We Study Billionaires - The Investor’s Podcast Network - TIP401: The Most Important Company Is Going Public w/ Chris DeMuth Jr.

Starting point is 00:00:00 You're listening to TIP. On today's episode, our guest is the founder and principle of Rangley Capital, Mr. Chris DeMuth. After discussing a company called Planet with Josh Wolfe on episode 399, I wanted to explore the SPAC merger with DMY Technologies, which has a definitive vote scheduled for December 3, 2021. In this episode, we discuss why a portfolio of SPACs could be a great place to park cash, recent SPAC investments both good and bad, private investments in public equity, a.k.a. Pipes? What they are and how they tie into SPACs? Spac sponsor DMY Technologies and their latest target, Planet. What planet does and why it might be the most interesting company going

Starting point is 00:00:41 public in the near future. Chris is incredibly fun to talk to. He's an expert on SPACs and works closely with the SPACs and companies he invests in. I hope you enjoy it as much as I did. So without further ado, please enjoy this discussion with Chris DeMuth. You are listening to The Investors Podcast, where we study the first. financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Trey Lockerbie, and today I have with me, Chris DeMuth Jr. from Rangley Capital,

Starting point is 00:01:27 first time on the show, Chris, welcome to the show. Thanks for having me. Really looking forward to this one because a lot of interesting points that I'm very curious about. But just a disclaimer for the audience, we're going to be talking about SPACs. which can seem very counterintuitive to someone who's a value investor. But I want to highlight that you yourself are very much a value investor, but have had a really great streak of investing in SPACs.

Starting point is 00:01:51 And I'd like to kind of start there. What drove you to SPACs in the first place? And you've been doing this, I think, for 10 years now. So what's that journey look like? So I'm definitely a value investor. I definitely think primarily about the downside and risk. and kind of my day job is quantifying risk. And if there's good news, it's kind of the inverse to whatever you've put at risk.

Starting point is 00:02:14 I like interesting structures and I like quirky processes that you can kind of analyze. And so we've been doing this for a long time. It's only recently become kind of part of the media interest and vernacular in investing. But what was interesting to me was that the structure involves a free put in the form of embedded trust value and that trust is redeemable. So I've kind of joked about speculative investing and kind of cool kid, growthy stuff. I would love to do that if only I could get my money back if it didn't work out. And to me, value investing is having some kind of margin of safety that you're going to get something if things go horribly wrong. Well, SPACs literally contractually handy

Starting point is 00:02:59 that. You make the investment and if it goes horribly wrong, you get your money back. And so the free put is the right to redeem the cash and trust. The free call is you also get a warrants with your equity and you're paying part. So you pay 10 bucks, you get a share, you get some warrants upside kicker, you get cash and trust, downside production, and you get some dude who's looks for a deal. You try to pick a good dude. You know, somebody you know, typically, somebody that you have confidence in their history and skills as somebody to find a deal. But, you have this structure that was uniquely interesting to me, and that's why I got involved. So as I understand it, speaking to getting your money out, I'm under the impression that

Starting point is 00:03:45 that happens fairly quickly after you discover what company that's back is going to merge with. Is that the case, meaning like, is there a limited period of time you can get your money back after you now know what the merger looks like and if you approve or not of the deal? Yes, so it's a fairly typical SEC review process that's actually been slowly. flowed down massively this past year because with this glut of SPACs, the SEC has kind of been swarmed with things to do. And so it's now kind of a matter of months between a deal gets announced, and then you have to get the definitive proxy approves.

Starting point is 00:04:19 So sometimes you have a few preliminary proxies. They go back and forth, approve it, 20 business days, vote, redemption deadline, and the end. So you have a little time to analyze it. And typically the sponsors have a lot of incentive to do a full IPO. style press of advisors putting out information and press and conferences and so forth. So there's a decent amount to hear from. Now, from the founder's side, that brevity is a virtue because you don't have a lot of flux

Starting point is 00:04:50 in terms of employees and other problems where it's actually shorter than the whole IPO process. So it can be an advantage to kind of flip it fairly quickly and have a little sense of urgency from the company side. But you have a few months to think about what you want. want, and it's getting market tested. You can either do a lot of deep, pensive, thoughtful work on the company, where you can just glance at the stock price. If the stock price goes from 10 to 50, you probably don't want to redeem and get the 10 bucks back. If you hate the deal and the

Starting point is 00:05:21 market loves it, you can simply sell it in the open market. If you love the deal and the market hates it, you can hang on. And if you both hate it, you can just get your 10 bucks back. So the one thing I would say is that it has taken a little longer, so you have several months, typically. And then the second thing I would say, is a strategy out there that is not mine that's fairly new with these very, very low riskless rates of return where huge hedge funds with big calls on tens of billions of dollars that are well situated to use tons of leverage are now doing a form of SPAC arbitrage where they're simply buying the equity side at fairly tight spreads, but shorting out short duration debt against it at even tighter spreads. So that keeps the

Starting point is 00:06:03 downside, even before the redemption date, typically to $9.70. So like a 30 cent spread is kind of the lowest quality trashiest SPAC, given almost no credit for an equity upside, typically is held to that 970. And there's a huge amount of liquidity. So most shares, you kind of lower penny by penny. Sometimes it affects the price. I mean, these will just get hoovered up at any scale. You can sell tens of millions of dollars in a print when you hit a yield that some hedge fund wants to set up for a SPAC yield arbitrage. Different strategy than mine, but it kind of gives you a lot of liquidity the period in the downside, even before the redemption date. You mentioned the opportunity potential of a $10 spec stock price shooting up to something like $50 to $60. And that actually happened

Starting point is 00:06:53 recently in a SPAC that became lucid, which I know you invested in and it went from 10 all the way up to 60, but then it crashed back down again to 20s, you know, mid-20s. It's, again, since climbed a little bit. But that sort of volatility is a little disconcerning, right, to the average investor. And does that play into the speculativeness of this asset class, if you will? Yeah, it's a weird phenomenon that I'm in the middle of this. That was the biggest investment I ever had in anything ever. Actually, the one that you mentioned earlier this year, disclosure we can do at the end or now. I still own Lucid, but the first. The first one, The phenomenon is we bought a large stake of the predecessor SPAC at a discount to trust value.

