SPACs that have been lengthy shunned in Silicon Valley and established themselves within the technical subject

The New York Stock Exchange welcomes Desktop Metal Inc. (NYSE: DM) today, Thursday, December 10, 2020 to celebrate its listing. On this occasion, Ric Fulop, Co-Founder and CEO, The Opening Bell® rings.


Battery Ventures’ Roger Lee says “SPAC” was a “bad four letter word” in Silicon Valley.

According to Jeff Crowe of Norwest Venture Partners, the board of directors of every high profile start-up is now discussing special-purpose acquisition companies as a legitimate way to go public.

In the eyes of Peter Hebert, co-founder of Lux Capital, SPACs are “stealing from the IPO calendar 2021”.

“We have encouraged our top quality companies to seriously consider this,” said Hebert, whose company built its own health-tech SPAC in October and is looking for a target. “The vast majority of companies looking to offer traditional public offerings are dual-tracking SPACs.”

Within the Lux portfolio, the 3D printing company Desktop Metal went public in December via a SPAC. Others like real estate software companies Latch and Matterport have announced contracts with so-called blank check companies this year.

The sudden bursting of SPACs reminds some long-term workers of the dot-com bubble in the late 1990s. Pre-revenue companies with destinations far, far go public at astronomical valuations, and famous athletes and other celebrities get involved. Mention the acronym of a well-known startup CEO and you will likely hear about the non-stop calls you get from sponsors spending hundreds of millions of dollars.

For Wall Street skeptics, making money from speculators in a low interest rate environment when the market is at its peak and investors are starving for anything technology-related seems like the financial industry’s newest program. According to SPACInsider, SPACs have raised more than $ 44 billion for 144 deals so far this year. That’s more than half the money raised in 2020, which was a record year in itself.

While the SPAC boom is undeniably insane, another story is playing out in parallel. Venture-backed tech companies with high growth prospects avoid the IPO process, which has its own shortcomings. Instead, they are familiarizing themselves with the idea of ​​getting to market in ways 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, typically at a price of $ 10 per share, and then begins looking for a company to acquire. Once a goal has been found and a deal agreed, the SPAC and the company bring in outside investors for a so-called PIPE, or private investment in public equity.

The PIPE money goes into the target company’s balance sheet in order to get a large stake. The SPAC investors receive shares in the acquired company, which becomes a listed company through the so-called De-SPAC.

A major advantage: With SPACs, companies can create future-oriented forecasts that companies normally do not create due to the liability risk in IPO prospectuses.

“An IPO is what I would call backward,” said Betsy Cohen, who ran a SPAC that recently launched auto insurer Metromile. “Since a SPAC is technically a merger, you need to tell investors what the merged companies will look like after the merger and how the project will move forward.”

It’s also a much faster process than going public, which involves spending many months with bankers and lawyers preparing a prospectus, educating the market, running a roadshow, and creating a book with institutional investors.

Fin-tech companies have been big SPAC targets

Many of the better-known SPAC targets were at the intersection of technology and financial services. For these companies, cash burn rates are high, and real GAAP profits often don’t last for years, even in the best of circumstances.

Metromile, whose technology allows riders to pay miles instead of a monthly fee, began trading Wednesday after partnering with INSU Acquisition Corp. II, a SPAC under the direction of Cohen and her son Daniel. Chamath Palihapitiya, the venture capitalist, became the mega SPAC sponsor, and billionaire Marc Cuban invested in a $ 160 million PIPE.

At the close of trading on Friday, the stock was trading at $ 17.23, giving Metromile a valuation of over $ 2 billion on a fully diluted stock count.

“Metromile is entering the insurance market at a time when telematics will be installed in practically every car in the future. Therefore, there is the possibility of looking at insurance individually and individually, which is enormous,” said Cohen in an interview. “We thought it was an important company to get into the public markets and give them access to capital like insurance companies do.”

Cohen, who founded The Bancorp, said she will have closed seven SPACs by the end of this year, including payments company Payoneer and boutique investment bank Perella Weinberg.

Dan Preston, CEO of Metromile, told CNBC this week that when his board was considering funding options, he would raise a large round of private capital in mid-2020 and then go public in four to six quarters. The company had been in business for a decade and raised hundreds of millions of dollars in funding.

