Weird Money: Rest in peace, Fisker Inc.

Welcome to Weird Money, a column written by me, Jack Raines, where I discuss the most interesting and, more importantly, weirdest stories I've seen in business and markets.

Fisker (Finally) Filed for Bankruptcy 

In 2020 and 2021, as Tesla’s stock climbed more than 2000% from its Q3 2019 levels, investors were desperately looking for the “next Tesla,” and a slew of EV startups, including Nikola Motors, Arrival, Canoo, and Lucid, hoped to meet that need. These EV startups had just one problem: none of them had sold a car, making the path to an IPO difficult.

The IPO process is lengthy, expensive, and subject to strict regulatory requirements, including the inability to publish financial projections in a company’s S-1. Given these hurdles, most banks would be hesitant to underwrite an IPO for an EV startup that hadn’t sold a single vehicle (though there are exceptions!).

Fortunately for these EV startups, SPACs (special purpose acquisition companies) became really popular in 2020 and 2021. SPACs provided a quicker path to the public markets, and this path, conveniently, allowed companies with $0 in revenue to publish financial projections showing billions in future revenue.

So, of course, 21 different EV manufacturers, EV battery makers, and EV charging solutions went public through reverse mergers with SPACs, telling investors that their $0 in revenue would scale to billions in revenue, with healthy profit margins, in three or four years.

Four years later, consider me shocked, and I mean shocked, that Fisker, one of the hottest startups in this group that, in 2020, projected $3.3 billion and $400 million in 2023 revenue and adjusted EBITDA, respectively, filed for bankruptcy this week. From The Wall Street Journal:

Fisker, a much-hyped startup that sought to mimic Tesla’s success, has filed for bankruptcy, roughly a year after releasing its first electric-vehicle model. The filing marks the second time an automotive venture by car designer Henrik Fisker has gone bust and follows weeks of quietly winding down its operations…

Fisker had pitched itself as the automotive equivalent to Apple, which pays outside companies to build its products. Fisker sought to distinguish itself from more traditional carmakers by attempting to buy more of its hardware off-the-shelf and use software features as a way to set the Ocean apart from other EVs.

This piece linked to a 2020 profile of Fisker’s founder, Henrik Fisker, also published by the Journal, which is, in hindsight, hysterical:

In contrast to Tesla—which like other automakers, built its own plants and developed many of its own technologies in-house—Fisker intends to use core parts like batteries and motors developed by other companies, contract out the building of the vehicles and outsource parts and service. Customers can obtain the cars using a subscription-like lease that can be terminated at any time.

Within two years of starting production, he predicts $10.6 billion in revenue and companywide margins of 19% before interest, taxes, depreciation and amortization. “I’ve taken a lot of lessons from Fisker Automotive,” Mr. Fisker said. “I’ve also learned to sort of de-risk riskier decisions.”

Mr. Fisker will need to succeed where others—including himself—-have failed. Mr. Fisker’s unorthodox business model faces plenty of challenges, from potential pitfalls in its outsourcing strategy to an uneven industry record with Netflix-like car subscriptions.

Sometimes I wonder, had I been a few years older and had my moral compass been slightly more crooked in 2020, how much money could I have made by taking something public through a SPAC?

(For those curious, I did have some fun trading SPACs during the pandemic. In fact, I actually made some money on the Apollo-led SPAC that took Fisker public by buying thousands of warrants after I noticed they added windmills to their website. I miss 2020 markets.)

In 2020, Fisker: 

• Had $1.9 million left on its balance sheet,

• Had produced zero cars, 

• Planned to outsource every component, service, and feature of its not-yet-built cars,

• Wanted to offer its cars to customers through a subscription because young people are “used to getting mobility at their fingertips with no commitment,” and

• Had a founder, who the company was named after, who had already bankrupted an EV startup named “Fisker” seven years before.

Despite having more red flags than a Chinese Communist Party convention, Fisker managed to go public at a $2.9 billion valuation through a reverse merger with Apollo’s SPAC. (Though, to be fair, Apollo did alright, selling its stake for at least a $267 million profit long-before Fisker went bankrupt.)

When people look back on the absurdity of 2020 and 2021’s financial markets, most think of crypto, NFTs, 0% interest rates, and insane SaaS valuations, but my favorite market phenomenon was the emergence of the SPAC.

Stripe’s Tender Offer Program Is Genius

One reason that prospective employees join a startup is the potential upside: early employee compensation often includes an equity component that, if the company does well, could become quite valuable. The issue with equity compensation is illiquidity: your equity might be worth millions on paper, but it’s difficult to realize that value (aka: sell your stock) unless your company gets acquired or goes public.

2021 proved to be a lucrative year for many startup employees, with 235 companies, including 126 in the tech sector, IPOing on the NYSE and Nasdaq. That marked the most IPOs in a single year since 2000. In 2022 and 2023, however, valuations crashed and the IPO window closed, with only six and nine tech companies going public in each of the last two years, respectively.

One company that surprisingly missed this IPO window was Stripe.