Starting point is 00:07:36 We actually weren't in the original IPO. We actually came in later and simply bought in the secondary market. Almost all of our investments are in the primary market, either via SPAC IPOs or pipes. We do very, very little in the stock market, although this was one that we were able to buy a huge stake at a discount to trust. And it was pretty clear to us that they were going to do this deal. There was an overlapping chairman of Lucid was an operating officer at the SPAC. At the same time, they put out a ton of job listings for an SEC compliance, investor

Starting point is 00:08:09 relations analyst, investor relations director. So this is a company that's going to go public, probably via SPAC, probably via this one, and we were able to buy it at much less than $10 a share, a $10 unit actually, even so share and warrants. And the market had a very strong reaction, but your long volatility when you own SPAC units, right, because you own the warrants. And so I want volatility to go to infinity because if I have a portfolio of 20 of these, you know, put $10 million in 20 SPACs and half of them go to zero, redeem, and half of them

Starting point is 00:08:48 go crazy. And you own the equity and the warrant and you can sell for the market price. So to give a description of where the volatility went, we could get back our cost basis writing at the market calls against just the equity for a single month of premium. That's what the volatility did. So volatility is great, both for the warrants and for what options trade, especially because of the strange interaction between retail-oriented trading. apps, they create crazy arbitrages within the capital structure because these apps tend to have certain securities but not others. So if Robin Hood loves options, likes equities, and doesn't trade warrants, then the warrants

Starting point is 00:09:43 get completely disconnected from the equity. Equity gets completely disconnected from the options, typically bottom to top in terms of market reaction. So both on things that I quite like Lucid and things that I don't like at all, like Nicola, QuantumScape, quite a few of these others, you have these just crazy disconnects and price where the price just breaks for a while. Typically, that leaves us writing calls, getting some equity call away and being very, very long the warrants, typically, but we're indifferent. I have no principle at stake. I just like owning cheap stuff and I'm happy to be a service provider to sell expensive stuff if that's what people want. And then on things

Starting point is 00:10:24 that are frauds or things that are frenzies, you can do the opposite and kind of leg into the short side of it similarly with these kind of arbitrages within the different securities. So in any event, volatility is great and frenzies are great for value investors and specs, weirdly. Talk a little bit more about that discounted trust value because you mentioned that was after the IPO. And was that for us a pipe or something? some other kind of investment? No, that was a rare case for us that we just bought the units in the public market. So the units, and there's no magic to it being 10.

Starting point is 00:10:56 It's kind of the industry norm. You can make it 20 or 25. If you pick other prices, but call it 98% of these 10. So you can typically glance at a SPAC if it's trading at $20 or $30 or $40, the market liked it. If it's trading it two or three or four dollars, the market hated it after it's despaq. This was simply the unit had IPOed. The market had lost interest in it.

Starting point is 00:11:18 it was trading at not a huge discount because, as I said, increasingly funds are kind of keeping the price fairly efficient to the trust value, but it was less than $10 per unit. And that was a function of COVID, really. That was a function of just as the market tanked, we were able to take advantage of that. While the equity gets quite a buttressed, the weird little securities tend not to. So you have somewhat weird things like warrants. Those tend to be illiquid and trade irrationally. And then you have weirder things like rights, which are only the kind of the seedy

Starting point is 00:11:58 underbelly of the SPAC world. It's basically kind of a bribe to beg people to invest in otherwise uninvestable structures. And those get crazy. I mean, nobody really follows them that carefully. And they're not that institutionally owned. They don't tend to have that much liquidity. Their price doesn't make sense. there isn't this aspect of tens of billions of dollars in weight to keep the price almost

Starting point is 00:12:20 to the penny rational. So I would estimate that a large majority of retail investors are more familiar with options than they are warrants. So maybe talk a little bit about the retail investing experience. If you went onto your brokerage account and you bought a SPAC, where does that warrant live in your account? Are you just giving that automatically and it populates in your portfolio? If you are on some of the online trading apps, you can't trade the warrants.

Starting point is 00:12:49 The warrants get kind of orphaned. And secondly, you frequently don't have a lot of corporate actions. I mean, I feel like my brokers hound me in corporate actions just as an excuse to have a lot of interaction. I don't think I've ever in 20 years missed a corporate action. I always vote. But sometimes something trading in the public market at $25 and you have a vote on whether or not you want to approve the deal, that if it was voted down and collapsed, would be

Starting point is 00:13:16 liquidated at a 10, and they have to delay because they can't get a majority because people just don't vote for these things. So we do, you know, podcasts like this, and we blog and we write and we kind of interact with a kind of a breadth of investors. And one of the things we do is, we own the same things. Please vote this. Vote your shares. And frequently, I'll get a note. Somebody say, like, how do you vote shares? I've never, I've never done a corporate action before. So corporate actions are sometimes a hard fit for new investors on phone-based trading apps and then warrants frequently are as well. So with risk assets at all-time highs and inflation now hitting 30-year highs,

Starting point is 00:13:56 there's been a lot of discussion around where to park cash. And I'm intrigued by this concept of utilizing maybe a basket even of SPACs as somewhere to park cash because it seems to have, as you're kind of alluding to and talking about earlier, this downside protection and the upside is unlimited. Maybe talk to us about what a portfolio of SPACs might look like or what kind of goes into picking that. Sure. I mean, I love stuff that is kind of a Swiss Army knife of investing where you have

Starting point is 00:14:26 the cash like aspect on the downside or treasury like aspect on the downside and equity like aspect on the upside. So kind of in my personal account, I love mutual deposits where I have kickers on options to participate in equity offerings. I have a big portfolio of refundable deposits and all sorts of zany stuff that can catch bids when people are really very time sensitive, one in OEM, planes, trains, automobiles. And they sometimes get equity offerings too, as Riviam had recently. And professionally, I love SPACs for the same purpose. So I can tell you how we do it in different people can certainly structure things different ways. We typically,

