TheChek News Flow

Turnabout prompts disagreement among investors, executives over whether government loans should be repaid

Thousands of venture-capital-backed startups applied for U.S. government-assistance loans when the pandemic hit. Many of them then went on to raise hundreds of millions of dollars each by going public.

More than 30 venture-funded tech startups with valuations of more than $150 million announced a deal with a special-purpose acquisition company, or SPAC, within about a year of receiving taxpayer-funded forgivable loans designed to help small businesses pay their employees through the pandemic.

Another 15 companies, each valued at more than $200 million, had traditional initial public offerings within about a year of taking a loan, according to a Wall Street Journal analysis of data provided by research firm PitchBook Data Inc.

As much as $4 billion in Paycheck Protection Program loans went to venture-backed startups, according to PitchBook.

The fast track from the PPP to a lucrative public-market debut shows how after a brief time of uncertainty last spring, when startups braced for the economy to collapse, the tech industry quickly emerged as a beneficiary of the pandemic.

Low interest rates drove investors into tech, the public markets welcomed tech IPOs and a record number of SPACs sought out companies to take public through mergers.

The turnabout has also prompted disagreement among investors and executives over whether startups have an obligation to pay back the loans even if they meet the government’s standard for forgiveness. PPP loans were designed to rescue barber shops, restaurants, child-care providers and other small businesses that lacked access to other sources of funding, according to economists. Loans used mostly to pay employee salaries and meet other criteria can be forgiven, according to program rules.

“I think generally speaking, any company that produces a great outcome within say a year or two of having received a PPP loan should consider repaying it even if they technically qualify or even have already received forgiveness,” said Albert Wenger, managing partner at venture-capital firm Union Square Ventures.

Of the 15 highest-valued startups that received a PPP loan and went on to announce a SPAC deal or IPO, one-third have repaid the loans or pledged to repay them, according to a Wall Street Journal analysis of PitchBook data and company securities filings, and interviews with company chief executives.

It is unclear if all of those loans would have qualified for forgiveness, but in several cases, startup CEOs said they would have. Lenders process loan forgiveness according to rules outlined by the Small Business Administration, which oversees the PPP.

Scott Mercer, CEO and founder of electric-vehicle-charging company Volta Industries Inc., said his company’s approximately $3 million PPP loan would have qualified for forgiveness, but he is paying it back now that he has a SPAC deal to raise $600 million.

“It was an invaluable tool, it helped, and we are happy to pay it back because it got us to a place of unexpected success,” said Mr. Mercer. “Back in April 2020, I had no idea what a SPAC was.”

Mr. Mercer kept his 140 employees, and like many of the CEOs involved, credits the PPP loan for allowing his startup to keep enough momentum that it could attract SPAC offers.

SPACs are blank-check companies that acquire startups to take them public, and last year they raised a total $83 billion, according to data provider SPAC Research, more than all previous years combined. Companies in the electric-vehicle sector have been among the most popular targets.

Space-technology startup Momentus Inc. and 3-D printing company Markforged Inc. each said they repaid their loans ahead of completion of their SPAC deals.

Used-car marketplace Shift Technologies Inc. repaid its $6.85 million PPP loan the same day it received more than $300 million from a SPAC in October.

“We have the liquidity, we have the capital we need to grow,” said Shift Co-CEO George Arison. “Why keep something that you don’t need?”

Other startups say they used the money appropriately and want loan forgiveness. SVB Financial Group’s Silicon Valley Bank, which counts many startups among its clients, processed some 5,000 rescue loans totaling $2.5 billion, most of which went to private tech companies. So far, around half of the companies asked for and received partial or full loan forgiveness, while about 600 repaid the loans, said spokeswoman Julia Thompson. Additional companies have requested forgiveness for loans received last year and this year, she said.

