SPAC and Venture Investments

2020 is the year of Special purpose acquisition companies (SPACs). Without a doubt, since our days of watching IPO trends, we have not seen so many startups going public via the SPAC. According to SPAC Insider, SPACs have generated nearly $36.2 billion gross proceeds so far in 2020. This is much higher than $13.6 billion in gross proceeds for SPACs in 2019 or the $10.8 billion in 2018. Simply amazing!

What is a SPAC anyway? SPAC is essentially a blank-check company. SPAC founders form the company, raise a large sum of money, typically fifty to a few hundred million dollars through an IPO first, with the intention of buying another company with the money they have raised. The whole purpose of SPAC IPO creation is to acquire an operating company, typically a venture-funded startup or a private company, within 1 – 2 years. This is mainly an arbitrage game. The assumption is that being a public company would generate a significant higher valuation than being a private company.

What’s there for a private company? There are some advantages for a private company to go IPO via SPAC vs a traditional IPO. The main reasons are a faster timeline, no roadshow and certainty of funding and valuation. There are a lot of details around SPAC from a private company perspective that we might just do another blog on it.

How to play this SPAC trend? One method is to invest in SPAC once it is listed. You can find all SPACs listing either via SPAC insider or SPAC research. Since these SPACs are just shells waiting to find an acquisition target, you can invest in these at IPO price (typically $10) and find winning operating managers to bet on. Another method is to find interesting startups or investors that you can put in money early and hopefully they can be rolled into a SPAC. In order for the SPAC to work, the assumption is that the private market is cheaper. If that’s the case, why would an investor not invest in startup/private companies beforehand? For example, autonomous vehicle and lidar tech company Luminar is one of the latest companies to go public via SPAC, so are some brand name companies such as DraftKings, Virgin Galactic and Nikola. The best way to research startups are through startup database sites such as Ventures Media or Crunchbase. Startup investment is harder, but rewards are much better if it can be done right.

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