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.

2020: A SPAC odyssey

Was it just a fad, or is the SPAC here to stay?

Image: Grafiker61/Protocol

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.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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