Starting point is 00:15:08 come in at some significant percentage of a SPAC IPO. So sometimes five, more frequently 10% of a offering. This is something that it's very sensitive to us because it's only opportunity cost. I mean, all the risk is opportunity cost, but we like to go in with teams that we like and respect. So we have kind of a hierarchy, and you can call it a negotiation, but at the low end, it really is a negotiation at the middle end, it's a little more balanced. At the high end, it's more like begging an invitation. But we have teams that have demonstrable history of successes of finding really good deals. And we try to be very flexible capital. So we have a lot of available capital to come in later, to do a pipe later, to do other types of things so that when we show up with a dollar, I'm really thinking about

Starting point is 00:16:02 $10 in the back of my mind of different ways that we might want to be involved. And we sometimes also have risk capital. So we sometimes are also on the SPAC sponsor side as well. We sometimes come in when they find a deal, then you sign an NDA and you have MNDI so you can't trade, but I don't do that much in the stock market anyways. So that's not a constraint. It doesn't really change my life that much. But that's where I can actually look at the deal. And that's a lot more fun. I mean, analyzing a shell company is kind of pretty boring S-1. I like reading SEC filings, but that even stretches my entertainment value of reading about. It's somebody you know in a structure that you negotiate or do have a back and forth and

Starting point is 00:16:46 say, hey, I would like to invest, but this is what I need to make it make sense for me. And that's why they always have minutely different structures. So in terms of how much cash is in trust, because more recently when the market was hot, you had the advantage of you got these big pops. So you'd put in, we had a big investment in the liberties corporate spec. I don't recall exactly, but I think that was trading. up like 20 or 30 percent above trust almost immediately. So, yay, you get to make all this money and these pops. But the flip side is when it gets really cold, they do things like overfund the

Starting point is 00:17:17 trust. So you put in $10 and you don't get $10 back, you get $10.20 back. And so you actually get a bit of the yield, a little bit lame, but by the standards of two-year paper, not bad. It's better yield than the treasuries. And so you kind of have one advantage or the other. So we have kind of all of those different ways that we approach it. And then we find a team that we really like. And ideally, because we do a lot of due diligence, there's a lot of research involved in each of these deals. And there's a lot more to look at once to actually find something and you decide if you want to do the pipe and invest in the company for the longer term. But ideally, you find a team you really like. So instead of kind of doing a lot of background on that person,

Starting point is 00:17:55 you can do it once and then do four or five deals. And so we've had a couple opportunities with our biggest pipe investments, with our biggest back investments where we can do that. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:22:11 All right. Back to the show. You mentioned pipes a couple of times, and I'd like to kind of dig in on those a little bit more, because it stands for private investment in public equity, which to your average retail investor, I think that deserves a head scratch. You're kind of like, wait a second, what? You're getting a private investment in a public offering, essentially. How does that work? And why is it available to only seemingly institutional type of investors? Sure. So it's a contract. You negotiate it back and forth. The parties to it are kind of, it's a creature of the parties to it. So it's more like buying a house than buying a stock, right? So it doesn't scale down, just like buying a house

Starting point is 00:22:50 would scale down the much. So it's typically a small one's millions of dollars or tens of millions of dollars per investor typically, I guess you could do smaller. I've never really done one that wasn't a pretty substantial amount of the capital that they were raising. So, you know, we, And I can't talk about any of the current ones because of, you know, you sign the NDAs and the ones you're working on. I can kind of talk about past ones and the kind of situation. So something like air sale is one that we took a significant stake in their IPO. And then they found a deal that we really liked. Disclosure, we own, we're very invested in it.

Starting point is 00:23:29 And then when they find the deal, deal certainty really matters to the target. And one of the things I try to provide, I always try to be the most. sponsor friendly outside minority passive investor. The typical way to get good allocations is just to trade a ton with Wall Street. So if you're, you know, say, if you're my broker, I was like, hey, I do $100 million of fees that you get every year, give me this allocation. You do it just as a kind of payola for fees. We're not active traders.

Starting point is 00:23:58 We're kind of a research shop. We're not really a trading shop. And so if I can't get close to Wall Street, because Wall Street doesn't have any particular reason to care about me because I'm an annoying. I'm like the worst client. I have tons of corporate actions and complexity. I probably have the greatest ratio of complexity to fees of any investor in the world. So we're doing a lot of complicated stuff, but we're not really doing a lot of trading

Starting point is 00:24:23 that really benefits Wall Street that much. So if I want to be relevant, I have to be helpful to the sponsors. I have to. And one of the ways we do that is we're very flexible. So a typical demand for somebody who's an outsider investing in risk capital would be I want to be senior, whatever you find, you can't negotiate my equity. I always tell them opposite, negotiate my equity, have it peri-pursue with the actual sponsor insiders. And the reason is, I want the pie to be really, really, really big. And even if that constrains precisely how I'm set up,

Starting point is 00:24:57 yeah, you're negotiating the same thing for yourself. The problem is, is if I'm very inflexible, then you have to be ultra-flexible with your own economics. What I mean by that is you find a company, founder, you're negotiating with them, and I have this like chunk of your equity, he has to deal with that. And so if you want to switch it to an earn out or if you want to switch around how that equity is treated, you're trying to encourage him to roll over his equity, I create this problem. And so it's kind of like short term greedy, long term stupid in a way that I really try to say, no, I want to be a good partner. And so that's kind of how we get into the best deals at a smaller scale than most of our peers would, just trying to kind of

Starting point is 00:25:42 think like a SPAC sponsor to get really good deals. And the problem with really good deals is they have pushy founders because they have a lot of inbound interest. So pipe, you negotiate, you come in, you get to see the deal, so it's much more fun due diligence. You can't trade at the time or talk about it at the time clearly. And then the economics vary, right? So, you know, sometimes in a difficult situation and a difficult market, you're also getting a combination of securities in terms that might actually be at a big discount. And so where a IPO might be $10, you might be coming in at eight or you might have protection down to eight or some other virtues and how it's structured.

