What Private Tech Firms Should Watch Out for in SPACs
The Information, 2020-07-20
A Bit of Theory
SPACs are “Special Purpose Acquisition Companies”, a public (!) firm with only cash as an asset, which is used to acquire another firm to make it instantly public.
Closing a deal with a SPAC and becoming public is roughly 3-4 months’ work vs 6-9 months to do the listing [actually longer].
2020 (!!!): 44 SPACs went public ($13.5B) vs 31 SPACs ($7.4B) in 2019.
Why Do It?
If SPACs have experienced Board Directors (who will stay) or committed investors believing in the business. (otherwise it’s a drag)
Listing via a SPAC reduces volatility as opposed to the usual boom and bust.
Oversupply of SPACs: money chasing acquisition targets.
What to Look for in SPACs
Strong Leadership. Experienced Directors make a big difference. Or even can put in their experienced CEO. [MK: Clearly an incumbent CEO will jump for joy.]
Committed Investors. The best deal is when the SPAC investors believe in the industry and hold on to the investment.
Lockup Periods. They are not necessarily standard but with SPACs they seldom cover all employees.
Realistic Expectations. SPACs are not blind and are smarter than an average investor Joe. Also, high incoming valuation for a business is likely to drop.