With $600M 'Blank Check' IPO, VCs Experiment on Startup Listings
bloomberg.com
bloomberg.com
http://www.investopedia.com/terms/s/spac.asp
Essentially people collect money upfront and then go deal hunting, after a period of time, usually 2years or less, they then go back to the people who put their money in the deal and give them the choice of pulling their money out and taking a nominal interest rate gain, or putting their money into the deal and collecting warrants along with the deal as a sweetener.
This is very common in the minerals and mining space where serial entrepreneurs found an oil company, go drilling and then sell the company once its got a well up to a big producer. It's a way for these deal makers who know everyone in their industry to help smaller companies get liquidity, while of course helping themselves and the unit holders to make money.
They benefit the unit holders because its a place for them to park alot of money risk free with a decent call option on the upside.
Asa hedge fund in today's market the problem is often too much capital and too few places to invest it. SPACS offer a way to park say $100 million in a vehicle that has alot of upside with not alto of downside. It has a very similar payoff to Venture Capital in that most SPAC's end up not working out but the few that do make it worth while.
As a side note, if you ever work for a hedge fund or any investment company, you'll get the idea of asymmetric risk drilled into your head. Meaning you want your deals to have the potential for 10x upside with say 1x downside.
The key to running a successful SPAC is almost always:
- who is running it, do they have deep industry connections and the ability to get deals that no one else can
- the company being acquired needs to be in need of capital and not in a position to raise it. or put another way, it needs to be win/win for both investors and the company owners.
This particular SPAC seems to solve neither of these needs as typically silicon valley tech companies have no problems raising money nor do they have any issues going public, so this SPAC fails the second test.
It also seems to fail the first test as I can't see why the founders are in any better position to be deal rain makers than say Sequoia, KPCB, or A16Z.
As for the sniff test - while I agree with your assessment, I wonder if the aspect of providing employees easier liquidity will make them more attractive than traditional VC deals? Essentially by "investing" in companies with a mix of SPAC stock and capital, making the SPAC stock available to employees to sell in order to liquidate some of their options / equity. Essentially giving them better access to deals than others (a variation of test 1)
As for test 2 - I think this is true of many tech startups outside of the valley, maybe they will look outside the echo chamber.
As far as Chamath's Hedosophia, not sure I'd bet against him just yet. He's got a pretty good track record of winning ;)
1) An endless oversupply due to the US oil boom. Even the OPEC cuts + Russia restraint + Saudi cuts to the US market + OPEC cut extension + modest demand growth have not been enough to inflate prices. There's vast supply perpetually waiting on the sidelines, between Russia + the US + OPEC, there's no scenario where $100 oil returns anytime soon.
2) The strong dollar. Commodities are largely priced in dollars globally. If the dollar goes up, oil goes down. Oil tanked exactly in line with the greatest dollar bull run in decades. July 1st 2014, the dollar index was at 80, eight months later it was at 100 - a massive move by the dollar. Over that time oil got cut in half.
ISIS is entirely meaningless in this context.
https://www.bloomberg.com/news/articles/2017-02-20/saudi-ara...
Why do you think that is? The only reason why they flooded the oil markets with oil is because they wanted a low oil price. And the very simple explanation for this is because they wanted to starve ISIS from all their extra money they were receiving from black market oil.
They eased off a bit because they've achieved their goal to maintain rock bottom prices, but they're still producing > 10M barrels a day.
There's an oil glut because Saudi Arabia and the US want an oil glut. There's no sane reason why Saudi Arabia increased production to historic levels in the face of $40/barrel oil prices except for the fact that they want a low oil price.
- they were trying to starve out oil sands and other alternative oil sources to ensure they don't continue to come online in the near term, this has had some success as anyone in Calgary or Edmonton will tell you.
This is far and away the biggest threat to Saudia Arabia's oil business and probalby the first thing you should look into.
- they need money, they essentially buy peace in their own country by showering it with money. As oil prices fall due to more oil being available, they have to sell even more to make their budgets balance. Russia is also doing the same.
I'm sure ISIS is in their minds but its much more of a happy conincidence.
I mean oil isn't bitcoin, you can't just send it over the internet. ISIS was selling to Syria, If you want to stop ISIS from selling oil to Syria, then wouldn't you just ask Syria to cut it out and if they didn't listen then wouldn't you start bombing them..... hmm sounds familiar
Always look for the simplest answer first, just shouting ISIS doesn't make a whole lot of sense when you consider how much the depressed price of oil has hurt Saudia Arabia int he past few years.
