San Francisco Chronicle - (Sunday)
Fast route for tech firms to go public
In IPO alternative, companies merge with entities made for acquisitions
“SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one.”
Bill Gurley, venture capitalist
Andrew Paradise, CEO of mobile esports company Skillz, rang the New York Stock Exchange’s opening bell this month, a timehonored way that newly public companies celebrate their Wall Street debut. Because of the pandemic, he did so remotely over Skype.
But there was an even bigger difference from tradition in how Skillz went public.
The San Francisco company eschewed a conventional initial public offering, in which investment bankers pitch a company to investors and arrange for sales of its shares before they begin trading on Wall Street. Instead it merged with an alreadypublic entity called a special purpose acquisition company, or SPAC ( pronounced “spak”), that had formed and gone public for the express purpose of acquiring a company. The fact that they go public with the intent of buying an operating business gives rise to SPACs’ nickname: blankcheck companies.
Paradise had barely heard of SPACs three years ago. “I thought, ‘ What is that, is that a dirty word?’ ” he said.
But as SPACs courted Skillz, he learned of their advantages.
“The SPAC route gave us more flexibility to negotiate terms, to pick out partners, to go public faster,” he said. “Next thing you know, my dream to go public became a SPAC route as opposed to a traditional route,” he said. Skillz merged with Flying Eagle Acquisition Corp., an entity formed by the same group that took fantasysports company DraftKings public through a similar vehicle.
SPACs have become a hot trend in 2020, with 237 of the new acquisition vehicles going public, quadruple last year’s 59, according to the most recent available figures from website SPACInsider. A stunning $ 80 billion has poured into this year’s crop of SPACs. That presages a gold rush next year as they go shopping for attractive acquisition targets.
SPACs are “the topic du jour in Silicon Valley,” wrote venture capitalist Bill Gurley in a blog post. “SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one.”
Going public through a SPAC merger can help companies lessen some of the delay and risk of a traditional offering. “Once they become listed, they have all the benefits and services of any other companies that are part of our listing community,” said Bonnie Hyun, head of technology capital markets at the New York Stock Exchange.
The SPAC process allows a company to go public at an earlier stage and values businesses with high growth potential, a draw for many hightech startups.
Because a SPAC transaction is a merger, the company that is acquired can give investors projections about its future — a nono for regular IPOs. That means companies can go public via a SPAC acquisition even before they have started selling products. The New York Stock Exchange and Nasdaq have listing requirements that would typically prohibit such firms from going public on their own.
One significant downside for companies that go the SPAC route is dilution, or a lessening of the value of stakes owned by the acquisition target’s current shareholders. The sponsor — the group that creates the entity — takes a fifth of the resulting business for a nominal price. The existing shareholders will own proportionately less as a result.
There are also considerable risks for retail investors who buy into a SPAC after it goes public, though some of the same risks exist for those who buy a company after it completes a conventional initial public offering.
San Francisco’s Metromile, which sells payasyougo car insurance, said in November that it would merge with a SPAC called INSU Acquisition Corp II. Metromile already sells a product, auto insurance, and is doing relatively well amid the pandemic — but being able to talk longterm was a big draw, CEO Dan Preston said.
“This transaction allowed us to tell the fiveyear story of what Metromile will become so we could raise the capital to scale to the next level,” Preston said. “With an IPO, you only tell a very constrained shortterm view of the business.” Metromile — which hired a new chief technology officer, Paw Andersen, from Uber last year — would raise about $ 290 million in the deal, which it expects to be complete by the end of March. It currently operates in eight states. The infusion would let it expand nationwide by late 2022. The SPACtrades as INAQ, but the combined company will be known as Metromile and will trade on the Nasdaq under the ticker symbol MLE.
At first glance, it might sound crazy that investors would pour millions into SPACs, since they are essentially shell companies. But the structure has builtin safeguards, including a moneyback guarantee, said Garth Osterman and Dave Peinsipp, partners at San Francisco law firm Cooley LLP, which has handled SPAC deals for both acquiring and acquired companies, including Metromile; Nuvation Bio, a biotech startup in San Francisco; Left Coast Ventures, a cannabis
SPAC in Santa Rosa; Opendoor Labs, a San Francisco online real estate firm; and 5: 01 Acquisition Corp., a biotech SPAC.
All the money raised is kept in a trust fund during the 18to 24month window the SPAC has to acquire a company. Once a SPAC finds a target, investors have three choices: they can request their money back with interest; they can keep their money in; or they can get their money back but keep a share of what are called warrants, allowing them to buy shares in the new company at a certain price, Osterman said.
Investors putting money in a SPAC are betting on its founders, also known as sponsors.
“A lot have extraordinary boards of luminaries, and sponsors leading SPACs who have done one or two before,” Peinsipp said. “They’re trading on their track record of identifying companies and bringing them to market, and in some cases helping those companies grow.”
San Francisco’s Opendoor, an online marketplace for buying and selling houses, said in September that it would go public by merging with Social Capital Hedosophia II, a Palo Alto SPAC run by venture capitalist Chamath Palihapitiya. A former Facebook executive, Palihapitiya is often credited with spurring the current SPAC craze — he calls the idea “IPO 2.0.”
Palihapitiya started his first Social Capital SPAC in 2017 and his first SPAC acquisition was a big swing: Virgin Galactic,
Richard Branson’s spacetourism company, which Social Capital merged with a year ago.
Opendoor started trading on Nasdaq on Monday under the ticker symbol OPEN.
“A couple of things that really drew us to this path,” CEO Eric Wu told CNBC when the merger with Social Capital was announced in September. “One was speed to market. We wanted to focus the management team on building the best product, and the best business as opposed to distracting the company by taking the company public. The second is that Chamath is fundamentally a technology investment. … He believes in building organizations the right way for the long haul.”