Certain start-ups sweat under the spotlight

It was a trend that came and, for the most part, went. In 2020 and 2021, special purpose acquisition companies (SPACs) were everywhere, merging with start-up firms—usually with new technologies geared toward sustainability—and taking them public.

Investors created 247 SPACs in 2020 and 613 in 2021, according to the Villanova Law Review. Many chemistry-oriented companies went public via SPACs as part of the craze. For a while, it appeared that the SPAC merger would be the vehicle of choice for start-ups seeking to access the large amounts of capital they need to grow.

It didn’t turn out that way: most of the SPACs crashed. Writing in the Yale Journal on Regulation, Michael Klausner and Michael Ohlrogge, professors at Stanford Law School and the New York University School of Law, respectively, note that by December 2022 the average share price of SPACs that merged between July 2020 and December 2021 was down more than 60% from the levels they were when shareholders originally invested.

“SPACs had lost their luster and were no longer viewed as the miraculous financial innovation that some had imagined,” they write.

At least three chemistry-oriented companies with unique technologies—Danimer Scientific, Origin Materials, and PureCycle Technologies—have stumbled under the watchful eye of public shareholders after SPAC mergers. They are all still in business and outwardly bullish about their prospects, but investors, as evidenced by these firms’ low stock prices, are skeptical.

Industry watchers attribute the stock declines in part to value dilution as the capital of a SPAC gets split among many parties. Other experts have observed that during the SPAC mania, sponsors—the companies that organize SPACs—weren’t always judicious about the firms they purchased. “A lot of companies didn’t do their homework for sure, but you can’t use a broad brush,” says Aamir Husain, global leader of IPO (initial public offering) readiness at the advisory firm KPMG.

One of the biggest problems is the nature of the targets themselves. Start-ups are optimistic and set ambitious—and often unrealistic—goals. Moreover, they are bringing new technologies to market, an enterprise beset with fundamental risks. Start-up culture is often ill-suited to life in a publicly traded company and to the accountability, transparency, and certainty it must deliver to shareholders every quarter.

Anthony DeOrsey, a research manager at the research and consulting firm Cleantech Group, says start-ups that go public are often not ready to deal with shareholders who want quick returns. “A lot of these start-ups are used to engaging with venture capitalists,” he says. “Venture capitalists at their heart are long-termists. They are looking for a return over 5–7 years. And that is just not how the public markets think.”

But those markets bring the large sums of money that start-ups need. And for those aiming to go public, SPAC mergers can be cheaper, quicker, and easier than conventional IPOs.

In an IPO, a private company sells a portion of its shares on a stock exchange. The process normally takes a year or more: it requires finding investment bankers to underwrite the offering, making filings with regulators like the US Securities and Exchange Commission, and marketing shares.

In a SPAC transaction, in contrast, the start-up is acquired by the SPAC. Long before the SPAC has identified a target, the sponsor conducts its own IPO with no assets other than the understanding that it will use any money raised to make an acquisition. If it doesn’t succeed within 18–24 months, shareholders get a refund; critics say that provides an incentive for some sponsors to find a deal—any deal.

If the sponsor does find a deal, the target firm is paid in stock. The target thus gains control of the combined company and obtains the cash that the SPAC raised from shareholders. The target firm is then listed on a stock exchange as if it had gone through a conventional IPO.

For example, LanzaTech, a start-up that uses fermentation to convert carbon monoxide into ethanol, merged with a SPAC called AMCI Acquisition Corp II in 2023. In that deal, LanzaTech got the $240 million in cash on AMCI’s books and additional funds from investors that included BASF and ArcelorMittal.

SPAC transactions typically offer more certainty than IPOs about how much money start-ups will raise, DeOrsey says. In an IPO, public investors and financial analysts determine a company’s share price. They might not be intrigued by firms without track records.

In a SPAC transaction, the target company negotiates a price with the acquirer. “So you have the benefit of getting a more favorable valuation, but ultimately that has to resonate with the public markets,” DeOrsey says.

Danimer Scientific

By the time it went public via a SPAC in December 2020, Danimer had completed a fermentation plant in Winchester, Kentucky, that makes the biodegradable polymer polyhydroxyalkanoate (PHA). Danimer was planning to triple capacity at that site by mid-2022, to 30,000 metric tons (t) per year; after it went public it announced an even larger facility that it would build in Bainbridge, Georgia, by the end of 2023, at a cost of about $700 million.

In 2021, Danimer bought Novomer, which made a similar kind of PHA via a synthetic route, for $152 million. Danimer modified its Georgia project to add production of PHA via Novomer’s process.

The purchase and change of plans prompted a report from a short seller—a company that bets against a stock and then issues reports meant to sow doubt about the target firm in an effort to drive down its stock price. The short seller, Muddy Waters Research, accused Danimer of overreporting production; it panned the expansion and acquisition as “spending money based on hope rather than on realism.” In response, Danimer’s stock price tumbled by more than 10%.

Companies that go public via a SPAC merger are vulnerable to short sellers looking to pounce on missed targets and other problems, according to DeOrsey. Most such companies haven’t reached full scale and will confront a lot of risks, he says. “You are going to hit reality when you are building a factory, when you are putting together a supply chain, and you’re trying to actually manufacture and distribute.”