The oil sands have been in business for the last 40 years. You're telling me now is when they feel the Canadian oil sands are a threat? In the last 2 years is when they decide to act irrationally and start dumping oil? Hogwash.
ISIS controlled large portions of Syria's oil output. But their operations in Iraq are much larger.
https://www.forbes.com/sites/timdaiss/2016/08/26/why-islamic...
Also from the article: ISIS used to earn some $30 million monthly from its oil operations, but revenues were down to around $15 million a month at the beginning of the year, according to Christopher Garver, spokesman for Operation Tidal Wave.
ISIS's claim to be a caliphate hinges on their ability to maintain a government-like status. They can continue doing this if they make $30M/month. But the US is hamstrung because they want to stop ISIS from taking advantage of the oil in Northern Iraq, but they can't bomb all the fields, otherwise it will cripple Iraq going forward.
So the best way to hurt ISIS and the Caliphate is by hitting their major source of income, which is oil, but cutting the price. If legit oil is $40/barrel instead of $100, and the caliphate can't afford to maintain their structure, then it implicitly collapse. Did you notice that after Hurricane Harvey, the US used that as an excuse to dump oil from the SPR? The problem isn't oil, it's the refineries in Houston that were taken offline. Releasing oil from the SPR made no sense because we're already in a glut, except to keep pressure on oil to stay low.
Again, I don't know why this is so hard for some people to believe. It's not a conspiracy theory, it makes a lot of sense, and I support it.
When the Saudi's tanked the price of oil, I assumed it was engineered by the USA to kick Russia's economy in the nuts in retaliation for their actions in Ukraine, Syria.
Uh, how would we know that if they’re undiscovered?
No, seriously - back up 20 years and tell that to the people who invested in Google/FB/Amazon. Or back up 10 years and Tell that to the folks who were going to invest in mobile gaming startups. Or how about 5 years ago - tell the folks who were starting Uber and Lyft that their markets don’t exists.
GDP seems like a terrible way to measure the economy. Let's smash all of Bastiat's windows and grow the GDP!
I think you should qualify that with "good" tech companies (eg good team, good market, good product, good growth) ... crappy companies have plenty of trouble raising money.
A final thing about SPACs is that they are so expensive. Banks charge a rack rate of about 7 percent for initial public offerings, though big sexy tech IPOs tend to be done more cheaply. SPAC sponsors compensate themselves rather more lavishly. Hedosophia's sponsor -- a Cayman Islands company owned by Palihapitiya and his co-founder -- invested $25,000 to found the SPAC. In exchange for that nominal payment, and their work on finding a company to take public, they get 20 percent of the SPAC's stock. (They are also are putting in another $12 million or so to buy warrants in connection with its IPO.) A 20 percent fee for taking a company public is just ... more ... than a 7 percent fee. And that's not even counting the 5.5 percent fee that Credit Suisse charged for taking Hedosophia public! Something like a quarter of every dollar that investors are putting into Hedosophia is going to compensate financiers for doing the work of (ultimately) taking a unicorn public, which is a funny way to make that process more efficient.
To get in only paying 7% (i.e. at the IPO), you have to already be a wealthy investor so you can get some of the IPO stock.
The 18% difference is your fee for deal access basically.
I'm not saying it's right, but it explains why it makes sense.
It's often funny and quite informative.
It's not true that there's nothing new under the sun. There are some domains where there's almost nothing new. But there's a big difference between nothing and almost nothing, when it's multiplied by the area under the sun.
Matt Levine does a daily "roundup" style column where he links to and comments on multiple finance-related stories. He did not claim this was an ICO; he simply mentioned this in a daily roundup which included a story about Hedosophia and also a story about ICOs (and in context he was discussing them as two different alternatives to traditional IPOs). Thus, 'ICO' appears in the URL, because the URL is autogenerated from the title, and the title gives a rundown of what he's covering.
"If you are a technology startup, there are two hot ways to fund yourself:"
I just thought SPAC was some VC term or something. Didn't realize he was laying out a third way.
I admit by that point in the article, I had assumed I got the gist of the article. Why fund yourself with an VC when you can ICO and give away basically nothing.
FYI, I just laying out where the mis-understanding came from.
