🛸 WWS - World Wide SPAC
When you talk about startups, it's impossible not to mention the exits. The exits are liquidity events during which investors sell shares of the company and (hopefully) realise a hefty return. These are acquisition, merger, IPO, direct listing ... and SPAC.
WTF is a SPAC?
SPAC stands for special purpose acquisition company. Such entities raise capital through an initial public offering and use the funding to acquire/merge with an existing company.
Like CEOs of normal companies in the process of doing an IPO, SPAC managers go on a roadshow to drum up the interest in the vehicle. But there is a major difference: it is unknown to investors what the target of the SPAC is going to be (Forbes). That's why they are often referred to as blank check companies.
Unicorn chasing SPACs
SPACs come in all sizes. Some manage more than half a billion dollars (Seeking Alpha), others are as small as a $6M trust fund. On average the private company to-be-merged is 4 to 6 times the SPAC (TechCrunch <- great overview, worth reading). The valuation of the company varies accordingly, but the profile stays the same: R&D heavy companies, addressing a big market, but with immature unit economics.
The SPAC is short on capital? No problem there are PIPE deals, private investments in public equity. The manager will approach institutional investors and disclose the acquisition target, creating information asymmetry between retail and institutional investors.
On average a SPAC has a 2-year life and requires $2M to cover the operating expenses and the management fee corresponds to 2%. Many investors have been wary of them, but SPACs are now on the rise.
The trend increased the pace in October 2019, when Richard Branson's Virgin Galactic went public with a $2.9B market cap (Reuters). Behind the operation there was ex-Facebook growth exec Chamath Palihapitiya, who addicted to the kick went on becoming a serial SPACer (TechCrunch). Then 2020 came and SPACs raised $47.1B - 44% of all US IPOs (CB Insights). Experts and celebrities followed suit and meddled with SPAC, e.g. Silicon Valley entrepreneurs Reed Hoffman and Mark Pincus, music producer Jay-Z, front office executive Billy Beane and infamous ex-Uber executive Emil Michael (TechCrunch).
SPAC v. IPO
SPACs are an attractive offering. The target company is able to go public quickly without much of the volatility associated with a traditional IPO. Meanwhile investors get access to high-reward investments with limited risk.
Great! How come they aren't as big in EU then? European investors face stricter restrictions, but there are early signs that regulators started looking into it (LinkedIn).
If so, would SPACs contribute to the liquidity of markets where entrepreneurs and private investors have a hard time exiting their ventures?
To be continued...