Starting point is 00:26:23 And the cool thing about that investment is it also kind of protects your earlier investment. If you're already pot committed, you can come in and make something push over the finish line. So if you own a lot of warrants, you come in with a pipe investment, you can kind of push those way into the money. Now, pipes and SPACs, do they go hand in hand? Can you have a pipe in just an IPO of any company without a SPAC or vice versa? Are they always tied together or not so much? They don't have to be tied together.

Starting point is 00:26:52 The reason why they are often thought of in conjunction with a SPAC is that a SPAC has raised some peculiar, finite amount of money, then you find some target. And there's no particular reason why if it was my SPAC and your company, and you want to combine with my SPAC, like, why should your company be worth the precise amount of cash that I have in my trust? Now, one of the ways you can tweak that is how much of your equity you roll over. So the predecessor will own some of the equity. the SPAC sponsor will own some, the SPAC equity holders will own some, but the pipe is kind of

Starting point is 00:27:35 the flux. I mean, it accomplishes two things really. One, it then lets you scale to hit the right size of the consideration for that company. The other thing it does is it kind of back stops getting the deal done. Because if you don't know for sure, if a SPAC sponsor is trying to negotiate with the founder, say, hey, I have whatever it is. Typically something like 300 million, in trust, I'll pay the $300 million, except if people want it back. So there's that kind of strange aspect to negotiation where strong hands with the sponsor can make the negotiation go a lot better. So if you have the top tier, top performing experience SPAC, you know, one way to glance

Starting point is 00:28:20 at it is if there's a Roman numeral in it, if there's a Roman numeral in the name, it's probably the dumb guy on the board whose dad gave him the job, that if there's a Roman numeral in a SPAC, it's probably an experienced sponsor because they've done something before. And I've always thought it was funny. You could always just name your SPAC, you know, ABC SPAC 7 or something like that. Like there's not a law against putting a number at the end of it. But I guess the market would find that out, you know, have some kind of history makes the difference.

Starting point is 00:28:46 But a pipe says, hey, we have the money. We have private investors coming in. This deals can get done. And so you can perhaps get a better. deal or pay a little less than if it was in flux where there's a, you know, the cheesier deals that have a minimum cash requirement and that cash requirement's not covered is dicey to the last minute and not clear why a really high quality company would put up with that. Very interesting. So yeah, if I'm comparing it to your real estate example from earlier,

Starting point is 00:29:14 it's sort of like this escrow, these two escrow accounts. One is a very secure potential buyer, right? The pipe, you know, that's locked in capital with the SPAC that has more capital, but it's a little bit more, you know, it's a little bit more risky for lack of the story. The story you want to be telling and really anybody that I would want to put a lot of my own money with is this deal is going to get done and we're going to be helpful and relevant to you. We have people with public market experience, which you might be a genius business founder with some spectacular technology who's never even thought about public markets before. So we've just put five of these through a pipe that has investor relations and public relations.

Starting point is 00:29:54 and a public ready CFO, because those are the functions, I mean, the regulatory functions, kind of a grown-up finance person is the function that even a spectacular, multi-billion dollar tech startup might not have really thought up that much. I mean, especially if your growth has been meteoric, you might have been kind of a startup fairly recently. And so the world of dealing with the SEC is new. Well, a SPAC sponsor is probably, you know, an experience one might have done it five times in a row. So it's kind of like you're definitely getting the cash, and then there's some other good

Starting point is 00:30:24 news is the kind of one you want to be involved in, not you might get the cash or not, and then there's some other bad news because we're kind of a mess on our side. In this back world, as it exploded, it kind of has a lot of both. We've had an era as recently as the first quarter where everything was trading hot, and then an era in the summer where everything was trading cold, and now it's kind of gotten to be meritocratic where the market's starting to pick out winners and losers, and it's doing so in a way. It makes a lot of sense to me.

Starting point is 00:30:54 And I think it's really healthy and it's kind of serving well the kind of ones that I'm in and like. And it's kind of starting to sort out some of the irritants of people who have no business touching this much money and are going to do wacky deals and distorting prices and so on. Well, speaking of experience sponsors, one in particular I'd like to talk about a little bit more today, DMY technology, who has done a number of SPACs. And I think you've participated in maybe all of them, it sounds like. Yeah.

Starting point is 00:31:25 They're my favorite. They've been my favorite for a long time. And my interest really in them is not the thing that's kind of coincided subsequently, which is my interest and is really on the technology and business side. They are very thoughtful and they're very long-term oriented. And if I'm stuck in something because of how we get set up in these, we're, yes, we're getting in at a very advantageous time in a very advantageous way, but we're going to own these from the beginning to the end.

Starting point is 00:31:59 And we frequently have, you know, more and more of our capital come in through different means, through the IPO, through the pipe, and elsewhere, and often in risk capital. These are the guys we want to kind of be in for the long term. Nicola DiMassi is, I don't know that you need a separate disclosure for saying he's a friend, but he's a friend and somebody I quite admire. He's very savvy on tech. My focus has always been on finance. I am not a tech specialist in some of the areas that we've gotten very big investments in.

Starting point is 00:32:27 But he's somebody who I've always liked his judgment and trusted him on higher tech deals. But he's had a really good record, Blue Mobile, professionally, the CEO, and his deals he's found have been, you know, we've just liked them all. He did Rush. Global Rush Street Interactive was the first DMY deal. That one is trading now over $20. So just they've taken out the warrants. So it's much better than a double because you had warrants that came with it.

Starting point is 00:33:01 But like just call it just the equity that you paid, you know, $10 for and you got other stuff with it. It's been more than a double. And that was barely recently. Their second one, oh, is a genius sports, things like $14, something like that. And then you got warrants too. And so those both were quite good. I.NQ, their third one, and that's, at that point, was the one we were, you know, by far most involved with over 25. And then the next one is a planet, DMYQ, disclosure.

