SPACs, long avoided in Silicon Valley, becoming popular in technology

Roger Lee of Battery Ventures says “SPAC” used to be a “bad four-letter word” in Silicon Valley.

Now, the board of all high-profile start-ups is discussing special-purpose acquisition companies as a legitimate way to go public, according to Jeff Crowe of Norwest Venture Partners.

In the eyes of Lux Capital co-founder Peter Hebert, SPACs are “stealing the 2021 IPO calendar”.

“We encourage our high-quality companies to take this seriously,” said Hebert, whose company created its own health technology SPAC in October and is pursuing a goal. “The vast majority of companies looking to make traditional public offerings are double-track SPACs.”

Within Lux’s portfolio, the 3D printing company Desktop Metal went public through a SPAC in December. Others, like real estate software companies Latch and Matterport, announced deals this year with so-called blank check companies.

The sudden burst of SPACs reminds some of the old dot-com bubble in the late 1990s. Pre-profit businesses with ambitious goals are being made public in astronomical assessments, and famous athletes and other celebrities are getting into the mix. Mention the acronym for any well-known start-up CEO and you will likely hear about the uninterrupted calls they receive from sponsors with hundreds of millions of dollars to spend.

To Wall Street skeptics, it looks like the financial sector’s latest scheme to make money from speculators in a low-interest environment with the bull market and investors hungry for all that is technology. SPACs have raised more than $ 44 billion so far this year for 144 businesses, according to SPACInsider. This is equal to more than half of the money raised in the whole of 2020, which in itself was a record year.

While there is an undeniable craze in the SPAC boom, there is another story going on in parallel. Risk-backed technology companies with high growth prospects are avoiding the IPO process, which has its own flaws. Instead, they are feeling comfortable with the idea of ​​reaching the market in a way that would have been incomprehensible just a year ago.

In a SPAC, a group of investors raises money for a shell company with no underlying business. SPAC goes public, usually at $ 10 per share, and then starts looking for a company to acquire. When SPAC meets a goal and a deal is closed, the company attracts foreign investors for what is called PIPE, or private investment in public shares.

PIPE’s money goes to the target company’s balance sheet in exchange for a large shareholding. SPAC investors obtain shares in the acquired company, which becomes the publicly traded entity through what is known as de-SPAC.

A major advantage: SPACs allow companies to provide forward-looking statements, which companies typically do not do in IPO prospectuses due to the risk of liability.

“An IPO is what I would call a retrospective,” said Betsy Cohen, who led a SPAC that recently went public with auto insurance company Metromile. “As a SPAC is technically a merger, you need to tell investors what the merged companies will look like after the merger and move forward with the project.”

It is also a much faster process than the IPO, which involves spending many months with bankers and lawyers to prepare a prospectus, educate the market, conduct a roadshow and build a book for institutional investors.

Many of the most well-known SPAC targets to date have been at the intersection of financial services and technology. For these companies, cash burn rates are high and actual GAAP profits generally take years, even in the best of circumstances.

Metromile, whose technology allows drivers to pay per kilometer instead of a monthly fee, began trading on Wednesday after the merger with INSU Acquisition Corp. II, a SPAC led by Cohen and his son, Daniel. Chamath Palihapitiya, the venture capitalist who became a mega sponsor of SPAC, and billionaire Marc Cuban invested in a $ 160 million PIPE.

At the close of Friday, the shares were trading at $ 17.23, giving Metromile a valuation of more than $ 2 billion based on the fully diluted share count.

“Metromile enters the insurance market at a time when telematics is installed in virtually all cars going forward, so there is an opportunity to look at insurance in an individualized and personalized way, which is huge,” said Cohen in an interview. “We felt it was an important company to bring to public markets and allow them to have access to capital in the same way as insurance companies.”

Cohen, who founded The Bancorp, said he will have closed seven SPACs by the end of this year, including payments company Payoneer and investment bank Perella Weinberg.

Metromile CEO Dan Preston told CNBC this week that in mid-2020, while his board was considering financing options, he hoped to raise a large round of private equity and go public in four to six quarters. The company had existed for a decade and raised hundreds of millions of dollars in financing.

