Power

Inside a SPAC: How it feels to go public with 2020's hottest financial tool

Shift went public this summer using a SPAC. Here's how it happened.

Inside a SPAC: How it feels to go public with 2020's hottest financial tool

Despite the work and the learning curve, SPACs are more popular than ever.

Image: Enrico Magistro and Protocol

You know the tubes from "Futurama," where you step in and are accelerated at super-high speed to your destination? That's how asset manager Daniel Cohen describes the SPAC process. He should know: His SPAC has just taken used-car sales company Shift public.

But doing things so quickly isn't easy, Cohen says. IVP's Jules Maltz concurred, pointing to IVP portfolio company Hims and Hers, a telehealth company currently in the process of going public via a SPAC. "Doing a SPAC is like doing an IPO, an M&A transaction and a financing, all in one," he said. "It's a lot of work." And for many involved, doing a SPAC is a totally new experience, full of peculiarities that you might not expect.

But despite the work and the learning curve, SPACs are more popular than ever. They have already raised over $41 billion this year: more money than in the last 10 years combined, according to Bloomberg data.

To get a better idea of what exactly goes on inside a SPAC, Protocol spoke to founders, investors and sponsors who have all been involved in the process this summer. And their responses suggest SPACs might just be here to stay.

SPAC 101

For Shift co-CEO George Arison, it all started with an email. Manish Patel, an HCP partner who sits on Shift's board, sent Arison a bank report on SPACs, back in 2019 when they weren't something that most people in Silicon Valley were acquainted with.

"Frankly, it went a little over my head," Arison said. "I didn't fully understand what they were doing — and at this point, most people did not." Shift had entered 2020 with a plan to raise a private capital round in the spring, with tentative plans to IPO in 2021. Then came the pandemic. "COVID hit literally weeks before we were getting ready to go out into the market," Arison said. "Fundraising ground to a halt." But Shift, after a brief slowdown, started to do really well. "So we started thinking about, 'hey, what are the alternatives to a private raise?'" Arison said.

Arison and co-founder Toby Russell decided to explore SPACs in more detail. "We had to get educated," Russell said. Shift's bank, he said, was really helpful in that process, explaining the potential benefits to the founders and their board.

Maltz seconded the value of external advice, saying that having an impartial adviser was "the most important thing." Given the older, relatively bad reputation of SPACs — they were often viewed as a way for poor companies that couldn't IPO to go public — a lot of people have approached them with caution up until now. At first, Maltz said, he was totally opposed to the idea of a SPAC. But as he learned more, he came around. "One of the values," he said, "is that you can tell the story in a more detailed way," pointing to the looser disclosure requirements compared to an IPO, which allow companies to directly share financial projections.

For Russell, the certainty of a SPAC was another advantage. "Given the volatility and risk in the COVID environment, it made the SPAC stand head and shoulders above an IPO," he said. "The choice of a SPAC was intentional, specifically to minimize the amount of things that would be surprising."

Speed was another consideration. "Given how well the public markets were performing, getting into [them] faster than we had originally planned made a ton of sense," Arison said. Maltz agreed, noting that the current telehealth boom made speed of the essence for Hims and Hers.

But deciding to do a SPAC is just the start of the process.

Finding a partner

Next, companies have to find a SPAC to merge with. Those SPACs — essentially blank-check investment vehicles taken public with a large chunk of investor cash — meanwhile, are out looking for companies. They usually have specific sectors in mind.

"We were looking for a high-growth insurance company that was ready to go public," Cohen said. Cohen and Co.'s SPAC went public last year, then spent a lot of time searching for the right prospect: Cohen said they looked at hundreds of companies, with "at least five that were serious contenders." Before coming across Shift — which, it's worth noting is not an insurance company; more on that below — Cohen got very close to doing a transaction with a "growing insurance agency," he said. "But when we saw Shift," said Cohen, "we realized this would be just a tremendous opportunity."

Shift and Cohen were introduced to each other via a mutual contact, and once in touch, they quickly realized that it was a good fit. There wasn't much negotiating, Arison said: "Everyone [was] very aligned on getting it done well." Discussions, he explained, were more focused on, "Hey, what's the right story here, and how do we articulate that story correctly? And in light of that story, how do we position the valuation to be correct?"

