Neil Patel

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Every entrepreneur should understand what is a SPAC? SPACs have been commanding a lot of media attention. Some commentators love them. Others fear them. So, what is a SPAC?

This unique form of corporate dealmaking has plenty of fans and haters. They have been rising in popularity and visibility.

Some may consider them to be the new way to do business. Others are concerned they are a bubble or fad.

Let’s take a look at the facts, beyond the hype and generalized criticism, as well as how they compare for founders and investors. This information will help you make your own decision.

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    What Is A SPAC?

    SPACs aren’t as complicated as the mystery in the media and acronyms may suggest. It simply stands for Special Purpose Acquisition Company.

    Essentially a SPAC is a company that really has no other business of its own than to specifically acquire other companies.

    Think of them as a holding company or entity. What is special about them is that from the beginning they are organized and designed to be publicly traded companies.

    They launch themselves with an IPO, to raise public money from regular investors. Then go about buying private companies.

    Through this strategy, they take private companies public. Though this is effectively a backchannel process.

    It effectively helps the target company which they acquire to circumvent and skip all of the regular processes of filing to go public and launching an IPO.

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    A Quick History Of SPACs

    SPAC shell companies are much like LBO (Leveraged Buy Out) firms. It’s a strategy that has been seen since at least the 1980s under different names.

    Wikipedia traces the origins of SPACs back to the founders of Early Bird Capital and the venture capital surge of the 1990s. Since the 90s, they have been seen in the fields of ….

    SPAC deals reportedly saw a resurgence after 2003, and again in 2014. They have perhaps gained more credibility with increased observance by the SEC and major banks.

    Some liken these companies to competitors of strategic business buyers and private equity.

    By 2014, SPACs were responsible for 12 IPO deals and $1.8B in investment capital for the year. That should give you an overview of what is a SPAC.

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    The Hype & Criticism Of SPACs

    SPACs have been gaining increased attention in the news headlines over the past couple of years. Most notably for the surging number of transactions and billions of dollars flowing into them.

    As well as more high-profile individuals and firms being involved in them. However, there seems to be as much acclaim for these big deals as there is criticism in the media.

    Many commentators have seized on their surging popularity as a chance to publish more clickbait content online.

    Most notably ringing the alarm bells that this may be a new bubble forming. One that may be unsustainable.

    There is no question that SPAC deals are becoming bigger and more popular. Sponsors have also certainly made a mint from promoting these deals and structuring them.

    At the same time, notable publications like Bloomberg and Harvard have also highlighted some of the lackluster performance of SPACs, behind the scenes.

    For example, SPAC promoter Chamath Palihapitiya, who has seen his performance both go up 150% and down 50% in a year.

    Harvard has also highlighted that post-merger, SPACs have a track record of falling sharply, by an average of around 30%.

    So, through the IPO, companies may typically surge dramatically. Though many have fallen sharply soon afterward.

    This may not be that uncommon, however, given the performance of other grand IPOs in recent years, and the high failure rate of mergers and corporate integrations.

    SPAC Stats

    • By 2017 SPAC volume had grown to 34 deals, and $10B
    • A quarter of all IPOs in 2020 were in the form of SPAC deals
    • SPACs grew by 5x in 2020 alone
    • More than $100B was invested in SPACs in just the first few months of 2021
    • In Q2 2021, PWC reports IPOs outperformed SPACs on returns across all major sectors

    Digging deeper into the data, SPACs seem to have become very competitive with traditional venture capital and IPOs.

    In fact, in the past two years, SPAC deal volume may have outpaced traditional IPOs. With the amount of capital being put into SPACs about to surpass traditional VC investment.

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    SPACs Versus Traditional IPOs

    When understanding what is a SPAC, know the main difference between a traditional IPO and a SPAC deal.

    The target company, once acquired and taken public, is able to avoid all of the regular filings, paperwork, and scrutiny of working with investment bankers and the SEC to go public.

    This may lead to a shorter time frame, great efficiency and cost savings, and ease of accessing public capital.

    This may offer many benefits to startup founders and their early investors who are seeking to cash out and liquidate their investments.

    However, there may be some debate over the value for the public, amateur investors whose money is replacing much of this savvy institutional capital. Especially given the overall performance of this market.

    Some companies being acquired in SPACs may otherwise have to wait much longer to go public or may have to stay private.

    Consider WeWork, which infamously crashed, losing its investors’ tens of billions of dollars. Yet, then went for a SPAC to raise another $9B from the public.

    SPACs Versus M&A Exits

    The other main option to going public for startups is an M&A deal. Merging with another company, or being acquired by another larger entity.

    While there are certainly advantages to going public, managing a public company with public governance is a completely different beast to managing a private one.