TuSimple Holdings Inc. raised more than $1 billion last month in an IPO that gave the autonomous-trucking company a valuation of $8.5 billion. TuSimple asked the government to forgive its $4.1 million PPP loan, according to a regulatory filing. A TuSimple spokeswoman said the loan allowed it to retain more than 300 employees; she didn’t respond to questions about repayment.

Advertising-technology company Viant Technology Inc. had an IPO in February, and battery startup Romeo Power Inc. and electric-vehicle company Canoo Inc. went public via SPACs in December. Each company is seeking forgiveness of its loan, according to company filings. Battery maker Enovix Corp. had all of its $1.6 million loan forgiven last year and in February said it would raise $405 million in a SPAC deal, according to a company filing provided by a spokesman, who didn’t respond to further questions. Viant, Romeo Power and Canoo didn’t respond to a request for comment.

“To go back and repay the PPP loans that were forgiven makes little sense and detracts from the needs of these companies to recover and invest in their futures,” said Dave Blivin, managing director at Cottonwood Technology Fund, an early-stage venture-capital fund.

Several of the startups that took the PPP loans have little to no sales revenue, and founders said payroll would have been impossible to make. Others had no work for their customer-service, sales or factory employees.

“Our business was not in great shape,” said Jennifer Walsh, chief financial officer and chief operating officer at Shapeways Inc., a New York-based 3-D printing company with backing from Mr. Wenger’s firm Union Square Ventures. It had to halt its factory operations at the onset of the pandemic and furloughed almost half of the workers and put others on partial unemployment.

The company expects to close a SPAC deal in the third quarter that would raise almost $200 million, at which time Shapeways plans to pay back its $2 million PPP loan, even though it was already granted forgiveness.

“I would be uncomfortable keeping it,” said Ms. Walsh.

Electric carmaker hopes pricey technology will give it an upper hand in fight with US rival

Chinese electric vehicle maker Nio is betting that battery swapping will play a critical role in its challenge to Tesla in the world’s biggest car market, even after its US rival shunned the expensive technology.

Battery swapping allows drivers to rapidly exchange their depleted battery for a fully charged one at specially-equipped service stations. In April, New York-listed Nio partnered with state-run oil group Sinopec as part of plans to more than double its network of such stations across China to 500 this year.

Nio also plans to open battery-swapping stations in Norway this year as part of its expansion into Europe.

“Lots of our users tell us that battery swapping was the reason they chose this car,” Shen Fei, Nio’s vice-president for power management, told the Financial Times, adding that many drivers in Chinese cities lack access to home-based electric vehicle charging. “Battery swapping is already core to our competitiveness.”

Nio is one of several Chinese automakers trying to challenge Tesla’s leading position in the country’s high-end electric vehicle market. The US group has been under pressure in China recently after its bungled handling of a high-profile customer protest turned into a publicity nightmare.

China, the largest market for battery-powered and hybrid vehicles, is an outlier in an industry that has focused on developing infrastructure to support charging at home and at stations.

Geely, China’s biggest private automaker by sales, plans to build 100 swapping stations in the southern city of Chongqing this year before rolling out facilities in other parts of the country.

Beijing New Energy Vehicles, a subsidiary of state-owned automaker Baic Motors, is targeting electric taxi fleets and operates 121 swapping stations.

Global interest in battery swapping has faded in recent years, partly due to high costs. Tesla ended a two-year trial of its own swapping system in 2015 after tepid customer uptake.

The technology has benefited from Beijing’s strong support. Last year, the government made battery swapping a requirement for receiving subsidies on electric vehicles priced at Rmb300,000 or above, in a move that benefited Nio

An appeal of battery swapping for drivers is that it lowers upfront costs. Nio launched a subscription option for batteries last year that allows customers to buy cars without a power pack, cutting about $10,000 from the purchase price.

However, some analysts remain unconvinced, pointing to the high costs of building stations. They argue that fast charging systems developed by Tesla and others are more efficient once overall running costs and the potential to charge multiple cars simultaneously are taken into account, despite being slower than battery swapping.

