What Founder’s Need To Know About SPAC’s
It’s your job to understand how to use the available financial tools to grow your business and create value for yourself, employees, and shareholders.
SPAC’s are an old technique for taking companies public that has been repurposed for tech companies over the last year or so. They are called “Blank Check Companies” because they raise large sums of money that are put in a trust account. Their stock price starts at $10 which is backed by $10 in the trust account.
This money is used by the target company to continue growing after they merge into the SPAC, which is already trading publically.
Founders should think of them as a way to raise the next round of financing at a much higher valuation than other alternatives.
Why is this true?
We are in an era of low-interest rates which inflate asset prices. So stock prices are trading at high multiples to earnings, revenue, and even forward forecasts. The last time this happened was in the late '90s.
Sure, a lot of crappy ideas went public at the height of the mania and then went bust. But a lot of great companies also went public like Amazon, eBay, and Barry Diller’s TMCS (which acquired my startup.)
I’m assuming you founded one of those great companies, not the other type. You’ve built a company with great revenue growth and a fundamentally sound business.
Where does that next round of funding come from for hitting the accelerator? You need $50M, $200M, or more to keep growing. You’ve outgrown the check size or stage that your current VCs invest at.
Prior to SPACs, your primary choice was private equity. I had a portfolio company just close a $30M round from a private equity company. It was at a 10x to revenue valuation. That sounds great until you look at public companies in their space.
They are trading at 35x revenue.
Life just doesn’t seem fair, does it?
Enter SPACs. You can reverse merge into a SPAC. You won’t get the same multiple as a company that has been out for a couple of years and proven they can hit quarterly revenue targets, but it will be cheaper than a private equity round.
You now have accomplished 2 things.
- Raised money more efficiently
- Given yourself a new currency to do deals with. Now instead of needed all cash for an acquisition, you can acquire other startups with stock as a currency.
In each competitive category, a subset of companies will go public before their rivals. This gives them access to cheaper capital and allows faster acquisition of other companies.
If either gives them a big advantage, they start pulling away from all their rivals.
Make sure you are the one that gets the competitive advantage first.
Now, there are lots of downsides to being public, so this isn’t the right tool for every company and situation.
This is the first of many articles about how all this works. If you have specific questions be sure to ask them below.
