De-teasing Manward’s “#1 pre-IPO investment for 2021”

What's being teased by Manward's new Venture Fortunes? (Plus, a little primer on SPACs)

Today we’re sniffing out some teased picks by Andy Snyder that were hinted at in ads for his new “upgrade” newsletter at Manward Press. It’s called Venture Fortunes, and theoretically has a $5,000 sticker price but is being launched at $1,975 for the “charter” subscribers, who also get two years (“list price” in these kinds of letters exists just to get you to think that you’re getting a bargain at $2,000 for some investment research… though they do, to their credit, offer a refund for folks who test the product for a full year and are disappointed, now sadly a rarity for the “upgrade” newsletters that generate most of a publisher’s profit).

And the idea with this Venture Profits newsletter is to “get in early” on hot stocks and IPOs, which is, of course, a hugely popular idea… particularly among newer investors who think they’ve “missed out” on past growth stocks. He even teases a “back door,” which is a popular metaphor for a sneaky way to invest in a hot idea — and that, of course, makes it feel more justifiable to pony up a huge price for a newsletter, because you’re getting access to something “secret” (wait behind the velvet rope with the peons? Forget it, dude, I’m using the VIP “back door!”)

None of this will be all that “secret” to most Gumshoe readers, since you’re so smart and well-informed already (and lest I forget to mention, looking really sharp today!), but let’s see how he pitches this… the ad is staged as an “interview” with a newsy-type person, Corrina Sullivan, who is one of the huge flock of freelance former TV news reporters and anchors whose TV-ready personalities make the world of promotional “interview” presentations and corporate videos seem somehow reassuring and familiar. Here’s a bit from the infomercial, in Snyder’s words…

“… with the back door I’m going to talk about today, anybody can get into the hottest pre-IPO opportunities, usually for around just $10…

“Today, I’ll explain how this back door works so our audience can decide for themselves whether it’s right for them.

“I’ll give everyone watching details on my #1 pre-IPO investment for 2021.

“And I’ll also share the details behind THREE MORE little-known pre-IPO opportunities.

“Each of these companies plays a key role in developing new technologies that are changing our world.”

And it will come as no surprise that what he’s really talking about here are SPACs…

“I believe the success of Virgin Galactic’s SPAC fundamentally changed the IPO market.

“And it started the SPAC revolution in 2020.

“As Jack Ablin, the chief investment officer of $12 billion investment fund Cresset Capital, says…

‘It’s an easier and often cheaper way for private firms to go public.’

“After Virgin Galactic went public and proved startups could bypass the Wall Street machine, the number of SPAC deals took off…”

That’s certainly true, though the market has cooled off dramatically now — for six months or so, from last Fall through February or March, anything related to SPACs seemed to be soaring as investors got excited about the next big deal and the idea of buying “pre-IPO” companies. Those Special Purpose Acquisition Companies (SPACs — more on that in a moment if the idea is new to you) have raised giant pools of capital in their “blank check” listings on the stock market, and are looking to invest that money by merging with private companies to take them public… which, depending on who you talk to, is either a democratization of the IPO process or a way to further fleece novice investors.

Snyder goes through the basic idea of SPACs, which we’ll skip for the moment, but the basic backdrop is that hundreds of those SPACs are out there, with billions of dollars burning holes in their pockets (if they don’t buy something, they have to give it back — which is the LAST thing a SPAC manager wants to do), so they’ll be making deals right and left over the next couple years… Snyder’s new high-end newsletter, like many others from most publishers, is trying to take advantage of that buzz and promising to try to recommend the best plays on this group of new-to-the-market companies.

Which ones does he like? We do get a tease for his favorite, along with three others, so we’ll put the Thinkolator to work, get some names for you, then you can research and decide for yourself, without a $1,975 impulse purchase of a newsletter clouding your judgement. Here’s more from the pitch:

“Our strategy is to purchase SPACs planning to merge with companies you want to be invested in….

