Revisiting the Unicorn

This week, I’m going to continue my examination of Innovacorp’s “unicorn” investment, spurred, in part, by the Cape Breton Post’s take, which appeared in Monday’s print edition wrapped in a piece of puffery about Bob Pelley, Innovacorp’s regional manager in Cape Breton.

The Post — like the CBC before it — managed to tell the tale of Innovacorp’s $104 million exit from Metamaterials (which we’re now calling META) without mentioning meme stocks, social media hype, reverse take-overs or pole-dancing companies. In short, by leaving out all the fun stuff. Here’s the paper’s full account of what happened:

Innovacorp invested about $3 million into the Dartmouth-based company known as META over the past six years. In June, the once-fledging [sic] start-up merged with a Nasdaq-listed company (Torchlight Energy Resources) and was subsequently listed on the New York City-based stock exchange. The stock caught fire and Innovacorp sold its shares in July for a $101-million profit on its investment.

While the Post gets credit for at least mentioning the merger with Nasdaq-listed Torchlight Energy Resources, the assertion that the stock took off after the merger and subsequent listing of Meta is just plain wrong, as I went to some lengths to explain last week.

Although the paper actually offered more detail than Innovacorp itself did in a press release announcing its “35 Times Return“:

Innovacorp invested about $3 million in Dartmouth-based META over the last six years. When META merged with a Nasdaq-listed company in June 2021, Innovacorp elected to sell its META shares in July.

I’m not going to go over the same ground as last week, but I need to reiterate that shares in Torchlight Energy Resources, a Texas-based oil and gas concern, began surging before it completed its reverse takeover with Metamaterials and analysts seem to agree that surge had nothing to do with Torchlight’s underlying financials (it was heavily in debt and listed as “inactive” in a Texas State registry for oil and gas companies.)

Nor does it seem to have been driven by META’s fundamentals — the company “generates minimal revenues and runs operating losses,” as Ian Bezek pointed out in this analysis for InvestorPlace. Bezek admits this is to be expected for a start-up company, but he goes on to question META’s approach to going public, suggesting that “if the metamaterials space is about to take off,” then META should have been able to stage an initial public offering (IPO) or attract a special purpose acquisition company (SPAC, a shell company that raises money through an IPO then looks for a promising company to buy). Merging with a struggling oil and gas company looks odd.

Dana Blankenhorn, another InvestorPlace contributor, was crueler — accusing META of playing “faintly smelly stock games to stay in business” and suggesting that “if there were anything real here, a corporation or Silicon Valley hotshot would have swooped in and commercialized it by now.”

And while not discussing the Torchlight/META merger, Rizwan Virk, a VC investor himself, has argued that “meme trading” amounts to a “pump-and-dump” scheme, in which:

…Groups of people collaborate to orchestrate a rise in a stock price based on increased demand, without regard for the company’s business prospects…

That means most of the people putting money into the next big thing aren’t really investing; they are truly just gambling online.

And though Innovacorp may not have set out to “gamble online” — its decision to invest in META far predates the hype — it ended up benefiting from an online phenomenon that Virk thinks “may not be a good thing for our markets or economy — or the little guy” and that the Securities Exchange Commission (SEC) in the US is starting to crack down on.


Stranger things

I asked Innovacorp some questions about its META exit in an effort to better understand what it thinks just happened and judging by the answers I received via email from Andrew Ray, its VP of investment, Innovacorp thinks it invested in an early stage company that will “help transform the Nova Scotia economy,” that after that company listed successfully on the Nasdaq it no longer needed Innvacorp’s support as an investor, so the corporation divested itself of its shares over “about eight days in the first two weeks of July 2021.”

Ray say they sold the shares through a broker on the Nasdaq at the market price at the time of sale — $6.00 to $3.80 USD (Out of curiosity, I checked META’s closing prices on the Nasdaq in July — it closed July 1 at $7.29 on July 1 and July 16 at $3.63.)

I also asked who would have made the decision to sell and Ray said “the board of directors made the final decision to sell the shares, upon the recommendation of Innovacorp’s investment committee and management team” but they also solicited external advice from “multiple investment banks/brokers on the best strategy to maximize the returns from the sale.” Although I don’t think you’d have to be an investment banker to look at this graph at the beginning of July and say “Sell.”

MMAT stock prices, Nasdaq

Source: Nasdaq

I asked specifically for a comment on allegations that Torchlight was a meme stock and that Innovacorp had capitalized on the hype surrounding it, and Ray responded:

Our view on the price behaviour of the stock pre-merger was that there was a material component of the price related to the Torchlight special dividend and a lack of market consensus on its value. We anticipated that following the merger (i.e., without a special dividend of undetermined value), the market would ultimately determine the underlying value of the META stock, which we believe happened. Our divestment plan and strategy was unchanged through these price fluctuations.

Torchlight rose 1,152.1% between January and June 2021, and while analysts agree the dividend was a factor in sending the stock “to the moon,” they also pointed to talk the stock was a potential short squeeze target and rumors META had a deal with Tesla and the general effect of the social media hype. So while it’s entirely likely Innovacorp’s “divestment plan and strategy” was “unchanged through these price fluctuations” — the plan and strategy being “sell as soon as META is listed on the Nasdaq” — the amount of money realized was surely the result of the strange circumstances surrounding META’s listing, and I feel like Innovacorp should address that.

As for the idea the market has now determined the “underlying value of the META stock,” that is surely complicated by the fact that META hit the jackpot as a meme stock and now has money in its coffers. As Squawk Box’s Jim Cramer said of the deal, “I am actually a believer in meme stocks that have raised money because then they’re better.”



To be fair to all concerned, I have to note there are also analysts who believe in META’s value proposition — they think the metamaterials space is going to boom and that META, the first metamaterials firm to list on the Nasdaq, with its six registered trademarks, 58 patents and 44 patents pending (numbers I took from an SEC filing) will boom with it.

David Moadel in InvestorPlace was excited by META’s H2 total revenues, which grew 88% year/year to $1.2 million and thinks these figures “could potentially get even bigger” thanks to “some apparently in-progress deals with big-money original equipment manufacturers (OEMs)” META CEO George Palikaras has been teasing. (Make of that what you will.)

And META is using some of its meme money to buy a company that generates actual revenues — in August, it announced its intention to buy British Columbia-based Nanotech Security for $90.8 million.

Nanotech, which has a “confidential central bank customer,” has products that include “secure and memorable security labels, stripes, patches, and colour-shifting foils for currency authentication and brand protection” and revenues of $6.1 million for the nine months ended 30 June 2021.

Nanotech investors voted overwhelming to approve the acquisition on Tuesday.

My point, you see, is not that META is necessarily a bad company.

My point is that Innovacorp’s META win had little to do with whether META was a good company and everything to do with the strange circumstances under which it went public.

But that isn’t how Innovacorp sees it. Ray told me:

With the returns from the Meta Materials exit and the value held in our remaining portfolio companies, our vintage 2015 venture capital fund ranks in the top 5% of all venture capital funds in North America.

Next week: Does Innovacorp rank in the top 5% of all venture capital funds in North America?


P.S. I ran across this quote from Ray that I couldn’t fit into either Innovacorp article this week but really want to include. Here he is explaining how Innovacorp plans to “scale” Innovacorp:

…by generating above one-X returns. If we have a $25 million fund and get $25 million back, we keep doing what we’re doing. But if we have a $25 million fund and can two-X or three-X that, then now we have a $50 million fund that we can start to deploy.

Did you hear that? That was the sound of failed VC managers the world over slapping their foreheads and saying, “Why didn’t we think of that?”