SPAC Deals Boost Local Companies and Workers
Anever-growing pot of Bay Area venture capital money increasingly spills into public markets in a new way – the Special Purpose Acquisition Company (SPAC).
The Bay Area has seen its share of blockbuster Initial Public Offerings (IPO) over the last two years: AirBnB, Snowflake, Uber, Lyft, DoorDash and Pinterest, to name a few. Now, SPAC is used by less known companies in a process sometimes referred to as a “backdoor IPO.” These backdoor IPOs happen in two main steps.
First, a SPAC raises its own money and does its own public listing without any real business activity. At this point a SPAC is often called a “blank check company,” as it is just a corporate shell, capital and a dealmaker looking to invest in a real business. This makes the initial public listing of shares simple on the regulatory front.
The second step is when the SPAC merges with an actual business. This step is what transforms an actual pre-IPO business into a publicly-traded company.
Over the last six months, the SPAC process has already been used by Bay Area companies, including lidar companies (lidar is a detection system that works on the principle of radar, but uses light from a laser instead) such as Ouster, Luminar and Velodyne; biotech start-ups (Nuvation Bio, 5:01 Acquisition Corp); per-mile auto insurance (Metromile); a cannabis company (Left Coast Ventures) and a real estate transaction technology (Opendoor).
The stage is set for even more of these backdoor IPOs – four times as many blank check companies were formed in 2020 compared to 2019, with $80 billion to invest. That’s $80 billion that needs to find a real business for a backdoor IPO. Otherwise, it will be returned to investors – often within 24 months or less. These dealmakers are motivated.
Companies use SPACs for a variety of reasons, but some of the most common are avoiding typical IPO regulations and getting a better price for the company. Some investors are excited about broader public participation in younger growth companies, citing the rise of the pre-IPO “unicorn” – a pre-IPO company worth over $1 billion. If AirBnB had gone public when it was worth $2 billion instead of $50 billion, then more of the public could have participated in profit-making – or so the argument goes.
Others are more cautious. There is a large body of evidence showing that IPOs in the aggregate under perform the broader market. For every Amazon, there are many more like Webvan, pets.com, and eToys.
Perhaps the hottest company to SPAC in 2020 was Nikola Corporation, a zero-emission automobile company. The share price rose eight times over, with the company reaching a total value of over $27 billion. The valuation began rolling over when it was revealed a demo video of the Nikola One showed a prototype that could not actually propel itself – it was just rolling downhill. The founder and CEO resigned.
It doesn’t take a lot of imagination to see that some people are about to make a lot of money, while others are going to get burned. When you hear your friend’s son quintupled his Robinhood account, don’t be inspired to bet the farm on a cannabis SPAC.
And if it’s your company that goes SPAC, you may have a better sense of the prospects and vision for the company. Even if you are confident in the company’s future, keep in mind that Webvan and pets.com visions came true – for Amazon and Chewy.
Whether you are on the outside or the inside, you may want to limit your SPAC exposure to what you can afford to see roll downhill. Picture: Nikola One rolling downhill to oblivion.