“… it’s an easy decision to invest in SPACs because…

  • You need only a small amount of money.
  • If the SPAC doesn’t go public, you get your $10 back.
  • SPAC pre-IPO profits come in a fraction of the time that regular pre-IPO profits take.
  • And you can do it over and over and over again.”

Snyder also tells us what he looks for in these SPAC deals…

“There are three main boxes I like to check.

  • I want to see quality backers and management.
  • I want the company to be set up for big growth in a huge market.
  • I want to see that the company is a first mover in its market.”

The examples of past deals he thinks meet those criteria is a nice cherry-picking of a few of the most popular SPAC deals in the last year, including Luminar (LAZR), AppHarvest (APPH) and QuantumScape (QS)… but what’s his favorite “#1 pre-IPO investment” right now? We finally get into the clues…

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“I’m recommending people buy a SPAC that could merge with a genetics company in the coming weeks.

“But this isn’t a normal SPAC…

“It’s funded by the guy who started this revolution in the first place… billionaire and founder of Virgin Galactic Sir Richard Branson.

“He says this genetics company is ‘absolutely transforming drug discovery.'”

And a few other clues we can feed to the hungry Thinkolator…

“This company is the first mover and market leader in the field of genetic testing.

“It has 8 million separate, individual genomes sequenced….

“The personalized medicine market size is expected to reach $3 trillion by 2025.

“And this single company is by far the market leader.

The Wall Street Journal reports that it has ‘a pipeline of more than 30 therapeutic programs, spanning oncology [as well as] respiratory, cardiovascular and other diseases.'”

And apparently it’s still trading at roughly the initial SPAC price, which means investors are not super-lusty about the idea at the moment (this is true of a lot of SPACs — anyone with a deal announcement saw their price soar during the high times a few months ago, but investors have grown more cautious of late) … and, of course, we have the “urgent” message that all newsletter ads are required to include (if there’s no rush, why would I pull out my credit card RIGHT THIS SECOND and spend $2,000?)…

“But to be very clear: There’s serious urgency right now to get in.

“The company could go public in the coming weeks… if not days.”

That’s one you might well have heard of before, it’s Anne Wojcicki’s 23andMe, which is in the process of merging with Richard Branson’s VG Acquisition SPAC (VGAC) and, assuming the deal is consummated as planned, will mean that VGAC changes tickers to ME, probably within the next month or so.

23andMe started life as the first high-profile “check your DNA” company almost 15 years ago now, and has been through a few upheavals in that time — originally they wanted to provide preventive DNA-based health screening to consumers as genetic sequencing dropped below $1,000 a pop, but the FDA cracked down on that so they became more of an “ancestry” tracking company for a while, effectively competing with Ancestry.com’s DNA spit test to track your lineage and find relatives, and then as the years passed they gradually got FDA approval for some health-related DNA testing (for six “predispositions” so far), which led to a partnership deal with GlaxoSmithKline (GSK), and they’re also trying to harvest their library of DNA info to help create medicines, the first of which they licensed out for possible development last year.

So far that’s at an extremely early stage. They have built a large library of genetic data and most of their customers have opted in to having their genome used for research, with many of them also submitting survey answers to build on that data and staying engaged with the platform, so they are trying to mine that data for insights and possible drug targets or other health information, which could create value for the company and for shareholders.

Their first step to do this in the near term is by building a subscription product for DNA-interested consumers, which is what Wall Street typically loves (recurring revenue is the best kind of revenue), but the larger potential gains are probably from drug development — including their lead compound, a CD96 inhibitor, which is progressing through a Phase 1 trial with GSK right now. It’s going to take a long time to play out, they’re going to use this SPAC fundraising ($500 million from the SPAC, assuming no redemptions, plus $250 million from the PIPE deal) to try to goose their growth by increased marketing for customer acquisition and fund their clinical trials and drug development (the GSK partnership is 50/50, so they shoulder some cost, and they have several of their own targets to work on as well), but even if they get the roughly 20% revenue growth they’re forecasting for the next several years they’ll still be unprofitable in 2024. The market cap at $10 a share, again assuming no redemptions, is going to be about $4.4 billion, with almost a billion of that in cash. You can check out the original investor presentation for the SPAC deal here if you like.