Other insurance technology companies, like Lemonade and Root, held traditional IPOs last year. But Preston says the more he learned about SPACs, the more he realized it was the best approach for his company, which faced high operating costs in the highly regulated insurance industry. – and a pandemic that reduced the number of kilometers traveled.

“The sweet spot is companies that are very close to going public, but need a little more historical data to prepare,” said Preston.

Metromile said in its merger process that it expects insurance revenue to increase 39% to $ 142.1 million in 2021, and then to jump 81% in 2022 and more than 100% in 2023. Adjusted gross profit will increase by $ 11.1 million last year to $ 144 million in 2023, the suit says.

Online lender SoFi said in January that it was going public through a SPAC administered by Palihapitiya in a deal that values ​​the company at $ 8.65 billion. In the merger agreement, SoFi projects annual revenue of $ 980 million this year, increasing annually to $ 3.7 billion in 2025, while the profit from contributions will more than quintuple in that stretch to $ 1.5 billion.

In other financial SPACs, Palihapitiya led the reverse merger of digital real estate company Opendoor, which went public last year and is now worth more than $ 20 billion. He did the same with health insurer Clover Health (which said this month it is under investigation by the SEC) and is leading PIPE for solar financing provider Sunlight Financial.

He is also doing software business. In January, Palihapitiya was a PIPE investor in Latch, a developer of smart lock systems sold to real estate. Latch generates recurring sales of software and said that the revenue reserved for 2020 increased 49% over the previous year, to $ 167 million.

Blackrock, Fidelity and Wellington are also part of PIPE, which means they will be shareholders when Latch goes public. These names, seen as first-rate investors in the public market, are becoming familiar to SPACs, with at least one of them appearing on the PIPE of SoFi, Matterport, Opendoor and consumer genetics company 23andMe.

For companies that can attract investors of this caliber and have sponsors that they trust to accompany them through the ups and downs of the journey, a SPAC can be the most efficient way to raise money. Large private rounds usually require a great deal of dilution, while IPOs usually come with a 50% to 100% discount for new investors.

In a SPAC, the goal ends up delivering up to 20% of the shares to sponsors and additional shares to PIPE investors. The rest mostly remains with insiders. When public, the company has the ability to raise capital subsequent to market rates. For example, Opendoor has just announced that it is raising $ 770 million to $ 27 per share, marking an increase in valuation of around 200% since the time of PIPE’s investment.

Norwest’s Crowe, whose company was a venture capitalist in Opendoor and online therapy provider Talkspace, another SPAC target, said the price is favorable for the best companies because there are many SPACs behind them.

“The price is crazy,” said Crowe. “There is a huge pent-up demand for all of these companies. Many companies that would have gone public relatively evenly between 2021 and 1922, if the markets held up, are now all going in a mad rush.”

Venture investors are also entering. In addition to Lux, companies like FirstMark Capital, Ribbit Capital, Khosla Ventures and SoftBank have raised their own SPACs. Separated from their companies, venture capitalists Steve Case, Reid Hoffman and Bradley Tusk followed Palihapitiya into the SPAC sponsor arena.

Growth stage venture firm G Squared announced this week the closing of a $ 345 million SPAC. Founder Larry Aschebrook, in an interview, called it “just another tool in our toolbox” to help companies access capital. He said it could be a good option for a CEO who is ready to run a publicly traded company and a business that has raised a lot of money in the past and can benefit from immediate access to the capital markets.

“There are only a handful that we consider to be super high quality companies,” said Aschebrook of the SPAC technology businesses that have already been announced. “The companies we are interested in are either fluctuating in profitability or are profitable and are logos that everyone knows.”

Although Lee at Battery no longer sees SPACs as equivalent to a dirty word, he said there were still none outside his company’s portfolio. However, Battery is an investor in Coinbase, which is going public through a direct listing, following the example of Slack, Spotify and Palantir in allowing existing shareholders to sell at the premiere instead of issuing new shares as a company .

Lee said he would not be surprised to see a SPAC for one or more of his companies this year, recognizing that it has become a viable third mechanism for going public.

“Direct listing was the first new thing to happen in the capital market in 50 years – and SPAC rebranding is the second thing,” said Lee. “At the end of the day, you’re still running a public company and you should be able to to withstand rigor and scrutiny. “

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