SPAC Fever high, Google Under Fire.
That Was The Week, #41
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Editorial: My Take
I’m drawn to Bill Gurley again this week. He has been relentless in calling out the Investment Banks for “stealing” money from founders and employees’ pockets. He does not mince words.
Thanks for doing this! At this point, the IPO process is financially brain-dead. Targeting 30X demand/supply imbalance will always create this outcome. And as you state, it comes out of the founders/employees pockets. One could argue a violation of fiduciary duty. https://t.co/ixJ3a99ybn
— Bill Gurley (@bgurley) October 16, 2020
Bill is on the record preferring Direct Listings, where companies raise capital from investors before their IPO and characterize the IPO process as “brain dead.” He clearly has a point, but it is not as strong a point as he pretends. Bill’s role as a VC means that he really wants all of the upside from an IPO to be in the stock before listing. He wants public market investors to have to wait for the company to execute more before benefitting from the increased value in the stock they purchase – just as the VCs and founders had to. I can’t fault the logic from his point of view, but all public offerings serve three stakeholders – former investors, the company employees and founders, and the new investors.
Whether the cash to the company comes in before the IPO (direct listing), at the IPO (traditional IPO), or via a SPAC (before an IPO) does not really impact the company. The main difference is who gets to place capital early and benefit from that. VCs do so in a direct listing; SPAC organizers and PIPE (private investment in a public entity) investors in a SPAC; and public market institutional investors in a traditional IPO.
Bill’s Bloomberg interview is worth watching to see if you can detect his self-interest that masquerades as support for the company employees and founders.
There are many commentators focused on special purpose acquisition corporations (SPACs). Increasingly voices are suggesting that SPACs are a bubble or, worse, can be a scam. The Wall Street Journal has a thoughtful piece on why the SPAC bubble may never burst. Laura Forman shines a light on an investor-friendly element of a SPAC:
But it isn’t all about fools rushing in. A lesser-known feature of today’s SPACs is that investors can opt-out, redeeming their shares plus interest around a shareholder vote on a proposed target. Investors in regular public companies inking a deal would love the ability to jump ship relatively unscathed before what could be a disastrous deal.
SPACs are seeing a golden era that will fade as speculative appetite does, but they are unlikely to fade away entirely—they are too useful to everyone involved.
What is really happening here is that companies like OpenDoor, part of Chamath Palihapitiya’s IPOB (ticker) plans, are using SPACs to fund their earlier stage companies where much of their growth is in the future. This reverses a trend where many private companies would go public later after most of their growth took place as private entities. Because of this, so long as good companies with growth potential use the SPAC process, it is likely that the public will be able to share in the growth that previously only VCs could imagine. SPACs can be a good thing.
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