Starting point is 00:33:30 These are investments of ours. But Niccolo is the most successful SPAC sponsor based on the DSAC equities values. So not based on kind of short-term trading during SPAC, but like once. you're past the trust. So once you're kind of beyond the arbitrage games, trust value, and this or that, you're just looking at what's the equity actually worth. He's the most successful ever. There's more famous ones, Shamath and Ackman and Richard Branson, but in terms of outside minority passive investors making money, Nicola's the best SPAC sponsor in history. And I think by far, I mean, I think there's others, maybe one-off ones, but just these have all worked

Starting point is 00:34:15 They've worked really well. And so, and I would have been involved. I kind of coincided in things that happened to have been, happened to have been kind of things that got good market reactions. I didn't really expect it. I wasn't, that wasn't why I was here. And then some of these are very kind of by their nature long term. You know, I incues the first public, freestanding quantum computing company.

Starting point is 00:34:41 It's an extremely important company. There's kind of two modalities of how quantum might work in the years ahead. And there are huge companies that are working on this like Google and Amazon. But in terms of standalone and vestible companies, there's only a couple. And in terms of the IN capture technology, one of the two ways as opposed to superconducting, which is kind of the other modality, it's INQ. What's that worth? As a value investor, I'm a lot more comfortable buying something at a discount to book value.

Starting point is 00:35:11 And that's not this kind of thing. But it could be a spectacular investment. I think it's spectacular important as a company. And we're really, really happy with that one. And that's just the last one in kind of the litany of success that you said. I think that quantum has an incredible market opportunity. Just this past year, Google for this first time was able to do something with quantum computing that would take 10,000 years within a traditional computer.

Starting point is 00:35:39 We're at a point in quantum that if you look at the physical spaces, if you look at the kind of spaces that these guys are working in, it looks like something from the 1940s and 1950s geniuses in these crowded rooms and all these wires and so forth that actually separating the scientific challenge, the physical engineering challenge of getting these computers set up is quite a brainer. And so you're inventing almost every step of the way. And so, I mean, there's years ahead of challenges. But if you start at the end and work back and say, who's going to have an important role

Starting point is 00:36:18 when solving these, there is currently one and eventually one other pure play, quantum computing opportunity. And then the rest of it is a very small part of Google, a very small part of Amazon and Honeywell, actually. and some much bigger companies. But INQ, if you look at the IP, if you look at the engineering talent, it just has a lot of the smart people who are going to figure this stuff out. And so it's an important company, it was a company ready to go public and a company that

Starting point is 00:36:52 I think it's just going to have a lot of market interest. If you look at the mechanics of how these things work, as soon as the market, see the deal. And you have, because you have the normal SEC process of going from a deal announcement to a shareholder vote, redemption, and close. As soon as you find something in the market that gets a positive market check, in a lot of M&A, a banker from Goldman can just leak something to the Wall Street Journal and then kind of see for a few days, hey, they like it or not, and then dump it if they don't, do it if they do. But this is kind of just a overt market check. And one thing nice about INQ is in an overt market check, people were really interested. People wanted to invest

Starting point is 00:37:38 in this. People were convinced by this idea is an investment. And so by the time you get to redemption deadline, you get almost no redemption. So you actually get for the company, not only your own capital put into it, which is great. So I wanted my capital in this. But I also wanted them to have the runway associated with a successful SPAC combination. So in this case, and there's always, like, I always want to get a phone number for the people who, you know, whenever it's like the people who, it's like the people who go to Berkshire and vote against Warren Buffett for, you know, his board seat. Like, I always say at a phone number. I was like, just tell me why, like, who are these people, you know, whenever something's 99 to 1. And so like people, they're always in

Starting point is 00:38:24 somebody who redeems for $10, even when it's trading at a big multiple. of that. So I think like, geez, you know, $12 is more than $10. But once you start trading really well, it has a little bit of a self-fulfilling aspect to it and that the vote goes through. And one change, by the way, in the decade since I started this is the vote used to be tethered to redemption. You can actually vote for the deal and still redeem. So you have no particular reason to, you have no particular reason ever to vote against a deal. I mean, the votes almost always go through. They did in that case. There were almost no redemptions. And then as a public company, it shouldn't really change that much because, you know, it should be discounted that it was probably going to happen.

Starting point is 00:39:08 But it goes from the old ticker related to the SPAC to its own ticker. So it's, you know, it is literally the name and the ticker's I and Q. You have sell side coverage for the first time. And then some long only mutual funds in different investment institutions actually don't have a mandate that allows them to invest as a SPAC. And they can invest as a public company. So sometimes that makes the difference in supply and demand. I know in the case of air sale, we think it's reasonably likely that they're going to get added to the Jets ETF. And then there's actually a new leveraged Derexian ETF. They could get added to that.

Starting point is 00:39:51 So there's some kind of just market supply and management dynamics that are affected by the deal actually getting done. But when I&Q got done, it's done extremely well. It kind of don't follow these things every day. But it kind of, well, since we're talking about it, I don't follow it. You know, trade it up from $10 to $28. And their warrants and the warrants are typically five-year warrants of the $11.50 strike price. And their warrants are at $16.41 right now. So that's pretty dramatically good so far.

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Starting point is 00:44:19 And we talked a little bit about it. And I'm now more intrigued by the company. So I want to talk and dig in a little bit on that company in particular. I'd like to hear your overview of the company and the prospects and what it's done to date. So Josh is going to be much smarter than I on the technology. And I hit it from having been involved on the SPAC side from day one or even before day one. I was involved in this from the beginning outside minority passive ennester, but concentrated position in this.

Starting point is 00:44:52 And one that I came in with this, with risk capital, participated in the, you know, invested from the beginning and have a big stake in this at this point, assuming we would deal with those through, which I think is highly likely. Shareholder vote on December 3rd, should be public shortly thereafter, ticker, PL. I guess this is an obvious and redundant disclosure, but I am an investor. in the company. And it's just a vintage Nicola Domasi deal, the kind of thing he looks for, the kind of reason I invest alongside him. It is a network, actually a couple overlapping networks of fairly low orbit mini satellites. I mean, tiny little cheap satellites with

Starting point is 00:45:30 unbelievable fidelity, earth imaging, and daily. So organizations that had to wait a year are now getting a daily imagery. I would say the company's product is a plus and a huge competitive advantage. And I don't know if anybody's ever going to keep up. And I think they're going to be the ones to disrupt themselves. I think they're way, way, way ahead in this product. I think their sales efforts have been good. But if their product is a plus, their sales efforts have been B plus because they kind

Starting point is 00:46:06 of have just raced ahead in what they have and kind of if we build it, they will come. I don't know what it's good for. I can say as a future customer, I can think of a half dozen things that I'm going to use it for that they've never pitched me on. And I suspect every industry has their eye on something. Everybody is going to be a Planet Labs customer. My priority as a market participant, if you were looking at a retail opportunity to say, you can be a customer.

