Hey, tech bro, can you spare a blank check?
Apparently so, given the recent explosion in SPACs — the jaunty acronym for “special purpose acquisition companies.”
While this investment instrument has been around for a long time, it has suddenly become the hottest way to raise capital, especially in tech. More than $30 billion has been raised so far this year through 75 SPACs. That’s more than double last year, with more to come in 2020.
It’s a good sign, since SPACS offer smaller, innovative and big-idea companies — like electric-transportation start-ups, savvy health care firms and space-exploration companies — a way to get enough capital to evade the tractor beams of bigger companies and reach escape velocity as independent businesses.
SPACs are essentially a back door to taking a start-up public, an alternative to a traditional I.P.O. An acquisition fund is formed — the SPAC — with a so-called blank check: Its goal is to acquire an unspecified company within two years. The target company becomes public through the merger.
Once used mostly by distressed companies in need of cash, SPACs are now seen by many forward-leaning companies as a way to go public with a lot less scrutiny and a lot more speed.
They’ve certainly become hot in the tech sector, spurred in part by top Silicon moneybags like Chamath Palihapitiya.
He’s the first person I heard talk enthusiastically about finding new ways to get capital to promising companies. He invited me — trapped me is a better way to describe it — several years ago into his office to wax poetic about SPACs. His goal at the time was to convince start-ups to move away from the more traditional investment-bank landscape to using SPAC “sponsors” like him.
“They suck away all the value,” he said flatly at the time about bankers and their clients. It was one of the nicer ways he described the I.P.O. process.
On the night that his first SPAC went public in 2017, I met him at a fancy New York restaurant where he was celebrating a company that had no assets except a $600 million pile of money he had raised for Social Capital Hedosophia Holdings. At the time, his SPAC was marketed as I.P.O. 2.0, which many people in tech derided to me privately. Mr. Palihapitiya, pricey glass of wine held high, couldn’t care less about the doubters.
And, after he finally merged that SPAC with the commercial human spaceflight company Virgin Galactic last October, he raised about $1.1 billion for his second and third SPACs in late April.
Mr. Palihapitiya isn’t the only one. On the investment side, there are lots of different SPAC flavors. They include Bill Ackman’s Pershing Square Tontine Holdings, which has raised a giant $4 billion SPAC that will perhaps target a “mature unicorn”; a $300 million SPAC from the former speaker of the House, Paul Ryan (you read that right); and even one from a sports manager, Billy Beane, whose $575 million sports-focused SPAC is “elephant-hunting in European soccer.”
These many SPACs are finding interesting targets. This week, the 3-D printing company Desktop Metal merged with Trine Acquisition, after saying it had planned a public offering. In June, the fantasy sports and betting outfit DraftKings gambled on a SPAC.
The list goes on. And while it can feel like a shell game, and there are possibilities for abuse, an essay this week by Bill Gurley, a well-regarded venture capitalist, got a lot of attention for declaring SPACs as “Door No. 3” for techies — an attractive third option for raising money. (The other doors are a traditional I.P.O. and the recently popular direct listing.)
Given the boom in SPACs — meaning there will be more competition — Mr. Gurley rightly thinks these financial instruments are a better deal for companies he invests in. They also offer a refuge from the underpricing of I.P.O.s, which leaves billions on the table that should go to the companies and not to Wall Street firms and their clients. It’s a longtime complaint of venture capitalists and start-ups, which are not in complete control of that process.
“The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees and investors of billions of dollars each year,” Mr. Gurley wrote.
Mr. Gurley is still an admirer of direct listings, which Spotify used in 2018 to much acclaim. Their downside, Mr. Gurley notes, is that a company can’t use them “to go public and simultaneously raise capital.” While the exchanges and regulators are working on perhaps changing that, any company that needs more capital — like a maker of electric trucks, for example — is taking a big risk using the direct-listing method.
Thus, SPACs offer perhaps the most flexible option and, more to the point, if I’ve correctly located the most important sentence in Mr. Gurley’s long essay, with SPACs, “Everything is negotiable.”
Those three words are the kind of sweet nothings that tech entrepreneurs and their venture capitalist friends like to hear whispered in their collective ears. With more choice — from picking board members to setting prices — it’s all up to the core group of investors and executives, with the added plus of having SPAC sponsors who are likely to have a deep understanding of the businesses. And, with more SPACs around, deals can be made among companies; we may even see more “SPAC-offs.”
As for missing out on the cachet that comes with an I.P.O., with all of its loud bell-ringing and fancy road shows, there is hardly an entrepreneur I have met who likes the I.P.O. process; often they compare it to dental implant surgery.
Is a SPAC the answer to their pain? We’ll see soon enough as more and more start-ups have announced I.P.O. intent recently.
So, as Mr. Gurley says, does that mean that more promising companies will choose Door No. 3?
I hope so.