And if you’d like a few more ideas to peruse, we’ll check out the “bonus” teases as well… Snyder says these are the focus of his “3 SPACs to Ride the $300 BILLION IPO Wave” special report…

“1. The Next Tesla

“The first company is in the massive electric vehicle space.

“It’s introduced an all-electric sedan with a 400-mile range, a top speed of more than 200 mph and a zero-to-60-mph time of less than 2 1/2 seconds…

“It’s sold out of ALL of its $170,000 vehicles, with reservations topping 8,000….

“I believe the company will soon be a major rival to Tesla.

“If fact, the company’s CEO is the former vice president of engineering at Tesla.”

That’s Lucid Motors, which was one of the more enthusiastically received SPAC deals when it was rumored that Churchill Capital IV (CCIV) was in negotiations to take Lucid public — no surprise, given the very direct comparison to Tesla (TSLA) (the Lucid Air looks like the next generation of the Model S) — but then collapsed when the details of the deal were announced (for a little while, in February, CCIV speculators were paying $60 a share for CCIV, based on rumors and non-specific reporting alone, for the chance to get in on a deal that would mean they were paying 6X what the experts were expecting it to be worth), so now the SPAC, which is still expected to close at some point, is trading at about $24 a share. The deal was so popular, and in such a hot sector, that the institutional investors who were brought in paid a premium, too, agreeing to a PIPE financing at $15 a share, which is very unusual (usually the PIPE investors get to buy in at the same $10 per share the SPAC originally was valued at, regardless of how the shares react to the news of a deal).

If Lucid gets a Tesla-like valuation maybe this will work out fantastically over the next five years as they get production ramped up and introduce new models… but it took Tesla a long time and a lot of showmanship and overpromising from Elon Musk to get them to this point, now about ten years since the Model S was introduced, and if it weren’t for Musk’s cult of personality and the bigger mission that has attracted so many investors they could easily have blown up along the way. Lucid is starting out with a lot of optimism and a lot of cash, and is clearly following very directly in Tesla’s footsteps, but they also haven’t delivered their first production car yet (plan is for the first delivery to be later this year)… and scaling up an auto company and building a new consumer brand is a lot harder than Elon Musk makes it look. If you’d like to start learning about Lucid, their analyst day presentation from last month might get you started on sipping the Kool-Ade.

Next?

“2. Bigger Than Bitcoin

“The second one is a new tech company focused on the booming cryptocurrency market.

“Obviously, this is one of the fastest-growing markets….

“It’s created the very first fully federally regulated cryptocurrency exchange, including futures and options.

“Its single purpose is to take cryptocurrencies mainstream by giving institutional investors a stable, liquid exchange…..

“And it has the power to do it…

“This company is backed by none other than the New York Stock Exchange.”

That’s Bakkt, which is going public through a planned merger with VPC Impact Acquisition Holdings (VIH)… and yes, that includes a $50 million PIPE investment from Intercontinental Exchange (ICE), which owns the NY Stock Exchange and was already the controlling investor in Bakkt (with 81% ownership). This will no doubt be a volatile one, since it will be driven by cryptocurrency interest, but they do foresee reaching positive cash flow in a couple years.

This is obviously a hugely competitive sector right now, with every company trying to get a toehold in what they believe will be the new world of blockchain-enabled financial services and cryptocurrencies, and Bakkt has some interesting ideas about aggregating lots of non-cryptocurrency digital assets (like airline miles, video gaming points, rewards programs and stocks in addition to cryptos). I have no idea how it will work out, but the ICE involvement is a good endorsement for getting institutions on board… and clearly there’s consumer demand for simplifying digital assets, and their integrations with big banks and consumer brands (Citibank, Starbucks, etc) offer some promise. Their SPAC presentation is available here. And yes, VIH shares shot up to the high teens on the initial deal announcement back in January, but are now trading right around $10, which if the merger goes through as expected, with no SPAC redemptions, would mean a market cap of about $2.6 billion for Bakkt.