Dan Preston, CEO of Metromile

Winni Wintermeyer

Other insurance companies like Lemonade and Root have carried out traditional IPOs over the past year. But Preston says the more he learned about SPACs, the more he realized that it was the better approach for his company, which has faced the high operating costs of the highly regulated insurance industry – and a pandemic that reduced the number of kilometers driven.

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

Metromile announced in its merger filing that insurance revenue will increase 39% to $ 142.1 million through 2021 and will increase 81% in 2022 and more than 100% in 2023. Adjusted gross profit will increase from $ 11.1 million last year to $ 144 million in 2023, the file said.

Online lender SoFi announced in January that it would go public through a Palihapitiya-operated SPAC to value the company at $ 8.65 billion. In the merger agreement, SoFi forecasts annual sales of $ 980 million this year, increasing annually to $ 3.7 billion in 2025, while premium income over that period will increase to $ 1.5 billion will quintuple.

In other financial SPACs, Palihapitiya led the reverse merger of digital real estate company Opendoor, which went public last year and is now valued at over $ 20 billion. He did the same with health insurer Clover Health (who said this month the SEC is investigating this) and heads the PIPE for solar finance provider Sunlight Financial.

High profile investors join the fight

He also makes software deals. In January, Palihapitiya was a PIPE investor in Latch, a developer of smart lock systems that were sold to real estate companies. Generating recurring software sales, Latch said revenue booked in 2020 was up 49% year over year to $ 167 million.

Blackrock, Fidelity and Wellington are also part of the PIPE, which means they will be shareholders when Latch goes public. These names, seen as top-tier public market investors, become known to SPACs, at least one of whom appears on the PIPE for SoFi, Matterport, Opendoor, and consumer genetics company 23andMe.

For companies that can attract this caliber of investors and have sponsors whom they trust to stay with them through the ups and downs of the journey, a SPAC can be the most efficient way to raise funds. Large private rounds usually require a lot of dilution, while IPOs for new investors often come with a 50% to 100% discount.

In a SPAC, the target hands over up to 20% of the shares to the sponsors and additional shares to PIPE investors. The rest remains primarily with insiders. In public, the company has the opportunity to raise follow-up capital at market prices. For example, Opendoor has just announced it will raise $ 770 million at $ 27 per share, which represents an increase in valuation of about 200% since the time of the PIPE investment.

Crowe of Norwest, whose company was a venture investor in Opendoor and online therapy provider Talkspace, another SPAC destination, said prices are cheap for the best companies because so many SPACs are after them.

“The pricing is insane,” said Crowe. “There is tremendous pent-up demand for all of these companies. Many companies that would have gone public relatively evenly in 2021 and ’22 if the markets held are now all going out in a mad rush.”

Venture investors are also stepping in. In addition to Lux, companies such as FirstMark Capital, Ribbit Capital, Khosla Ventures and SoftBank have set up their own SPACs. Venture capitalists Steve Case, Reid Hoffman and Bradley Tusk have followed Palihapitiya separately from their companies into the SPAC sponsorship arena.

Growth company G Squared announced this week that it has closed a $ 345 million SPAC. In an interview, founder Larry Aschebrook called it “just another tool in our toolbox” to make it easier for companies to access capital. He said this could be a good option for a CEO willing to run a public company and a company that has raised a lot of money in the past and can benefit from easy access to capital markets.

SPAC IPO of G Squared Ascend I Inc. on the New York Stock Exchange on February 5, 2021.


“There are only a handful of companies that we believe are of high quality,” said Aschebrook of the previously announced Tech-SPAC deals. “Companies we are interested in fluctuate or are profitable and logos that everyone knows.”

While Batterys Lee no longer sees SPACs as a swear word, he said there are none in his company’s portfolio yet. However, Battery is an investor in Coinbase going public via a direct listing, led by Slack, Spotify and Palantir, to allow existing stakeholders to sell on debut rather than issuing new shares as a company.

Lee said he wouldn’t be at all surprised to see a SPAC from one or more of his companies this year, admitting that it has become a third viable mechanism for going public.

“The direct listing was the first thing new in the capital markets in 50 years – and the rebranding of SPACs is the second,” said Lee. “Ultimately, you are still running a public business and must be able to withstand the rigor and control.”

SEE: Matterport CEO on IPO through SPAC contract with Gores Group

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