham referenced, that these companies have been sitting back and waiting to see what happens with new space. And it's a tried and true strategy for them. They don't rush to spend money early on. They see what's going to pan out, what the DOD is going to go after, or NASA is going to go after, and then they start investing in that.

    And instead of R&D they invest M&A funds, or they invest their corporate VC funds to go buy these companies and get a stake in them. So, we will see all of that emerge. We just aren't going to see new launch companies emerge anymore and go get public shares. We're probably not going to see many space tourism type companies, whether they're on a rocket or a balloon emerge. But I think SPACs are not dead. I think in a couple of years we are going to see more space SPACs, probably not at the same rate we've seen in the past couple of years, but the long-term prospects, just like with AAM, there are a lot of true believers in these markets. And SPACs have been around a good long time and it's a tool that'll probably be popular again as these markets prove themselves more worthy.

Graham Warwick:

I would agree with that. I think it is the AAM market, particularly in the US, has been thrown into a bit of uncertainty because of the FAA's change of direction on certification. Now, that's going to sort itself out, but it just makes it a little bit uncertain timing and risks, et cetera. And also the SEC, the Securities and Exchange Community, is reworking the rules around SPACs. So, once those become completely clear and that people really understand what a SPAC can or can't do and how it differs from an IPO and all that sort of thing and we get closer to market reality as well, I think we will see these vehicles coming back, or at least something that looks like these vehicles coming back.

    Also, I would point out that there are still SPAC activity in, like the battery side, the autonomy side. It moves along the markets as they move along. And I think the next one at the moment is going to be autonomy, is going to be a hot topic. How the money comes into that market I don't know, but I think people are really beginning to see a market, particularly the DOD getting really interested in moving into autonomy. I think there'll be some energy behind that, so we will see related transactions that are in a market that's adjacent to AAM and space.

Carole Hedden:

Well, thanks a lot to both of you. That's all we've got time for this week. So, join us again next week for another episode. Don't miss us by subscribing to Check 6 in your podcast app of choice. Bye for now, and thanks for listening.

Carole Rickard Hedden

Carole Rickard Hedden was Executive Editor for custom content and Program Excellence for the Aviation Week Network, providing custom content and research to industry executives.

Michael Bruno

Based in Washington, Michael Bruno is Aviation Week Network’s Executive Editor for Business. He oversees coverage of aviation, aerospace and defense businesses, supply chains and related issues.

Graham Warwick

Graham leads Aviation Week's coverage of technology, focusing on engineering and technology across the aerospace industry, with a special focus on identifying technologies of strategic importance to aviation, aerospace and defense.