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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.

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