In 2021, Stripe was the hottest startup in tech. In March of that year, it raised $600 million at a $95 billion valuation, and six months later, the company was flirting with the idea of going public.

Three years later, Stripe still hasn’t gone public, and its valuation (as of February 2024) has declined to $65 billion. If you’re a long-time employee still holding your paper shares, you can’t be too happy about missing the liquidity event of a lifetime. However, while Stripe missed the IPO window, the fintech giant has still made arrangements for employees to sell some of their shares. From Bloomberg:

Stripe Inc. expects to again let employees cash out some of their shares, the fintech’s co-founder said, reiterating that the company is in no rush for an initial public offering.

Stripe, which helps online and brick-and-mortar merchants process customer payments, will probably again turn to investors and the firm’s own coffers for an employee tender offer — which would be its third, John Collison said in an interview with David Rubenstein for an upcoming episode of Bloomberg Television’s “The David Rubenstein Show: Peer to Peer Conversations.”

‘We did that last year, we did that this year, and we’ll probably do it again in the future,’ Collison said.

Normally, startups raise outside funding because they’re not profitable, and they need additional capital for growth. Stripe, at this point, is hardly a startup. It’s 14 years old, it’s worth $65 billion, its payment volume topped $1 trillion last year, and, as of March 2023, Stripe “doesn’t need outside capital to function.” There is also obvious investor demand, considering that the fintech giant has completed at least three (see here, here, and here) tender offers and fundraising rounds allowing insiders to cash out since 2021. 

Profitable, venture-backed companies worth $65 billion with high investor demand usually go public, but Stripe seems to be in no rush to IPO. Why? Well, from the perspective of Stripe’s management, this kind of… makes sense? Managing a public company sucks: you are subject to quarterly filing requirements, real-time valuation fluctuations, and heightened scrutiny from a broader investor base. Why go public, then? So investors and employees can sell stock and make money.

If you have a pipeline of private investors that will buy employee stock year after year, however, employees can get rich, while management can avoid public market headaches. Basically, venture capital is subsidizing Stripe’s ability to stay private.

I don’t know, at this point, why venture capitalists are still piling into Stripe. VCs invest in high-growth startups, betting on an outsized return when they eventually cash out via IPO or acquisition. Stripe already grew: it’s worth $65 billion. And if the company has no plans to IPO, you are, effectively, buying illiquid shares of a private company that probably should be a public company, and you have no clear exit strategy besides selling to other private market investors in the illiquid secondary market. The venture upside isn’t there.

But it’s Stripe. Everyone wants to invest in Stripe. So who cares.

Building a $65 billion company is impressive, but convincing VCs to buy out your employees for three years straight so you can stay private indefinitely is just genius. Shout out to the Collison brothers.

Backyard Mortgages

One solution to America’s housing crisis is to build more houses. Another, cooler, solution to America’s housing crisis is to use equity in one’s home to securitize the construction of another, smaller home in one’s backyard.

From Semafor:

A startup that spun out of Airbnb to manufacture tiny homes at a factory in Mexico is launching a mortgage product it hopes will relieve California’s housing crisis. Samara, which raised $41 million in 2023, is now getting into the financing business. It will start offering a mortgage that lets homeowners take equity out of their primary house to install backyard units, technically called accessory dwelling units, or ADUs…

The average homeowner has $300,000 of equity in their house, up from $182,000 before the pandemic, according to CoreLogic. Samara’s offering mimics a second mortgage, but is cheaper, with rates starting around 6.5%. And because about half of its customers already use their ADUs as a rental, there’s an income stream that investors can underwrite…

Applications for ADUs in California, one of the nation’s most strapped housing markets and the epicenter of the grimy politics associated with it, have risen 20-fold since 2016. About one-quarter of the 110,000 housing permits the state approved last year were for ADUs.

Okay, I love this. Samara is an Airbnb-backed startup that builds studio, one bedroom, two bedroom, and “XL” model homes and installs them in your backyard, and, I have to admit, the designs are clean! The starting prices range from $269,000 (or $1,611/month) for a studio to $414,000 (or $2,479/month) for an XL. But what if you don’t want to front $400,000 for your backyard duplex? You can now use the equity in your primary home (which is probably worth a lot now that prices have gone up!) to securitize the construction and installation of your mini-home.

My favorite trope in finance is the idea that any real-world and/or regulatory problem can be solved through financial engineering.

Houses are too expensive? Zoning requirements and NIMBY policies are making it difficult to build new homes? Just put new units in the backyards of existing units. Don’t have the cash to pay for a new unit? Securitize it with the equity in your primary residence, then rent the ADU through Airbnb. You can underwrite the loan with rental income.

There’s no way this goes wrong, right? Unless you planned to pay for your ADU loan with rental income, and rental rates decline or the local government decides to ban short-term rentals, in which case I guess you could lose your home? I like to imagine that the 2024 version of the stripper from The Big Short who owned five rental properties in Miami is a crypto millionaire who decides to use ADU loans to fund seven duplexes in the backyard of a South Florida mansion, and then he can’t fill the units.

Anyway, I’m curious what Michael Burry thinks of this one.