Starting point is 00:46:34 You can be a data scientist that uses real-time data to know things. or you can get out of the markets or you can get destroyed. If you're coming up on an earnings report and you're guessing on some hunch and the people who are planning customers, they already know. I mean, they know. If you have credit card data and parking lot data and you're looking at, you know, in a commodity business, you just say, well, our algos have just tracked how many trucks have left the factory every day.

Starting point is 00:47:07 I mean, you get arrested for trespassing if you were doing it on the, the ground, but you just know. So I don't really know what else there is to do besides being good at analyzing data like that. But it's an incredible data set. And so as an investor, I can't wait to get my hands on all of it. I think I had four requests into planet so far today. But, I mean, it's an amazing succession. But think about this is something historically, it's the kind of thing that superpowers have. It was pretty much the U.S. and the Soviet Union could go back and forth looking at things like this. But now it's going to be everybody. I mean, now you have any intelligence organization, any civil government, I mean, insurance after a hurricane trying

Starting point is 00:48:02 to figure out, you know, who's defrauding you and who's a legitimate claim, you'll just look at in that day. And so the difference between kind of getting to have overflight and seeing what's getting the changes, especially because computers are really good at saying, like, oh, I'm looking at a million different data points, but here's where a road was cut legally or illegally. Here's where a roof was damaged or it wasn't from these or two claims. I mean, this is the kind of thing that you're going to have the imaging and the analytics

Starting point is 00:48:35 for. I don't know what else you do if you don't have that. But like you don't want to be the guy guessing competing in somebody who has it. So everybody's going to have to be a customer. And then they'll figure out what to do with it. But, you know, you just can't, you can't bet against somebody. I mean, you're playing Texas Hold on with your cards that the other person can see. I mean, it's going to be impossible almost immediately.

Starting point is 00:49:04 And so every industry will figure out what the ramifications are of that. I can kind of figure out the ramifications are as a hedge fund manager thinking about finance, thinking about insurance, thinking about financial products. But there are certainly human rights equivalent. People debating whether or not there is a labor camp in rural China, they have the picture now. People debating whether asbestos is being illegally dumped by a river. They saw it wasn't there yesterday and it is today. I mean, so many things that used to be Sherlock Holmes sleuthing is just,

Starting point is 00:49:38 just handed to people in almost every scenario you can think of. So it's kind of spectacular. The infrastructure itself is pretty cheap individual satellites. These were bought from Google. Google is a huge investor. They were kind of an early investor and their major in the pipe. And they sold a Google business to Planet Labs. And there's a lot of Google people back and forth. So, Google is, you could be, you can mistake this for a Google, Google subsidiary. If Google ever wanted to buy it, if the current owners ever wanted to exit, you can imagine it would go to Google someday. But they're happy as a separate company.

Starting point is 00:50:17 It doesn't really need to be that either. But it's just, I think it's just going to be hugely important. I mean, I think it's going to be one of the most important companies out there. And it's going to be just one of the data sets that the customers will start to kind of define what it's for. And they don't have any explicit kind of program for customers bringing in other customers. But I think it's just going to go like a wildfire through agriculture. You can look through clouds. Because they go so frequently, they can pull out all the clouds and just show you the soil, show you the crops. And there's just some answer. And that used to be something

Starting point is 00:51:00 a farmer would have to sweat. And now it's just, you know, it's just no. It's not even, the good news is there's going to be so many interesting things to think about in terms of how to use this. The bad news is, I'm sure there are a lot of people whose judgment created kind of a pre-moneyball career and identity for guessing things where the value of guesses are going to have no market value anymore. Yeah. And just for some further context for this company, I mean, $100 million in revenue already,

Starting point is 00:51:32 I believe just as of January of 2021, 600 customers over 65 countries. They have between 4 to 500 satellites in orbit, lower Earth orbit right now. And just for some further context, I heard Will the CEO talking about how it took him six years to get this up and running. They've got a huge leg up. And they're probably going to be, I guess my question, as it stands today, they look almost like a monopoly or a duopoly if you add SpaceX to the equation because SpaceX has its own fleet now of satellites.

Starting point is 00:52:04 I guess my question is, are they at risk? They've got to put these satellites up every three years because they kind of fall back to Earth. And I think they're using SpaceX more or less to get them up there. Is SpaceX a competitor waiting in the wings for this company that could eat the lunch of something like this? I'm sure people have thought of that way ahead of me, but I'm curious to hear your answer on that.

Starting point is 00:52:26 My answer is that people shouldn't talk about being a monopoly or pricing power and that It's the general counsel of every company should take a little seminar for all of the salespeople and say, don't talk about pricing power. Don't talk about being a monopoly. So it's not something I would focus on even if I thought it had a monopoly-like characteristics. I think the speed at which they've gotten this far is a big advantage. I think there are more ways to get into space than there are networks like this in space already. I also think that there are data aspects to how they are able to optimize and use their imagery

Starting point is 00:53:07 that makes it very, very sticky. I think that you're going to see a spectacular growth in revenue and in the number of customers, but I think, boy, I just don't think you're going to see anybody leave. Planet is Bloomberg for Earth imagery. You just, you know, the second best is going to be too little too late. And for the scale of decisions you're making that are affected by it, you don't really care too much because the costs are going to be. And how it works is for a lot of the data that we would need, it's just a regular

Starting point is 00:53:48 satellites. You can actually, they did have ones that are kind of optimized for specific sites, but just the regular kind of slices. It's kind of like an apple peel that goes around. And it actually uses the rotation of the earth. So it's actually just kind of going around and taking these images. I think the customers are going to be very, very sticky. And if there's competition, great.

