2020: A SPAC odyssey
A year of uncertainty opened tech's eyes to an IPO alternative. Whether the attraction will remain in 2021 is less clear.
For many in the tech industry, 2020 was a year of two acronyms. There was COVID, obviously. And then there were SPACs.
Special purpose acquisition companies, or SPACs, were catapulted into the mainstream this year, quickly rising from a niche IPO alternative to a credible option for a lot of startups. The numbers are testament to the explosion of interest: Over 66 SPACs have been raised this year, according to PitchBook, up from 30 in 2019. Heading into 2021, plenty of those are still looking for targets to take public, suggesting the SPAC boom isn't over just yet.
Though sometimes seen as complicated, the underlying SPAC process is relatively simple. A "sponsor" (usually a financial institution) creates a SPAC, listing it on the stock market and raising money from public investors. The SPAC's aim is to find a private company, acquire it and take it public, with the SPAC's investors ultimately owning a portion of the target company. Once the SPAC sponsor has found a target, they announce the deal, and the "deSPAC" process begins: Current SPAC investors are convinced to keep their shares and new investors are courted. If all goes to plan, the target company ends up public having raised money, with the SPAC sponsor typically taking a fee in the form of stock.
SPACs have steadily been growing in popularity for a few years now. Over that time, they've been shedding their older reputation as a way to list unattractive companies. In the tech industry, Chamath Palihapitiya was their biggest proponent, taking Virgin Galactic public via a SPAC last summer. The success of that listing attracted interest from others, and some boards and founders started to learn about the process. In the broader discussion of IPO alternatives, though, they were still second place to direct listings.
Then came March. Over the space of a few days, the stock market recorded some of its worst days on record and private fundraising all but dried up. For companies that wanted to go public or raise money, SPACs suddenly looked like a beacon of hope. SPACs involve negotiating with just one party — the sponsor — rather than the multiple investors that have to be convinced to buy into an IPO. And if you can't agree on a price that suits, you can always decide not to proceed without facing the embarrassment that comes from pulling an IPO at the last minute. In an uncertain environment, those advantages made SPACs particularly appealing.
"In the earlier part of this year when the market did slow down and we saw heavier volatility ... [SPACs provided] a very attractive alternative," Nasdaq head of capital markets Jay Heller told Protocol. Shift co-founder Toby Russell, who used a SPAC to go public this year, cited the "volatility and the risk in the COVID environment" as one reason why a SPAC stood "head and shoulders" above an IPO for Shift.
As markets started to recover in the spring, the other big advantage of SPACs came into play: speed. It's significantly quicker to go from private to public via a SPAC than it is via an IPO. In a market where no one knew if the good times would last, that was particularly appealing. "Given how well the public markets were performing," Shift co-founder George Arison said, "getting into the public markets faster than we had originally planned made a ton of sense."
In other words, the SPAC boom was partly driven by necessity. Hard as it is to imagine now, with IPOs popping all around us, in the first half of this year, SPACs were one of the only ways for some companies to raise money and go public. But that semi-forced adoption opened people up to the possibility of using SPACs even in more normal times, with investors and entrepreneurs alike starting to see their potential benefits. The speed that was a necessity this year might be a nice-to-have in other times, for example. And unlike IPOs, SPACs allow companies to file forecasts. Citi's co-head of North America equity capital markets, Paul Abrahimzadeh, said that gets "the market more clarity on growth," making SPACs particularly appealing for companies with hockey-stick performance.
Investors started to get in on the trend, too. Ribbit Capital, FirstMark and Lux Capital have all launched their own SPACs. For FirstMark, there's the potential for a new kind of "full-stack VC firm": It said it's open to taking one of its portfolio companies public, meaning it can guide startups all the way from conception to listing. Even SoftBank, the biggest proponent of "stay private longer," has said it plans to launch a SPAC.
Going into 2021, that influx of new SPACs could make them even more attractive for startups looking to list. "It'll give leverage to the companies to negotiate better and better terms," IVP's Jules Maltz said. Daniel Cohen, who ran the SPAC that took Shift public, agreed, saying that sponsors will likely have to make increasingly bigger investments in the companies they take public to seal a deal.
As with any new trend, though, there's a risk that it's inflating too quickly. "One of the things I worry about with this proliferation," Arison said, "is that [sponsors] don't actually know what they're doing." Navigating the "deSPAC" process, he said, is tricky: Sponsors have to convince the SPAC's backers to stay invested and court new investors, which is easier said than done. If new SPAC sponsors fail to do a good job, there's a risk that some high-profile SPACs won't go according to plan — taking SPACs' reputation back to square one.
Next year could therefore determine whether SPACs stick around as part of the going-public arsenal, or if they're relegated once more to an option only for the least-attractive companies. And with SPACs facing plenty of competition from other innovative methods — new regulation could make direct listings much more attractive, while others are experimenting with auction-based IPOs — their success is by no means guaranteed even if their reputation remains untarnished.