SPACs, long avoided in Silicon Valley, are becoming dominant in technology

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

Now, the board of all emerging companies is debating 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, the SPACs are “stealing the 2021 IPO”.

“We have encouraged our higher quality companies to take it seriously,” said Hebert, whose company created its own health technology SPAC in October and is looking for a goal. “The vast majority of companies that want to make traditional public offerings are double-track SPAC.”

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

The sudden explosion of SPAC reminds some of the long-lasting knitted bubble as in the late 1990s. Pre-revenue companies with very distant goals are made public based on astronomical valuations, and famous athletes and other celebrities are mixing. Mention the acronym to any known home CEO and you’ll probably hear the non-stop calls they receive from sponsors with hundreds of millions of dollars to spend.

For Wall Street skeptics, it seems like the financial industry’s latest scheme to make money with speculators in a low interest rate environment, with the market at a peak and investors hungry for all the technology. SPACs have raised more than $ 44 billion so far this year for 144 bids, according to SPACInsider. This equates to more than half of the money raised throughout 2020, which was a record year.

While there is undeniable mania in the SPAC boom, there is another story unfolding in parallel. Technology companies backed by companies with high growth prospects shy away from the IPO process, which has its own flaws. Instead, they feel comfortable with the idea of ​​going to market in a way that would have been unfathomable just a year ago.

In a SPAC, a group of investors raises money for a shell company with no underlying business. The SPAC goes public, usually at $ 10 a share, and then starts looking for a company to acquire it. When it finds a goal and an agreement is reached, the SPAC and the company attract external investors for what is called PIPE or private investment in public capital.

PIPE money goes to the balance sheet of the target company in exchange for a large equity stake. SPAC investors acquire shares in the acquired company, which becomes the listed entity through what is known as de-SPAC.

One of the main advantages: SPACs allow companies to provide prospective projections, which companies typically do not do on IPO brochures, due to the risk of liability.

“A IPO is what I would call retroactive,” said Betsy Cohen, who ran a SPAC that was recently made public by vehicle insurer Metromile. “Because a SPAC is technically a merger, you have to tell investors what the merged companies will look like after the merger and project.”

It’s also a much faster process than going public, which involves spending many months with bankers and lawyers to write a brochure, educate the market, conduct a roadshow, and build a book for institutional investors.

Many of the best-known SPAC targets to date have been located at the intersection of financial and technology services. For these companies, cash burn rates are high and the real benefits of GAAP will often not come for years, even in the best of circumstances.

Metromile, whose technology allows drivers to pay for miles instead of a monthly fee, began trading Wednesday after merging with INSU Acquisition Corp. II, a SPAC run by Cohen and his son, Daniel. Chamath Palihapitiya, the venture capitalist turned mega sponsor SPAC, and billionaire Marc Cuban invested in a $ 160 million PIPE.

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

“Metromile enters the insurance market at a time when telematics systems are being installed in virtually every car, so there is an opportunity to review insurance in a personalized and individualized way, which is huge,” Cohen said in an interview. “We considered it to be an important undertaking to bring to public markets and allow them access to capital in the same way that insurance companies do.”

Cohen, who founded The Bancorp, said it will close seven SPACs later this year, including payment company Payoneer and boutique investment bank Perella Weinberg.

Metromile CEO Dan Preston told CNBC this week that by mid-2020, while his board is evaluating funding options, he expects to raise a large round of private equity and then move on to trading in four to six quarters. The company had been around for a decade and raised hundreds of millions of dollars.

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 the high costs of operating in the heavily regulated insurance industry. – and a pandemic that reduced the number of kilometers traveled.

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

Metromile said in its merger filing that it expects insurance revenue to increase 39% to $ 142.1 million in 2021 and then increase 81% in 2022 and more than 100% in 2023. Gross profit adjusted will go from $ 11.1 million last year to $ 144 million a year. 2023, says the presentation.

Online lender SoFi said in January that it would be listed through a SPAC managed by Palihapitiya in a deal to value the company at $ 8.655 billion. In the merger agreement, SoFi projects annual revenues of $ 980 million this year, which will increase annually to $ 3.7 billion in 2025, while the profits from the contribution will quintuple in this stretch to $ 1.5 billion. .

In other finance 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 investigating the SEC) and leads the PIPE for solar financing provider Sunlight Financial.

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

Blackrock, Fidelity and Wellington are also part of PIPE, meaning they will be capital holders when Latch is made public. These names, seen as top-tier public market investors, are becoming familiar with SPACs, with at least one of them appearing in the PIPE for SoFi, Matterport, Opendoor and the consumer genetics company 23andMe.

For companies that can attract investors of this level and have sponsors they trust, adhere to them during travel ups and downs, a SPAC may be the most efficient way to raise money. Large private rounds usually require a strong dilution, while IPOs often have a 50% to 100% discount for new investors.

In a SPAC, the target ends up delivering up to 20% of the shares to sponsors and additional shares to PIPE investors. The rest remain mainly among the privileged. When it is public, the company has the ability to increase monitoring capital at market rates. For example, Opendoor has just announced that it will raise $ 770 million to $ 27 per share, which will increase its valuation by approximately 200% from the time of the PIPE investment.

Crowe of Norwest, whose firm was an investor in Opendoor and online therapy provider Talkspace, another target of SPAC, said prices are favorable for the best companies because there are many SPACs chasing them.

“The price is good,” Crowe said. “There is a huge accumulated demand for all these companies. Many companies that would have gone public on a relatively uniform basis during 2021 and 22, if the markets held, are now all coming out in a rage.”

Investors at risk are also jumping. In addition to Lux, companies such as FirstMark Capital, Ribbit Capital, Khosla Ventures and SoftBank have raised their own SPACs. Separated from their ventures, venture capitalists Steve Case, Reid Hoffman and Bradley Tusk have followed Palihapitiya into the arena of SPAC sponsors.

Growing venture firm G Squared announced this week the closure of a $ 345 million SPAC. Founder Larry Aschebrook, in an interview, called it “one more tool in our toolbox” to help companies access capital. He said it can be a good option for a CEO who is prepared to run a public company and a business that has made a lot of money in the past and can benefit from easy access to capital markets.

“There are only a handful of people who we believe are high-quality companies,” Aschebrook said of the SPAC technology offerings that have already been announced. “The companies we care about don’t stop at profitability or are profitable and are logos that everyone knows.”

Although Lee de Battery no longer sees SPACs as the equivalent of a curse word, he said there have not yet been any outside of his company’s portfolio. However, Battery is a Coinbase investor, which is made public through a direct quote, following the leadership of Slack, Spotify and Palantir by allowing existing stakeholders to sell at the start instead of issuing new shares as a company. .

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

“Direct trading was the first thing that happened in the capital markets in 50 years, and the second brand change of the SPACs is the second,” Lee said. “In the end, you still have a public business and you have to be able to withstand rigor and scrutiny.”

I WILL SEE: The CEO of Matterport goes public through a SPAC agreement with Gores Group