Starting point is 00:54:07 But I think, and this is a falsifiable claim, but in the next two, three, four years, I think you're going to see spectacular growth. And I think it's going to essentially all stay. Yeah, well, again, that Tam being almost unlimited is pretty promising. When you mentioned the competition, though, you know, the fact, that it's a very powerful tool, and especially for, as you kind of mentioned earlier, around governments and defense and there's a whole application for this kind of data, that it kind of raises this question around,

Starting point is 00:54:40 will the U.S. step in and try to claim rights to the data and exclude other countries? Would that set off, you know, a number of other competitors and other countries launching their own stream of satellites to get their own data? You see how I'm going with this? Is there a incentive structure in here that some exclusion could kick off or ignite? And a lot of the customer base is going to be civil and going to be industry and going to be an NGO organization, not kind of security sensitive. I think as the need for this becomes almost ubiquitous, I think there could be growing pains in the national security side, but I think it's ultimately more fraud. for the national security efforts than it is for the company, a sale.

Starting point is 00:55:29 And when GPS first came out, they tried to scramble GPS so that it wasn't highly accurate. And then you can always use words about national security to justify anything. And you can kind of imagine, you can say it allegorically why it makes sense that private citizens shouldn't have their own GPS. And it was annoying if you're a sailor because having very accurate GPS is helpful for individual rocks and shoals and so forth. And they were actually really crude on how they scrambled it. And I figured out a way to unscramble it. But they tried it for a while and then they gave up. I think trying to limit earth imagery, it might be like that. I would bet on the market against

Starting point is 00:56:13 the government every time in this case. It is going to be ubiquitous to have access to this. and it's going to be necessary. And I think that as the customer base builds up, it would country more in peril than the market to try to stand in the way. I mean, I just think that's going to be very, very hard. Now, I mean, on the edges, we don't want terrorists to use this or something. Sure. But I think that the vast majority of customers will be, you know,

Starting point is 00:56:41 indifferent to national security. And on the edges, will there be some issues? Sure. You know, you mentioned Google being an investor. It's interesting that this company is choosing to go public. And, you know, I almost wonder if it were wrapped up into Google, it might be worth $50 plus billion on its own already, you know, just living in that ecosystem. Is it just that they have their site set on, you know, being the next trillion dollar

Starting point is 00:57:05 kind of company and they've held out and they're going this route? Or is there other reasons to go public for a company like this? Well, it's kind of the best of all worlds because when planet needs, capital, they get capital. So back to what's the point of a pipe, you can kind of top off the needs, right? So Google owns, whatever it is, full 10% or something. They have the capital that the smaller company needs, the bigger company has access. You have personnel that are kind of have, you know, even you can get data off of like LinkedIn. It's not, it's all public, but that are kind of mesh back and forth. You need things they now have. You know, you know, you

Starting point is 00:57:46 You need grown up, finance people, SEC compliance, public company, ready. Even just IR functions, PR functions, they're 100% set for that. And that's one of the advantages of the fact that it's called DMY4 for a reason. And the fact that Niccolo, who's going to be on the board and is, he's a fairly young guy for being very seasoned as a public company CEO who had an entry and an exit who has had multiple of these before. it has all the upsides of kind of being adult supervision. But if you're a young, hot engineer doing something cool, it's kind of cool to have a big stake in the thing you're actually working on. It's cool to own a lot of Google stock too.

Starting point is 00:58:29 But if this thing really explodes, I think there'll be a little more public awareness. And I think the breadth of the type of customers, and you all have people like me who's going to be an investor customer. And I think you'll have a lot of people in that category. So I think there's just some more awareness. I mean, imagine if Google wants to, Google put a link on this at their homepage. I mean, they can do with this whatever they want in terms of the upside. Oh, and I should also say, you asked about regulators.

Starting point is 00:59:00 There might be some higher level of comfort with an independent company making decisions on the basis of this product than being more integrated. There's me sensitive data in terms of not just the imaging, but how the imaging is being used. Like, if you're a subscriber, what are you using that for? I think that there might be a higher level of comfort from people who are aware that that data is just in this one silo and not being shared with other functions at a bigger company. I'm not a conspiracy theorist about that. Google buys them someday. Hollywood still be a customer, but there might be some preference to have it somewhat silent. All right. So let's talk a little bit about the deal structure, the capital

Starting point is 00:59:45 structure of this. If you're a retail investor and you're buying into the SPAC, the SPAC has, it's a trust. It's got about 350 million. There's another pipe on the sidelines where I think of, what, 250 million at this point. And the valuation post merger is estimated to be around 2.8 billion. So if I'm a SPAC holder, and I hold one of those shares, what am I really getting at the end of the day as far as a real piece of this company? The IPO proceeds 345 million. million. And all of this is going to be, and the deal size, you have two, two and a quarter billion, but the deal size is also predicated on that we will have essentially no redemptions. So one of the things about this sponsor, this team, and this structure is it's highly likely that we're going to

Starting point is 01:00:36 be dealing with close to no redemptions. But the other thing that I always look for or kind of hope for is there are a ton of SPACs right now and this worry that what you're dealing with is an exit for the people who are smart about it and a disaster for the people who are coming in. I mean, there is, I think I won't say which one, but there is a very popular SPAC sponsor with one that's been a train wreck of a public company so far. and I talked to some of the people who were involved in the bidding war for the company that he bought and the second highest bid was 30% lower. It was not a spec and that that was a much more typical kind of market check for that.

