SPAC Attack

There has been a big tidal wave recently. In the first half of 2020, there have been 48 SPAC IPOs completed, with almost $18 billion raised in proceeds. There is another $5.4 billion of SPACs on file to complete IPOs this year.

After Chamath Palihapitiya’s (of Social Capital fame) move with Virgin Galactic, now you see top tech players like Kevin Hartz, Reid Hoffman, Marc Pincus & hedge fund giant Bill Ackman jumping on this trend too. 

What is a SPAC aka Special Purpose Acquisition Company?

A SPAC is a blank-check company that raises capital from investors through an IPO for the purpose of finding a private company to acquire. It is basically a new path for tech companies to go public that could compete with the present day ugly IPO process, and win.

Investors get both warrants and common stock, and a set period to find a target, which is usually 2 years. Additionally once this money is raised, the manager can take up to 20% of equity interest. 

But this is the trade off for faster time to the public market.  The benefit is you are able to get the money quickly and with more certainty versus the traditional IPO method. Also in the new SPAC 3.0, the financial structures tend to be cleaner. Basically they do not have too many weird terms, like it used to be in the 80s & 90s when it was the financing of last resort. 

Why are SPACs happening? 

The answer is pure supply and demand. 

On the supply side there are just a lot less publicly traded companies. In 1996 there used to be 7322 listed companies. In 2017, there were only 3671 publicly listed companies. 

So for example in the Mid-70s, there were on average 280 Initial Public Offerings (IPOs) per year. Fast forward now it’s about 115 IPOS. One reason for this beside a higher bar for going Public, the most common exits for Private Equity and VC funded companies used to be IPOs.  Now they are acquired either by strategics or financial players. 

Add on top of this the massive wave of $$ that has come into public equities from investors from all over. Basically a massive way of demand which has driven the US Stock market’s total valuation to $38 trillion dollars. Yes, trillion with a “T.” (for tech folks, there is $480B invested in Venture Capital as asset class)

From a company perspective why do it? Why not go the IPO route? 

Well, IPOs are bloody expensive as it could be up to 3-7% of the proceeds. There are also lots of regulatory hurdles. There is a big time element, a normal IPO process could also take more than a full year. It’s been shown how much $$ companies spend to go public. 

Also how much $$ is left on table because of gross and systematic underpricing and un-aligned incentive structures with Wall Street i-Banks. Just look at the crazy spikes of the share price on day one. That means the IPO has been underpriced and that money has been left on the table for the company.

SPACs are happening because it can be a way better deal for founders. Yes, you have to give up 20% “promote” of the shares in the SPAC but at least you are better aligned on long term incentives. 

What are considerations a founder needs to keep in mind when choosing a SPAC?  

Your partner leading the SPAC ideally needs to have deep operational experience & credibility with public markets. As Alex Danco says “SPACs are highly centred around the cult of personality of the sponsor.” That is why I mentioned heavy hitters in the tech market like Reid Hoffman, Kevin Hartz, Marc Pincus and Bill Ackman previously. 

When to do it? 

$50M in revenue and high growth, like a series D. It’s a new and very feasible exit as well for founders and Venture capitalists. Queue the most recent SPAC, Opendoor for example. 

I’m quite interested in this movement and think this is the one of the most promising new developments in the capital markets. As Marc Pincus describes:

“SPACs as “venture at scale,” letting companies go public in close partnership with experienced growth investors. The “scale” comes from SPAC founders pushing the companies they merge with to maintain a venture mind-set even after they list. “There’s an interesting entry point into a company at the point they’re going public,” Mr. Pincus said, “to help them think, ‘How do you go from $1 billion to $10 billion in revenues? How do you 10X and 100X your business long after you’re public?’”

There is a lot to like about SPACs and a very big difference from the sketchy investment vehicles they were decades ago.  This is the future and think they are here to stay. Founders and investors rejoice!