The business is not terribly impressive yet, with their cryptocurrency trading platform not yet in the results for 2021, but, like all SPACs, they’re trying to pitch the business based on 2025 financials… which, of course, sound impressive. In the immediate future, which has some possibility of being predictable, they expect to reach $55 million in revenue this year and lose about $200 million to get there, with next year bringing a truly explosive step-up in growth to $224 million and a loss of only $20-40 million. What the odds are of that coming to pass in 2022, and of growth continuing beyond that, I don’t know, so I’ll just say that if they can reach that milestone next year, and if cryptocurrency prices don’t collapse completely and cause investor interest to disappear, then the $2.6 billion market cap might be justifiable — that would be about 10X 2022 revenues, for a company that thinks it can grow revenues at 75% a year. It’s important not to put too much weight on those projections, aggregators of loyalty and miles programs have failed before, the easy crypto “on ramp” companies like PayPal, Square and Coinbase have a huge head start on them, and Bakkt doesn’t know what 2024 will look like any more than you do and there are a lot of moving parts with their different planned collaborations… but it’s at least a nice goal for them to shoot for.

And one more….

“3. The Amazon of Finance

“It’s backed by arguably the most successful SPAC backers in the market – Social Capital.

“This firm backed Opendoor, where SPAC investors could’ve seen a 216% gain in nine months’ time.

“It also backed the Virgin Galactic SPAC…

“… this company’s goal is to become a one-stop shop for financial services… from personal and home loans to small business financing to crypto and stock investments.”

That’s SoFi Technologies (SOFI), the only one of these which has officially completed its SPAC merger — and yes, it came public through one of the Social Capital Hedosophia SPACs launched by Chamath Palihapitiya, who has become either the Crown or Clown Prince of SPACs over the past year or so, depending on your perspective. They started life as a different kind of lender, using social data instead of credit scores to underwrite student loans and other lending programs, but they’ve grown more generic since those early days, with lots of different financial products, and are aiming for that “all things financial” app experience, competing with giants like PayPal and Square and Intuit and lots of others. I honestly can’t get my head around this one, but it’s got a decent starting position in a huge market — you can see their investor presentation here if you’d like to start learning about their goals.

I expect there will be a pretty large number of “washouts” in the SPAC space, as SPACs who overpaid for their target companies in a burst of enthusiasm over the past year come to the same kind of crisis that hits regular IPOs in their first year… insider selling after the lockup period, combined with a loss of enthusiasm for the story as reality sets in, may bring down the share price to something more attractive (or even rational) in some cases. There are so many of these that we’ll miss a lot of them, there are dozens of SPACs looking somewhat urgently to close a deal within the next six months or so right now, and hundreds of them that will begin to feel pressure to consummate a deal over the next 12-18 months as the ludicrously large crop of new SPACs that were launched in the first couple months of this year fights for the scraps. Should be an interesting story to watch over the next few years to see if the SPAC craze becomes the new way that smaller companies go public, or if it washes out and we go back to the world as it was in 2015, when SPACs existed but were oddball investments that nobody took very seriously. I had more fun with SPACs and warrants in the years before the SPAC mania took hold, but this mania and/or revolution has, at least, reinvigorated the small cap IPO market, and I expect that will give me plenty of new teaser stocks to write about in the years to come.

What are SPACs? If you already understand what’s going on with this strange fundraising vehicle, you’re done for the day and you can skip ahead to share a comment below…. if you don’t get the whole idea, here’s the basic explanation of SPACs that I’ve shared before, back when I was looking into Bill Ackman’s SPAC and the Yellowstone Acquisition SPAC (YSAC) for some previous reader questions (I own shares of both Pershing Square Holdings and Yellowstone, for disclosure’s sake):

A Special Purpose Acquisition Corporation (SPAC) is often called a “blank check” company — these are companies that go public in a regular IPO, raising money from the public on the strength of some internal and institutional sponsorship and a vague notion of what they might do with the money. That sounds inherently risky, and it is, so to make it palatable and less likely to screw over investors who are putting money into this pool of capital with no promise about what might happen to it, there’s both a sweetener and an escape hatch:

The escape hatch is that the SPAC sponsor has a set amount of time, usually two years, in which to find a use for the capital that they control, which is tied up in a trust fund — typically, that means they leverage both of the SPACs assets (their public listing and their pool of cash) to take a private company onto the public markets (or sometimes more than one company, as when what became DraftKings was formed from DraftKings, the gambling tech company SB Tech, and the Diamond Eagle Acquisition SPAC). The “escape hatch” opens when that deal is consummated — shareholders of the SPAC get to vote on the deal, which gives them some power, but, more importantly, they also get the right to redeem their SPAC shares for their portion of the trust fund at the time the deal is done instead of participating in the deal, and if no deal is ever found that trust fund gets distributed back to all SPAC shareholders. That trust fund’s value to shareholders is essentially the $10 per share that almost all SPACs start out by raising (there are occasional exceptions), plus a tiny bit of interest… the estimated per-share redemption value is usually disclosed in filings along the way to keep shareholders updated (Pershing Square Tontine Holdings launched with a $20 per share trust fund, Yellowstone started with $10.20 in their trust fund).

And the sweetener is warrants. Each SPAC goes public initially as a stapled unit, typically with a U at the end of the ticker (so in the case of Yellowstone Acquisition, it is YSACU). That unit includes one share of equity, which is what can be redeemed at the time of deal consummation or if no deal is found before time is up, and usually a portion of a warrant. There is no rule that says all SPACs have to be identical, but in general each unit will have one warrant if the manager is not well known enough to easily raise capital, or a portion of a warrant (a half, a fifth, it varies) if that’s all that’s needed to get attention (like if they have a strong brand name with investors, like Pershing Square or Social Capital). After a month or so, the Units can be separated at the investor’s option, and they will begin trading separately as regular equity shares (YSAC in this case) and publicly traded warrants (YSACW). SPACs are the source of most of the publicly traded warrants that exist in the markets these days.

A warrant is essentially like an option, with a few key differences. They are individual securities, they are not standardized, so you have to pay attention — but almost all the time they are five-year warrants (starting from the date the SPAC makes a deal) that give you the right to buy the underlying stock at $11.50 a share, so that’s kind of like a long-term call option… with the leverage somewhat limited because there’s typically an early redemption right at the company’s option if the shares trade above a certain level (usually $18 for 20 days out of 30). Warrants require active attention, because they do not get exercised automatically by brokers like stock options do — so they can expire worthless even if they should be “in the money” and valuable, and that’s particularly true if the share price soars to that $20+ neighborhood and the company chooses to redeem the warrants early, if you don’t exercise them or sell them before redemption the company can seize your warrant for a penny (depending on the specifics in their prospectus) and you’re out of luck. Watch your mail and broker notifications about corporate events, and watch your SPACs.

The fractional nature of warrants sometimes gets confusing, too, so make sure to pay attention to the filings and understand, in each case, how many warrants are attached to your SPAC units, and what the exercise terms of the warrants are — sometimes a warrant is effectively for a half share, for example, so it requires two warrants plus $11.50 to exercise, and there are many different permutations out there that impact the value. Most of them follow the same basic structure, but, like snowflakes, no two are exactly alike. If you don’t want to read SEC filings, SPACs are probably not for you.

A few other things to note: If you buy a SPAC unit (with the U on the end of the ticker), you’re buying what originally went public, including whatever warrant(s) are stapled to that SPAC share. If you buy after the split, and buy YSAC instead of YSACU, you don’t get any right to that warrant. Once the units split you can also buy just the warrant if you prefer, which, to continue the Yellowstone example, most brokers will report with ticker YSACW (or YSAC/W or YSACws or some similar notation).

If you wish to use a SPAC as a low-risk option on a possible future company combination, as many institutional investors do, then the redemption value is critical. If you buy SPAC units at $10 a share, you’re taking very little risk because of the redemption right, it’s just that your money is “tied up” to some degree (you could always sell your SPAC units, of course, but at the market price, which might not necessarily be as high as the