Starting point is 01:01:29 So he was bidding significantly above what anybody else wanted for a story of respect. And the people who sold used a lot of the proceeds to cash out. And so that is not what's happening here. It's combining, but the current equity holders are going to be equity holders in the public company. And so they're going to be here for a long time. So the specific percentages kind of will get tweaked once you get through the votes. But this is a combination where hype holders were on some, current equity holders are on

Starting point is 01:02:03 some, and the public company holders won't some. And then we also have to deal with the warrants because it's just complicating this start. a little bit further. I joked that one of the kind of shorthands for SPAC experiences, just check the Roman numerals. The other one is look at what is nominally a generous structure to an outside investor can also be a bad sign. Like if you look for somebody who is inexperienced, somebody who doesn't have a track record, somebody who shouldn't really be sponsoring a SPAC, they have to kind of blib the investors. So you'll overfund the trust, you'll put in 10, 25 instead 10, you'll have maybe a full warrant, maybe rights and how rights tend to work is every 10

Starting point is 01:02:46 rights, you get another share if a deal is getting them. As Nicola's history has been so good, as his despaq equities perform extremely well, somebody like me is happy to go on for the right and doesn't have a lot of negotiating room to say, hey, I'm demanding this, that, and the other thing. So every time he does one, you get less and less and less warrants. So this is kind of, you know, it'll be interesting to see out of this. You know, I think. it was kind of a third, then a quarter, and this was a fifth. But the warrant is a big part of the cap structure. So dealing with that. And what happens is it's a five-year warrant. It's reasonably likely that at some point in the near future that there'll be a redemption deadline.

Starting point is 01:03:28 And if they redeem you literally, I think redeem for a penny. So you don't ever let them redeem you exercise your warrant and that people will then exercise the warrant to 1150. So you'll have You'll have the warrant holders own some significant amount, too. Rule of thumb, fiduciary duty is always to the equity holder. So assume they're not your friend in terms of how you're treated as a warrant holder. It's a warrant. Everything other than equity is a creature of contract, not fiduciary duty in the same way. So you'll get whatever the bare minimum deal you could imagine getting that'll be dealt with in the near term.

Starting point is 01:04:02 So there's a kind of different silos. But it's a very good thing that the old guys will. end up, you know, owning a significant amount. And that's how you can turn $345 million trust into a $2.5 billion deal size. And so, yeah, it'll, and they'll kind of lay that out a little bit more once that comes out. And then I should say the other aspect of it, and it gets a sense, and this is kind of an interesting one once you get towards the end of a deal, but is the at-risk capital. And the at-risk capital is if you are an outsider, you put in 10, and at worst, if things collapse, you get back 10. But if you're an insider, $345 million in trust,

Starting point is 01:04:50 the insiders put in, you know, in this case it was $8.9 million of that risk cap. And so, people have exposure that they don't get back. And that's the decision makers, that money goes away if you get to liquidation. So that's kind of the lay of land there. They actually have number six. They don't have number five, but they have number six. And that hasn't found a deal yet. But those are, those are the DMI deals. So just for first time SPAC investors, when you hear that it's going be a $2.2.2.2 billion dollar valuation post merger. Essentially, what you're saying is that the market cap essentially of the SPAC is $345 million, right? The same valuation of the cash sitting in the trust. Whereas when it merges, it's going to become the market cap of the valuation

Starting point is 01:05:42 at hand, and it'll be priced accordingly, correct, at the time of merger? All correct. The equity value goes to $2.8 billion when you look at $1.8 billion, when you look get kind of all told, the committed pipe. The post money, yeah. Yeah, and so you have the pipe in this case was $200 million. And so that was Black Rock, Coke strategic platform, Mark Bennyoff, and then Google topped up. Like Google was already big and they got bigger.

Starting point is 01:06:09 Oh, the other thing I always like to see is I always like to see some kind of industry participation in a pipe. Like a pipe can be a very good investment. People like me invest in pipes. But it's also important to see like partner type roles in pipes. So it's kind of like nobody knows this better than Google does. They had a big investment. They saw this and they're like, yeah, we want a bigger investment.

Starting point is 01:06:29 And that can be kind of a good data point for kind of just the health of a deal that makes sense. 77% of the company will be the existing owners. And so this will be the inverse of that, which you don't know the whole thing, but you have the data point of the insiders. We're buying, but they're not really selling. We're just kind of combining it and becoming public. Very cool. Well, this has been a really interesting discussion, Chris.

Starting point is 01:07:02 This opportunity of the planet especially is very intriguing. I'd love to do more of this. I'm really interested in the SPACs, especially a portfolio of them, as I mentioned earlier. Just very interesting stuff. And thank you for providing a little bit more of the more optimistic side of SPACs today. and I think our investors will learn a ton, and we'd love to have you back to do it again sometime soon. Thank you.

Starting point is 01:07:25 Yeah, we can do the pessimistic side. I have a bunch of these that are, there's a lot of good short opportunities in the SPAC world. And the other two things is the dumpster diving on broken SPACs. You know, when they go from 10 to two or three, there's some good dumpster diving, cheapies, and then the future of public quantum companies. So those are the three things that are on my mind for some of some. other time. But meanwhile, I really appreciate your having me on. Thanks, Trey. I really enjoyed the

Starting point is 01:07:53 conversation. Well, before I do let you go, I do want to mention that you write quite a bit about this. I want to give you the opportunity to hand off to the audience where they can learn more about you and find your writings and follow along with what you're up to. So if you're interested, I write on Seeking Alpha. I wrote as recently as today on planets. So you can look me up. Chris DeMuth Jr. on Seeking Alpha and Welcome to Read Anything There. And then I also have a community of long-term value investors called Sifting the World. And Sifting the World is from a Charlie Munger quote. And that is people specifically interested in event, special sits, kind of quirky weird value investments, stuff that I like. And you can sign up for that if you're

Starting point is 01:08:40 interested, if you're really interested on a seeking alpha. So thanks. Thanks for asking. Chris, really enjoyed it. Thanks again. Thanks, Trey. Enjoyed it. All right, everybody. Thank you so much for listening. If you're loving the show, please go ahead and follow us on your favorite podcast app. And don't be shy, please reach out to us on Twitter at Trey Lockerby or go to Ask the Investors.com to record a question that could be played on the show. And lastly, if you haven't already done so, please Google TIP Finance to find all the resources we've built for you there. And with that, we'll see you again next time. Thank you for listening to TIP.

Starting point is 01:09:16 sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

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