Not all deals are so seamless, though: Maltz said the Hims and Hers team negotiated quite hard with their SPAC on valuation.

Laying PIPEs

If picking a valuation is tricky, at least SPACs can offer a useful tool to help validate it: private investments in public equity, or PIPEs. That's a process that takes place after a letter of intent is signed, but before the deal is publicly announced, where the company raises a private financing round from external investors.

Raising a PIPE is a lot like a normal fundraising round. Companies meet investors, tell them their stories, and take subscriptions for a certain number of shares. "The ideal outcome is for the PIPE to be oversubscribed," Arison explained, because that helps with the next phase: the de-SPAC process. Once the PIPE is closed and the SPAC merger announced, investors that originally bought into the SPAC for short-term arbitrage opportunities will start to sell, as they often have no interest in actually owning the company being taken public. Ideally, long-term investors that do want to own the company will buy from them. If the PIPE is oversubscribed, investors who couldn't get in during the PIPE can buy in the public markets, instead.

"PIPEs are critical for SPACs," Arison said, because they "validate the valuation." In other words, PIPEs prove that there's investor demand for the company at a certain price. Maltz agreed: "The nice thing with the PIPE is that it gives you confidence that there's going to be a shareholder base that's going to want to buy your stock at the transaction price." Yet there's still some reticence to them, partly because of their dilutive effects. "There are people in Silicon Valley who don't understand SPACs and think that they should not do a PIPE," Arison said. "That is insane, frankly."

The de-SPAC process is when things start looking a little more like a typical IPO. Shift had a "three-week roadshow, where we met with a broad spectrum of investors," Arison said. "Some of those are people who had initially bought into the IPO of the SPAC … that's when you potentially have a chance to convince some of those to stay with you." Shift faced the added problem of merging with a SPAC that was designed to find insurance companies. But that didn't cause problems, Cohen said. "We've always been hugely opportunistic," he said, and the SPAC's investors knew that, trusting Cohen to go for the best opportunity even if it didn't fit the original mission statement. Ultimately, nobody who bought into the SPAC at IPO asked for their money back.

The roadshow is also a chance to meet with new investors who might be interested in buying into the SPAC for the long term. But there's also another audience to consider: "A massively critical piece here is analyst coverage," Arison said. It's crucial to being public, he argued, because it can put upwards pressure on the stock price. Shift duly spent some of the summer speaking directly with analysts, as well, explaining the company to them.

Eventually, though, the SPAC process just … ends. Old investors leave, new investors join, and one day the SPAC's ticker switches over to the ticker of the new company. Though even that can be complicated: Russell said an "administrative delay" with the ticker swap delayed Shift going public by a day.

SPAC to the future?

Having now been through the process, everyone we spoke to had thoughts on whether SPACs are the future.

When asked if SPACs will become part of tech's financial playbook, Russell said: "I think it can. I'm not certain that it will." A lot of it, he thinks, comes down to how future SPACs perform. "If it's used well, it will become more popular and it will get a good reputation. If it's not used well … it could go the other way," he said. Arison is particularly concerned about the prospect of the latter. "One of the things I worry about with this proliferation of a bunch of people raising SPACs is that they don't actually know what they're doing, in terms of the de-SPAC process," he said. The proliferation is changing the way SPACs work, though. "It'll give leverage to the companies to negotiate better and better terms," Maltz said. That might not necessarily be in terms of the fee, or "promote" that the SPAC gets, which is often "a rounding error for a good company," Cohen said. But sponsors may increasingly have to put in more capital during the PIPE or de-SPAC process, he thinks. "Those sponsors who are great but under-resourced are going to have a much harder time finding a company," he said.

In all likelihood, SPACs will neither be the future for everyone, nor will they be consigned to the trash can of defunct financial inventions. If going public is like going to a restaurant, Maltz said, SPACs are simply a new item on the menu. You just have to be prepared for what your decision entails.

Fintech

Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep ReadingShow less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep ReadingShow less
FTA
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.
Enterprise

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep ReadingShow less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep ReadingShow less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.

Enterprise

Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep ReadingShow less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories
Bulletins