It has been mostly downhill for Danimer since the Muddy Waters report. It completed the expansion of the Kentucky facility in 2022 but suspended work on the Georgia plant. The company received a notice from the New York Stock Exchange earlier this year that its stock was trading at less than $1.00 and was in danger of being delisted. In October, Danimer replaced its longtime CEO, Stephen Croskrey, with interim CEO Richard Altice, former head of the polylactic acid firm NatureWorks.

The firm is still struggling to ramp up production of its original plant. Danimer has about $380 million in debt and lost nearly $72 million during the first 9 months of 2024. Its stock price is less than 2% of what it was at launch.

Origin Materials

Origin was formed to develop a technology that converts cellulosic biomass into chloromethylfurfural, which it proposes as an intermediate for polyethylene terephthalate (PET). When it went public in June 2021, the company was building a plant in Sarnia, Ontario, that could process 25,000 t of biomass. In 2022, Origin announced a second plant, in Geismar, Louisiana, that would be 40 times that size.

Origin started up the Sarnia plant after a short delay. Then, in August 2023, the company abruptly changed direction. It announced that it had developed a PET bottle cap to replace the polyethylene and polypropylene caps on PET bottles. The new cap is meant to improve bottle recycling by reducing the mixing of materials.

That same month, Origin announced major changes to the Geismar project, delaying the plant and cutting the capacity in half. It also increased its cost estimate for the plant to $1.6 billion from $1.1 billion. Investors reacted by pushing the firm’s stock price down by 66%.

Two months ago, Origin said it would focus on the bottle cap business and run the Sarnia plant on a limited basis. In a conference call with analysts last month, CEO John Bissell said that it’s “not sufficiently likely that it’s worth sinking a reasonable amount of our capital into” the Geismar plant. Origin’s stock has now dropped to less than 15% of its original price.

PureCycle Technologies

PureCycle went public via a SPAC merger in March 2021 in a bid to accelerate commercialization of polypropylene-recycling technology licensed from Procter & Gamble. The approach uses a supercritical butane–based solvent to purify polypropylene to a much higher level than is achievable through the sorting and washing steps of mechanical recycling.

PureCycle started building a plant in Ironton, Ohio, in 2020 and planned to open it by the end of 2022 with 50,000 t per year of capacity. It was also eyeing a larger facility in Augusta, Georgia.

In addition, PureCycle had aggressive plans to expand internationally. In 2022, the company received $250 million in new investments, including from South Korea’s SK Geo Centric, and intended to build a plant in that country. The next year, it announced that it was also studying a location at Port of Antwerp-Bruges, Belgium.

But the completion of the Ironton plant was a few months late. On top of that, the company admitted in late 2023 to production problems, calling them “mechanical” but unrelated to the solvent technology at the facility’s heart.

PureCycle was also hit by salvos from short sellers. In 2021, Hindenburg Research attacked the firm’s management, panned its financial projections, and likened its pressurized process to a bomb. “We think PureCycle represents the worst qualities of the SPAC boom; it’s another quintessential example of how executives and SPAC sponsors will enrich themselves while hoisting unproven technology and ridiculous projections onto the public markets,” Hindenburg wrote.

In 2023, Bleecker Street Research published a report focused on PureCycle’s production difficulties. It raised alarms that the firm’s missed production milestones could trigger a default of the municipal bonds that financed the Ironton plant.

However, PureCycle and bondholders subsequently negotiated waivers over the broken covenants. And last month, the company said it had hit a milestone by processing 500 t of waste polypropylene in a week. After reaching lows earlier this year of less than 10% of their original value, PureCycle shares have bounced back to nearly 40% of their launch price.

“We’re starting to get our legs under us,” CEO Dustin Olson tells C&EN. Plant reliability is improving, he says, and PureCycle can now focus on marketing its products. Olson adds that the firm is thinking about resurrecting the projects in Georgia and Belgium provided that it can obtain financing, though it did recently cancel the project in South Korea.

Olson says PureCycle has put a first-of-its-kind technology into service just as well as a large chemical company could have done. “Any time you’re scaling a technology, regardless of the industry, regardless of the technology, it’s challenging,” he says. “When you look at it holistically, I think what we’ve accomplished is amazing in the time frame we accomplished it.”

Ultimately, Olson says, the stock market pressure made PureCycle a stronger company. “Having a quarterly report card, it really drives you to work faster, work harder, work smarter, because you are going to be judged by it,” he says. “It forced us to grow up very quickly and to get our house in order so it’s ready for a public market.”

Husain’s job at KPMG is readying start-ups for the transition to public markets. His firm makes sure that the companies have the infrastructure in place to make their financial disclosures accurately and on time. “You have to go through a cultural change,” he says. “And this is true whether you go public through a traditional IPO route versus a SPAC.”

Husain also trains firms in robust budgeting and forecasting. “A lot of these SPACs have also been disruptive technology or biotech companies and things of that nature, where they are selling a promise rather than a track record. The investor community, they’ve wised up to that and they are like, ‘OK, that’s all good, but show us the money.’ ”

And start-ups are still pursuing SPAC mergers to go public, Husain says. “Do you have the same volume of SPAC transactions as you did in 2021? Of course not, but is that number zero? That’s not the case either.” Firms have gotten better at making the transition, he adds. “People just generally have become more aware of the pitfalls and are navigating to make sure they don’t fall in.”