Whether Nio and others can make battery swapping profitable depends on utilisation of stations and driving down operating costs through automation, said Edison Yu, an analyst at Deutsche Bank.

Nio, which was founded in 2014, has previously struggled to build battery swapping infrastructure. A cash flow crisis in 2019 meant that it fell far behind early targets of 1,100 swapping stations by 2020. The group revived its expansion efforts after securing a $989m state-backed investment early last year.

Shen, the Nio executive, believes battery swapping will help Chinese carmakers open up an advantage over their foreign competitors, which are unlikely to adopt the technology. “Whether or not it’s the end game for the industry, Chinese automakers want to win now,” he said.

A few years ago, it could be difficult to find someone to accept a free NFT; today, the same digital tchotchke might fetch tens of thousands

When Erick Calderon tried to give a colleague a pixelated image of a man in a purple cap as a Secret Santa present in 2018, the colleague didn’t want it. Mr. Calderon’s father got it instead.

This February, his father sold the image for $46,000.

Tied to the image was a nonfungible token, or NFT. Called a CryptoPunk, it is one of 10,000 unique, algorithmically generated digital images created by two software programmers in 2017. The images were designed to be traded on blockchain, a digital ledger that records transactions, and they were originally released to be claimed free by anyone with a blockchain “wallet,” or account.

The rapid evolution of the market for such NFTs, or nonfungible tokens, has pulled the digital assets from near-obscurity to become quickly ingrained in the vernacular. “Saturday Night Live” set aside three minutes of a March episode to explain them in a rap sketch. In the first quarter this year, the total value of NFT sales on the ethereum network, the main blockchain underlying such transactions, surged to $2 billion in the first quarter from $94 million in the previous three-month period, according to data-tracking site NonFungible.com.

“Where we are now, I expected to be in five years,” Mr. Calderon, the 40-year-old founder of Art Blocks, an NFT art project, said. “It’s been this crazy explosion.”

NFTs weren’t even a phrase until CryptoKitties, which allows users to breed and trade digital cats, came to be in 2017, said Roham Gharegozlou, chief executive of NFT company Dapper Labs, which created the game. He and his collaborators used the same blockchain technology underpinning cryptocurrencies to create NFTs, which acted like ID collars for the digital cats.

Cryptocurrencies such as bitcoin are fungible because one bitcoin won’t have a different value than another, whereas NFTs are designed to be unique. They came into widespread use with the cats, but they are now being applied to digital art, albums and even weapons in videogames and other virtual accessories.

“We didn’t put too much thought into it,” Mr. Gharegozlou said. “The other things were fungible and we just called it nonfungible.”

The project came to life on the ethereum network. While bitcoin’s blockchain was designed to facilitate decentralized transactions, etherum’s design allows users to store more complex items such as financial contracts and applications within the digital ledger. At the time, it cost pennies to create assets on the little-used network.

There were precursors to CryptoKitties NFTs, even if they didn’t go by the NFT name. They largely relied on bitcoin’s blockchain. In 2013, a group of developers posited in a paper that bitcoins could be assigned different colors as a way to distinguish them from other bitcoins and give them a value independent of the cryptocurrency itself—so-called “colored coins.”

A later network called Counterparty built on this idea, allowing people to embed small bits of data in bitcoin transactions. Adam Krellenstein, one of the platform’s founders, described it as “writing in the margins of a bitcoin transaction.”

“A lot of our focus was building the plumbing and the platform...building the toolset that would let people build things that I couldn’t imagine,” Mr. Krellenstein said. “These early projects sort of showed what was possible.”

Collectible digital art stored on the Counterparty blockchain soon followed. In 2016, Rare Pepes, for instance, offered tradeable digital images based on the popular internet meme Pepe the Frog, a cartoon amphibian. (The character was appropriated as a type of online mascot by white supremacists.)

