Let’s talk about spacs
About four years ago, I was chatting with one of Snap’s investors and he told me about a scheme he’d cooked up.
He was creating a shell company and would list that shell company on the stock exchange. Then he would find a promising private and merge with it.
The result was that private company would end up, via the backdoor, listed on the stock exchange and the founder of the shell company would retain a stake.
I’m not even sure if my investor friend gave a name for his plan at the time, but he certainly would do now. Because what he was describing has since become the dominant way for startups to list on the stock exchange.
SPACtacular growth
SPAC stands for Special Purpose Acquisition Companies, and they’ve exploded in recent years.
From 2010-19, fewer than 10% of new stock market listings took the form of a SPAC. In 2020, suddenly, SPACs became fashionable. From an average of $4.7bn of business per year for the preceding decade, SPAC issuances in 2020 reached $82.4bn, virtually equalling traditional IPOs. In January 2021, SPACs exceeded IPOs while in February 2021, SPACs were nearly four times traditional IPOs.
The pace of the change is breathtaking.
What is a SPAC?
An IPO is the traditional route to market for a startup. In the early years, startups like Snap raise money from private individuals or from venture capital funds (which pool investment capital from both individuals and institutions). These transactions are entirely private and unregulated; and often come with all kinds of special provisions and variations.
The pool of capital available for venture capital has increased dramatically in the last couple of decades, but there is still a limit. Moreover, the crazy mega venture capital deals that fuelled firms like Uber are likely to be a thing of the past, as they were all driven by one mega-fund, the Vision Fund led by Masayoshi Son. The Vision Fund was the world’s first (and only) $100bn VC and made gargantuan bets on startups. Some, like Uber, didn’t quite work out as planned. Some, like WeWork, went catastrophically wrong. Some, like the creators of TikTok, are likely to do seriously well.
This isn’t actually atypical of the VC model, and the overall returns from the Vision Fund have been reasonable. Nevertheless, the WeWork debacle was sufficiently high profile (and sufficiently bonkers) for the Vision Fund to promise a more coherent investment strategy going forward… and smaller cheque sizes.
So once a startup has reached a certain size (or when its founders want to get their cash out), it will typically list on the stock market.
Unlike the private deals they’ve been doing up until now, a stock market listing is a highly regulated transaction. The company needs to produce sets of numbers to defined formats and pages of plans and disclosures. For a startup, this can often be something of a challenge. Private investors tend to be more tolerant of being shown the results in whatever form they show up in. It can take startup many months of work to get its numbers and plans IPO-ready.
The IPO process can be revealing. The killer for WeWork’s failed IPO were the disclosures. Amongst many gems were the revelation that the company was set up to minimise the Adam Neumann, the founder’s, tax bills even at the expense of increasing bills for the investors. The disclosure revealed that Adam Neumann had sold the company the “We” brand and pocketed the fee and that WeWork had signed contracts with properties in which Adam Neumann stood to gain $237m over the life of the leases. It revealed that he owned the majority of voting shares (and would continue to do so) but had no employment contract in place and “there can be no assurance that Adam will continue to work for us or serve our interests in any capacity’.
As a private company, WeWork had used as its standard accounting measure something they invented called “community adjusted earnings before interest, taxes, depreciation and amortisation”. Their IPO documents had to use the standards approved by the Securities and Exchange Commission. The prospectus revealed that “we may be unable to achieve profitability at a company level… for the foreseeable future”.
Unsurprisingly, the WeWork IPO flopped.
Now, WeWork was a (very!) special case, but the process of preparing an IPO can be daunting and time-consuming. It typically takes around 18 months, and involves a lengthy ‘roadshow’, in which the company is taken round stockbrokers. And at the end of all this, the company may not achieve its target valuation (reference: Uber and Deliveroo, both of which undershot their own expectations).
Moreover, it is a huge distraction for the founders from the task of building the business.
The SPAC model is therefore rather attractive. The company that is listed on the stock market (and therefore has to make the IPO disclosures) is a shell company with no trading activity. It simply promises to merge with a startup within 24 months, or it will liquidate and return the cash to the owners. Investors are therefore buying into the acumen of the SPAC founder. But, typically, they are given the right to take their money out if they don’t like the deal that the SPAC proposes, so risk levels are relatively low.
For the startup, it means they can get onto the stockmarket without going through the pressures of an IPO. Selling to a SPAC is a private deal, of the kind the startup is used to. While they need to be ready for stock market rules and stock market rigours (as they will be expected to offer stock market info as soon as the deal closes), there’s no prospectus and no upfront disclosures.
The process typically takes around 6 months (similar to a VC funding deal) as opposed to 18 months.
Why is this relevant?
We’re seeing a lot more SPACs in the world of transport, potentially enabling companies to list on the stock exchange earlier than they would have done even just a few years ago.
In 2020, 26 mobility tech companies merged with SPACs (or entered the process of doing so), representing a combined valuation of over $100 billion. In the world of flying taxis, virtually every major player has recently listed via a SPAC. Major electric vehicle manufacturers like Arrival and Canoo have merged with SPACs, as has micro-mobility startup Bird.
The new mobility landscape consists not just of a load of hustling startups but also a bunch of regulated public companies with access to stock market capital.
Is it all SPACulation?
It’s too early to say where this all leads.
If SPACs turn out to be a way in which duff companies like WeWork can find their way onto the stock market without proper diligence, it may be that the SPAC bubble is very short-lived. It certainly looks likely that the kinds of companies that use SPACs are more likely to be early-stage and still loss-making. It seems implausible that there won’t be some spactacular (sorry!) blowouts on the way.
But, on the other hand, if it provides a way in which startups can become public companies without the disruption of the traditional IPO, it may accelerate a further wave of innovation. Transport is a sector in which startups tend to lose money for longer, so the SPAC pathway to public markets may assist transport startups more than most.
There’s been a curious trait in recent years for startups to start, scale up to massive size while losing vast sums of money and then list onto the stockmarket almost like a diet plan in order to discipline itself to profitability. That was very much the Uber model.
That never used to be how it worked. Companies like Amazon listed on the stockmarket far earlier than Uber or Deliveroo (and while still lossmaking) but continued to scale, invest (and lose money) as public companies for many years afterwards. Tesla is a public company and has managed to weave a path between discipline and ambition. For a company that can keep investors onside, a public listing provides a pathway to unlimited future capital without endless funding rounds.
The potential impact is uncertain but it may be that SPACs provide for a wave of well-capitalised, well-disciplined listed startups providing further innovation and disruption to transport and mobility. Watch this space.
