- SPACs are on the rise, and they have developed an interest in “hype” sectors: cannabis, space travel, electric cars, and sports gambling.
- Some hyped-up companies demonstrate a potential for growth, but remain unprofitable, whereas other hyped-up companies belong to industries that investors generally avoid, like gambling.
- But hype is actually a powerful creative force in the longer arc of tech innovation, says one VC, and funding hyped-up ideas can draw in fresh talent and lead to further innovation.
- Elon Musk launched Tesla in 2003 in response to the failure of General Motor’s hyped-up electric cars, which were all recalled from the streets earlier that year.
- Visit Business Insider’s homepage for more stories.
What do cannabis, space travel, electric cars, and sports gambling all have in common?
For one thing, startups in these industries have grabbed the attention of SPACs.
But more importantly, these adventurous fields have also generated what some investors call hype, says VC Duncan Davidson.
That hype factor hasn’t deterred SPACs, the so-called blank check companies that give startups a quick route to the public markets by acquiring them.
But for many reasons, more conventional investors are hesitant to back hyped-up companies like Virgin Galactic and Nikola: While both demonstrate a serious potential for growth, they remain unprofitable. It might be a while before Virgin Galactic actually makes money by sending eager travelers into space.
Given that industries like space tourism have never proven to be profitable, it’s easy to see why hyped-up companies get a bad reputation, in and out of Silicon Valley.
But hype is actually a powerful creative force in the longer arc of tech innovation, Davidson said. The seasoned VC said that SPACs can take a chance on far-out tech prospects and put new ideas on the tech industry’s radar.
Even if overstated, the early rush of enthusiasm over a new sector like AR/VR or space travel draws in fresh talent and capital that helps pave the way for a new crop of entrepreneurs and startups, even if the sector’s earliest players fail spectacularly.
After the 1990s, in the era that saw the dot-com boom and bust, some investors believed that there was no money to be made from the internet, Davidson said.
While the dot-com experiment imploded, the boom cycle nevertheless got investors and entrepreneurs to start paying more attention to the internet. That paved the way for the tech-focused startup ecosystems that have emerged in Silicon Valley and other corners of the world.
In recent years, one area that has generated a lot of hype, but not a lot of everyday users, has been AR/VR.
When the coronavirus pandemic struck, augmented reality and virtual reality technologies were touted as possible tools to help with treating coronavirus-related anxiety, training employees, enhancing distance learning, and watching live sports. “But the average person likely doesn’t have access to a virtual reality headset,” Business Insider’s Caroline Hroncich has previously reported.
What AR/VR represent, then, is untapped potential. Around the globe, consumers have purchased just 26 million VR headsets, and it remains to be seen whether the coronavirus pandemic will help to transform AR/VR products into household consumer goods.
But even if AR/VR technologies don’t take off soon, history tells us that the initial hype from 2017 and 2018 could clear the way for future innovation.
To see how that could play out, one need look no further than the history of hype and the electric car.
In the 1990s, GM launched its own pioneering electric car, General Motors EV1, long before Tesla’s Elon Musk became a Twitter personality. GM failed to popularize the electric car and make it profitable, and the company officially canceled the program in 2003, after losing millions and recalling every single one of its electric cars.
As it turns out, GM’s decision to gut and shutter its electric car initiative prompted Elon Musk to launch Tesla in 2003. Now, the electric car company is also venturing into electric trucks and SUVs, as well as solar-powered panels and batteries.
So if tech history is to teach us anything, it’s that innovation emerges out of the rubble of boom and bust cycles.
Sure, more VCs and startups will be looking into the option of going public through SPAC mergers than ever before. But, investors and entrepreneurs alike should also be thinking about what may emerge if and when the SPAC bubble bursts.
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