    Even if you already have an extensive board of outside investors. Many entrepreneurs just don’t enjoy being the head of a public company.

    Though some do seem to do well at it. It is something completely different, and it is worth considering this part of the outcome before diving in.

    Blank cheque company SPACs often offer a combination of cash and equity in the form of stock in the new parent company.

    Though founders may also negotiate a varying percentage of this, to either try to maintain more control of their company post-merger or to extract more cash at the time of the acquisition.

    Mergers may be more attractive for mission-based founders who really want to be intentional about the next chapter.

    These are the people who are making the deal for the best interest of the company, customers, and employees, versus just seeking a cash exit.

    It is perhaps a better way to maintain the reins and control and to negotiate terms you have more confidence in sticking after the deal closes.

    SPACs Versus Staying Private

    There has certainly been a growing trend in startups staying private longer. They’ve been getting bigger as private companies.

    And they have been attracting far larger rounds of institutional capital through later and later funding rounds. It is now not uncommon for a startup to go through a Series D or E round.

    Staying private certainly has its advantages for startups and their founders. Depending on how funding and new capital are structured, it can provide a lot more control.

    A lot more control of daily management, the direction of the company, adhering to the original mission, and how it takes care of employees and customers.

    We’ve seen plenty of big IPOs, which have turned companies sour due to endless poor decisions after going public.

    Of course, companies including later-stage startups often need access to more capital. How viable this is can depend on the amount of capital they need to raise in a given round. As the number of sources of big money can be more limited.

    Macro factors can require plans to change too. Not just changes in trends in the industry, but in larger consumer, business, and economic trends as well.

    Capital market trends can change. A few months can see a lot changing in private capital appetites and capital flows.

    Selling or going public may end up being the only or most attractive option, despite previous aspirations. The opposite can be true as well.

    Understanding these factors will help you learn the nuances of what is a SPAC.

    Notable SPAC Deals

    Notable SPAC deals and people involved in SPAC deals have been rising too.

    Notable SPAC deals include:

    • Burger King and Bill Ackman as one of the early and most notable of them
    • Opendoor
    • Grab Holdings at $40B
    • QuantumScape, which saw shares jump 50% on the first day

    Draftkings is also a prime example of both the best and worst of SPACs. The company went public through a SPAC, seeing its share prices grow by more than 7x, before horribly crashing again.

    Then there is Nikola. The electric truck company saw its shares rise over 6x in value, before crashing back to virtually where they started.

    At the time of publishing, the company’s founder was also out on bail of $100M after being charged with fraud and misrepresenting the company to investors.

    Plenty of famous people have jumped in to put their names behind SPACs. Through the SEC warns investors that a famous name by no means should be the sole basis of a decision to invest in one.

    As an entrepreneur, you should also take the time to understand what is a SPAC.

    Some notable people getting into SPACs have included:

    • Stephen Curry
    • Serena Williams
    • Alex Rodriguez
    • Richard Branson
    • Ciara
    • Kevin Mayer

    SPACs For Startup Founders

    SPACs are very interesting for founders. You can’t ignore them. On one hand, leveraging the SPAC craze and option to take your company public and bring in more cash is certainly attractive.

    Depending on your company, you may have few other options. Especially if VC money and traditional IPOs continue to be eclipsed by SPAC deals and buzz.

    It may be a necessity if you need more money in, and you aren’t really ready for a traditional direct IPO.

    Of course, SPACs can be dangerous too. The majority of startup founders just don’t love remaining the head of a public company.

    It will completely change the DNA and operating mandates of your company, not to mention the control structure.

    Counting on your shares in a SPAC exit to hold their value or to increase over the medium term does not seem to have much fact-based support behind it. Be sure you can cash out quickly before the dip.

    If you are really a mission-based entrepreneur, then you may find a merger or acquisition actually far better meets your goals and vision for the company and product.

    SPACs For Investors

    SPACs can’t be ignored for investors too. It is wise to know all of your options. Sponsors and promoters of these big SPAC deals certainly seem to be the big winners, with little to nothing to lose.

    As a fund or regular individual investor, there may be some great short-term gains to be found in these deals.  However, if you care about the end game and finale of the story and venture, then this may not be the investment for you.

    Summary

    SPACs have become very big news. It has become virtually impossible to overlook them. Even more so as an investor or founder.

    They certainly come with some serious benefits for founders and startup investors. Though their long-term performance is certainly questionable given the data.

    As always, be sure you understand these vehicles and the alternatives before using them or making an investment. Don’t just be carried by the hype, or ignore them out of fear.

    Rely on great advisors to guide you to make the best moves for you and your company. Explore what is a SPAC and how it works.

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    Neil Patel

    I hope you enjoy reading this blog post.

    If you want me to help you with your fundraising, just book a call.

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