Venture capitalists, disillusioned with the IPO process, are warming to blank-check deals in 2020.
SPACs, or special purpose acquisition companies, are publicly traded shell companies that can merge with private companies and offer them a different route to debuting on the public market. As market uncertainty prompted by the pandemic has prompted companies to rethink how to go public, venture capitalists are pointing to reports of tech IPOs being mispriced, and crowning the blank-check company as the IPO’s successor.
Bill Gurley of Benchmark Capital tweeted, “No question about it that the rampant/worsening underpricing of traditional IPOs has created a situation where SPACs actually have a lower cost of capital. SPACs are popular now & gaining steam/legitimacy. Wouldn't be surprised to see a VC raise a SPAC.”
Interesting thread. No question about it that the rampant/worsening underpricing of traditional IPOs has created a situation where SPACs actually have a lower cost of capital. SPACs are popular now & gaining steam/legitimacy. Wouldn't be surprised to see a VC raise a SPAC. https://t.co/cbVY002lOa— Bill Gurley (@bgurley) July 16, 2020
Some venture capitalists have already begun to do so. Chamath Palihapitiya, whose investment firm Social Capital switched from focusing on VC investments to the public market, has raised nearly $1.1 billion across two of SPACs.
💪🏽👍🏽👊🏽 https://t.co/JxkYMets7u— Chamath Palihapitiya (@chamath) April 28, 2020
A high-profile deal between Richard Branson’s Virgin Galactic and Palihapitiya’s blank-check vehicle Social Capital Hedosophia first helped bring about a resurgence in the SPAC’s popularity earlier this year. As of Thursday, the company’s shares were up more than 90% since the beginning of the year, as investors cheered the space exploration company’s appointment of a former Disney executive as its new CEO.
Although the company hasn’t capitalized off investor confidence by ramping up hiring, its workforce has remained fairly stable — a fairly positive sign amid the mass layoffs that have taken place across the economy during the pandemic.
Blank check company Diamond Eagle Acquisition Corp also saw its stock price jump more than 200% after it announced a three-way merger with the popular fantasy sports site DraftKings, and the sports-betting software company SBTech in December 2019. The company’s stock price continued to rise after it completed its merger in April 2020.
That said, the company’s headcount hasn’t seen gains. While DraftKings’ employee count experienced massive bumps in April and July, part of those gains can be attributed toward the three-way merger, which caused SBTech’s workforce to be folded into DraftKings’ overall staff count.
Meanwhile, the overall job listings available at the company appears to have declined (not shown).
Despite their performance so far, current market uncertainty amid the coronavirus has pushed the popularity of SPACs to new highs. At least 41 SPACs have gone public so far this year, according to SPACInsider.com. That’s ahead of pace compared to the total 59 blank-check companies that went public by the end of 2019 — and venture capitalists like Gurley and Palihapitiya stress that the process may be superior to the IPO.
“Traditional IPOs are very fraught with principal agent problems by the banks, who try to feed cheap stock and poor price performance to other customers of theirs,” Palihapitiya explained on the podcast 20VC. The IPO process, which can take more than 18 months to complete, was “a little Byzantine and broken,” Palihapitiya added.
But SPACs can merge with private companies to take them public in roughly 3 months, per Palihapitiya. The process allows selling companies to skip past the process of wooing prospective investors, SEC document reviews and market uncertainty.
And the evidence suggests that the popularity of SPACs is here to stay. Just this past week, healthcare provider MultiPlan and electric car maker Fisker announced plans to go public via blank-check mergers. Meanwhile, the hedge fund magnate Bill Ackman raised his blank-check company’s target to $4 billion, Reuters reported.
“There’s all these arcane rules that you can work around that a SPAC solves,” Palihapitiya reiterated on the podcast 20VC.
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