Users could create their own Rare Pepes that the platform’s developers could approve to be added to the blockchain. As more people joined, the collection became less about the frog meme itself.

Though the Pepe meme was also being used by white supremacists, said Joe Looney, one of the developers on Rare Pepes, “it was this really important project in the history of crypto art in general.”

While Mr. Looney disliked the term NFT when he first heard it, he credits the catchall initialism with leading to wider acceptance of the technology.

“It’s not a coincidence that it took off and it’s a three-letter acronym like a JPG or a GIF,” he said, referring to the popular digital-image formats. “People who don’t really understand, they think it’s a type of file.”

New networks have popped up and developers have created simple user interfaces that let people use credit card numbers to buy, sell and create digital collectibles tied to NFTs. Platforms such as NBA Top Shot have ushered in sports fans who have no knowledge of cryptocurrencies, but will pay to own a video highlight from a game.

Mr. Gharegozlou sees NFTs expanding into the real world in the future. Before he and others decided to make CryptoKitties, they originally envisioned the technology being used to record real-estate transactions.

But such a plan would entail government cooperation, so they pivoted to digital cats. “The internet is always driven by cats and they’re the first thing to go viral,” he said, adding that most of the developers were dog people.

“Ideas like that are still years away because they take coordination between online and offline platforms. It is going to take time,” Mr. Gharegozlou said.

Founder of collapsed family office Archegos was crucial in early days of tech-focused asset manager

Cathie Wood has revealed that Bill Hwang, the investor whose family office Archegos Capital blew up causing billions of dollars of losses, played a central role in the launch of her asset manager Ark Invest.

In a television interview on Friday, Wood also said she had swapped ideas with Hwang about US stocks and in particular the media sector back in 2013, when Archegos was still mainly focused on investing in Asia.

Wood created Ark, which runs exchange traded funds focused on innovative tech companies, in 2014 after a long career on Wall Street at AllianceBernstein and Jennison Associates.

“He [Hwang] did provide the seed for our first four ETFs and we were very grateful to him. It was at a time where market makers were sick of seeding new strategies, because they’d be stranded with $2m stuck in an ETF that doesn’t go anywhere,” she told CNBC.

“We needed to go out and find that seed and Bill, hearing what I was saying about the company that I was going to start . . . was very intrigued, and very intrigued with the stocks we were interested in,” she said. “He was just beginning to learn about them.”

A ferocious rally in tech shares has helped propel Ark into the top ten of largest US ETF managers and investors have poured money into its funds. The flagship Innovation fund now has $22bn in assets. The other three Ark funds seeded by Hwang are its Genomic Revolution, Next Generation Internet, and Autonomous Technology and Robotics funds.

Wood, like Hwang a devout Christian, who named Ark after the gold-covered chest described in the Book of Exodus, said she met the former hedge fund manager when they were both advisers to a religious group that ministers to young people on Wall Street.

“On our way back from that event, we were exchanging stock ideas back then and I know he bought into one of the stocks in which we had a high degree of confidence, Netflix,” Wood said.

Banks that acted as prime broker to Archegos suffered $10bn of losses in late March after Hwang’s highly leveraged bets on a small number of US and Chinese stocks turned against him, among them media group ViacomCBS.

When asked whether Hwang still owned a stake in any of Ark’s funds, Wood said ETFs do not know who their shareholders are, and added: “I’ve never asked him if he kept the money in. If he wanted to volunteer he might have but, no, we have never had that conversation.”

A number of banks are seeking compensation after suffering losses tied to derivatives trades with Archegos, which the Financial Times reported this week was preparing for insolvency. Securities regulators in Washington are probing the debacle.

Wood said she had not spoken to Hwang since Archegos blew up. “I sent him a note after I heard about the unfortunate events that we’ve all witnessed and I’m wishing him well,” she told CNBC. “He was there for us in the early days and we’re very grateful to him.”