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VCs: Nikola scandal won’t stem cash flow to clean-tech startups

Investors call attention to symbiotic relationship between electric vehicle companies and special purpose acquisition companies

Reacting to the stunning series of events that culminated in the resignation of Nikola Corp. (NASDAQ: NKLA) Executive Chairman and founder Trevor Milton on Monday, venture capitalists said the challenges facing the embattled electric truck company call attention to the symbiotic but risky relationship between clean tech startups and special purpose acquisition companies (SPACs), the alternative form of financing Nikola used to go public in June.

VCs said also that the scandal, showing few signs of abating, is unlikely to have a negative impact on private capital flowing into venture-backed clean technology startups.

“If anything, it might accelerate investment in real leaders and real product with the competition hamstrung,” said Santosh Sankar, founding partner of Dynamo Ventures, in an email to FreightWaves.

Milton, the brash 38-year-old entrepreneur who founded the hydrogen and electric vehicle startup in 2015, stepped down from the board following a report published 10 days ago by a short seller of Nikola stock that accused him of lying about the company’s technology accomplishments.

He was replaced as chairman by board member Steve Girsky, a former vice chairman of General Motors Co. (NYSE: GM). Girsky also led and partly owns VectoIQ, the acquisition company that led the reverse merger with Nikola earlier this summer.

In September, General Motors took an equity stake in Nikola, supplying advanced batteries and fuel cells for the company’s Class 7 and 8 trucks.

SPACs fuel clean tech companies

Often called shell or “blank check” companies, SPACs, also called reverse mergers, are entities that go public expressly to raise funds for private companies. Although they have been around for decades, SPACs are riding a new wave of investor interest, harvesting a record amount of money in 2019.

SPACs can be especially attractive for capital-intensive startups like alternative fuel vehicle companies, said Matt Goldstein, a partner at M12, Microsoft’s corporate venture arm.

“Private markets have historically not liked capital-intensive businesses.” At the same time, Goldstein said, going public — an increasingly drawn-out process involving endless negotiations with bankers, lawyers and regulators, along with expensive roadshows — has become much more difficult than it used to be.

“It would be silly to imagine Tesla (NASDAQ: TSLA) today in this environment going public,” said Goldstein, who sits on the boards of Airmap and Nautilus Labs, two of the several logistics companies in the M12 portfolio. “They would be laughed at.” (Nikola competitor Tesla launched its IPO in 2010.)

A faster, simpler way of going public, SPACs are among the innovations underway to make IPOs more accessible again. (Direct listings, a strategy used by Slack and Spotify to go public last year, are another.)

In the coming months, at least three electric vehicle companies are reportedly aiming to go the SPAC route. Volkswagen-backed QuantumScape, a solid-state battery builder, is preparing for a reverse merger with Kensington Capital. Pivotal Investment Corp. (NYSE:PIC) has agreed to a SPAC with XL Fleet, a startup behind commercial truck electrification.

And electric charging company ChargePoint Inc. is nearing a deal on a reverse merger with Switchback Energy Acquisition Corp.

“I’m generally in favor of innovation, so I’m glad these companies are going to be able to go public,” said Goldstein. The “beauty” of public markets, he added, is that the public gets to share in the returns, rather than having all the riches accrue to VCs and founders.

Pluses aside, Goldstein noted the Nikola SPAC does raise some questions: “The idea of a publicly traded company with no revenue always struck me as a little bizarre,” he said.

Nikola has yet to make a profit (or build a commercial product), and lost $86.6 million in its second quarter. 

Following Milton’s resignation on Monday, company shares dropped 19% to $27.58.

Fast, risky — and necessary?

SPACs simplify the process of going public, but with less process and diligence there can be more risk, said Julian Counihan, general partner at Schematic Ventures. 

While the target company disclosures are similar to a traditional IPO, the material is not subject to the same SEC review process nor recieves the same level of scrutiny by investors during a roadshow, he said. On the plus side, SPACs can be easier, faster and value companies more accurately.

Especially in areas related to electrification, there is a need for capital to fund product commercialization, said Sankar, whose firm invests in next-generation mobility and supply chain companies. “A public float via a SPAC can provide that,” he said, adding that SPACs are an option for a venture-backed company “and options are good.” 

Although EVs are poised to reshape the auto and commercial truck industries, because of the huge sums of money required, clean vehicle startups have struggled to secure venture funding.

Money isn’t everything

Known as much for his braggadocio as his deal making, Milton faced down questions about his leadership long before Hindenburg Research produced the report alleging Nikola had engaged in fraudulent practices.

“People are the keystone of any organization,” Sankar said, and Milton’s resignation is “an opportunity for Nikola to put credible management in place and execute towards their long-term goal.”

Echoing those sentiments is Reilly Brennan, general partner at TrucksVC. Nikola now has a “world-class executive” at the top, Brennan said in an email to FreightWaves.

He highlighted the fact that General Motors has contracted to build out much of the electric truck company’s technology, saying “that’s a positive step,” even if Nikola still has to account for previous statements about its technical capabilities.

“Nikola could not have started without Trevor Milton,” Brennan said, “but it became clearer that only the absence of Milton would satisfy its shareholders.”

Related stories:

Startups, regulators aligned in aggressive approach to getting zero-emissions trucks on the road

Infrastructure next big thing in AV investment

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Linda Baker, Senior Environment and Technology Reporter

Linda Baker is a FreightWaves senior reporter based in Portland, Oregon. Her beat includes autonomous vehicles, the startup scene, clean trucking, and emissions regulations. Please send tips and story ideas to lbaker@freightwaves.com.
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