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SPACs turn to the metaverse after returns from the real world flop

February 4, 2022, 4:38 PM UTC

After a year of mostly horrific returns tied to the real world, sponsors of three new blank-check companies are turning to the metaverse in search of takeover targets.

The ventures include one led by a former Sony PlayStation executive, and another from the video-game pioneer behind the Tomb Raider franchise; both managers have serious chops with highly successful track records. 

But to some observers, the new wave is an example of blank-check companies once again chasing the latest futuristic fad, after the industry’s bets on green vehicles and crypto went sour. This week’s volatility for tech and metaverse stocks likely made matters harder for sponsors of so-called special-purpose acquisition companies, which collectively are down more than 40% from last February’s peak.

That’s the nature of the beast, said Matthew Tuttle, chief executive officer of Tuttle Capital Management, which runs an index that tracks SPAC returns. “You have to do something to get and keep investor interest,” he said. “How do you do that? You find the new toy.” 

In this case, it’s the metaverse, a virtual reality world that people explore using headset systems, currently dominated by Oculus from Meta Platforms Inc. and PlayStation VR from Sony Group Inc. Meta CEO Mark Zuckerberg calls it “the next frontier” and Bloomberg Intelligence reckons the metaverse could be an $800 billion market by 2024. 

Warcraft veteran 

Into this nascent arena comes Jack Tretton’s PowerUp Acquisition Corp., a SPAC looking to raise $225 million. Another led by Ian Livingstone called Hiro Metaverse Acquisitions I has already raised about $156 million.

SPACs are known as blank checks because they raise money from investors in an initial public offering with the goal of buying a private business that isn’t identified yet. They cite the expertise of their management team as a reason people should invest.

Tretton, for instance, is the former CEO of Sony Computer Entertainment America with a 35-year career in the gaming industry, according to the prospectus. His team includes Matthew Ball, the metaverse theorist, and Bruce Hack, the former CEO of Vivendi Games and vice chairman of Activision Blizzard Inc., who is listed as overseeing the launch of World of Warcraft, one of the industry’s iconic games. Their targets could include video-game companies and “new metaverse video gaming businesses.”

Efforts to reach New York-based PowerUp for comment weren’t successful; a phone number listed in its prospectus wasn’t in operation. A call to the law firm listed on its prospectus, McDermott Will & Emery LLP, wasn’t returned.

Livingstone founded Eidos Plc, the U.K. company that created Tomb Raider, and was non-executive chairman of Sumo Group before it was sold for more than $1 billion to Tencent Holdings Ltd. Hiro plans to focus on the metaverse, e-sports, interactive streaming and “Gen Z social networks,” according to filings, with games and the metaverse expected to be “a large proportion of the new economy of the 2030s.” 

Untapped market 

European entrepreneurs and creators produce about a third of all the video-game content played worldwide, but only about 3% of the industry’s global public market capitalization, Livingstone said in a Jan. 31 statement. Hiro declined to comment, pointing to a filing where Livingstone touts a “deep experience of the rapidly evolving gaming industry” and the SPAC’s position “to identify and fund a target company that is further along its growth curve and still has high value creation potential.”

Evergreen Corp. is a SPAC aiming to raise $100 million with plans to buy a company involved in the metaverse, artificial intelligence, fintech or various other tech sectors, according to its prospectus. It’s led by CEO Liew Choon Lian, whose track record shows stints working with various large tech companies, and building a firm valued in the filing at $195 million. Officials at Malaysia-based Evergreen didn’t return a call seeking comment. 

Mission statements for SPACs leave a fair amount of wiggle room in what they might actually buy. “It’s likely they came up with the idea a few months ago and obviously the market changes very quickly,” said Julian Klymochko, who manages a SPAC-focused fund at Accelerate Financial Technologies. “They don’t have to stick with the mandate and oftentimes they do not.”

Waves of volatility have hit the SPAC industry as the mania faded in the past year. The IPOX SPAC Index plunged 43% since its record high last February and the De-SPAC Index, which tracks 25 former blank-check firms that bought something, has lost two-thirds of its value as of Thursday’s close.

To some, the pain is a signal of an over-saturated market that had focused on unproven technologies at high valuations. Skepticism remains high with interest rates rising and profitability still far off for many startups in the immediate future, said Ed Moya, a senior market analyst at Oanda Corp.

Still, SPACs tend to trade on ‘price-to-yearnings’ rather than price-to-earnings, which could provide a lift for the new breed.

“Following last year’s bursting of the SPAC bubble, many traders are cautiously looking for companies that might capitalize on the explosive growth that will happen with Web 3.0 and the metaverse,” Moya said.

—With assistance from Ben Scent.

Fortune’s upcoming Brainstorm Design conference is going to dive into how businesses are building experiences in the metaverse. Apply to attend the event on May 23-24 in New York.