That really gets at a deeper trend. Ben Thompson observed that Benchmark Capital took a huge gamble by suing Uber's CEO, as founder-friendliness is currently a large denominator in how promising companies choose funding sources. This acquisition company wants to leverage these same forces to put the companies first at the expense of IPO middlemen, which may be pointless if it ends up actually costing more.
There are a lot of companies whose valuation are not worth their price. Sooner or later they will need to raise money. They wont be able to approach debt markets as that means fixed repayments.
Sure 7% for IPO will be always better but if they don't want to answer all kinds of questions about their business in SEC filings, this might be the deal for them. Or cases where in the startup founders are not that versed in IPO filings and fees.
Many startups start the IPO process which takes 6-12 months from start to finish only to find that their IPO will be delayed due to unfavorable market timing. In tech IPOs, this can mean upwards of 20% pricing differences.
I'm surprised at how well this SPAC is trading at given how generally unsuccessful SPACs have been historically.
I believe there's a lot of opportunity in SPAC's little brother, the RTO on TSX-V, for startups. There are plenty of good startups that are no longer in a venture-fundable state (going after markets of sub $500M with less than 20% YoY growth) where liquidity and investment could help all stakeholders. If you know companies that fit this profile: $3M-$10M revenue, breakeven and 7-25% YoY growth... let me know.
It's actually both reasons combined. It is more challenging to be a public company today vs 20 years ago, in terms of regulatory compliance and investor pressure. And the private capital markets have massively expanded in that time, effectively enabling any sum of capital required by a private company (as demonstrated so well by Uber). If you're a successful private company, you do not need the public capital markets except as the final liquidation exit. The public market has become the last stop on the exit train, because that capital has the greatest annoyances / friction / pressure / activism with it.
Let's say you're a successful, Yelp-like company. You're not Uber or Facebook. You IPO. You're growing solidly. But uh oh, you miss your quarterly number, you deliver respectable 22% growth instead of 27% growth that was pegged by analysts. And forbid you dare to lower guidance so much as a penny. Your stock is gonna tank. Follow that up with a few quarters of good growth that doesn't hit the expectations, and you're going to find a pile of big activist types pushing for a sale of the company (that is still growing nicely). If you're a private company, and you barely miss growth expectations, your valuation is not going to get cut in half.
When you get past the fees discussion and everything else what you end up with is $600MM in capital to invest.
That isn't enough to buy a single unicorn, regardless of valuation, so you are buying a secondary stake, but then the shares you purchased still don't have liquidity until the company itself decides to IPO.
So this doesn't really do anything to improve the IPO landscape, and it's just a fancy shell for buying secondary shares.
Unless, through their purchase of secondary shares they are also going to receive updated financials which they will be reporting under their umbrella company. But without those other companies being public, the data doesn't undergo as many controls and scrutiny, and without a controlling stake of the company they invested in, they can't force much change or anything else, so ultimately you still end up with little transparency into the financials of the underlying companies.
If anything, this just delays the IPO landscape further as now there is another secondary market to sell shares, which means founders and other key people can cash out, and wait on the eventual IPO.
It's a compelling offer for any founding team still in control of their unicorn startup and who is still in it to build a great business.
You should ask yourself why an existing owner who believes in the future of their company would be willing to give up 20% upside to avoid the cost of an IPO. I would suggest that the very act of giving up this 20% promote for a 'hot' unicorn tells you something about the valuation that the SPAC eventually does a deal at.
The ownership stake is dependent on how the negotiations go and how much the company is looking to raise at what valuation/terms. Social Capital will argue a liquidity premium should be applied, and I'm sure the company will say what you're saying (they can IPO <1%). However, they could both stand to benefit, so I see a deal happening with this SPAC
I do think you do raise a fair question of what stake Chamath et. al should get for sourcing a deal. 20% is definitely high, and I think a typical SPAC is something like 5% sourcing stake for the owners.
20% is standard SPAC comp.
Also yes, I apologize, you are right - they get 20% of the value of the SPAC, so if they buy 10% of a company, they are only getting 20% promote on that 10%.
This somehow looks a bit the same, although the people behind this are quite promising.
Also confusing that they tout ability to help build product market fit as an advantage for targets when in almost all cases, a unicorn startup would have achieved that: “We, i.e. the team that helped build Facebook, will help you build a bottom up understanding of product market fit”
Expect to get hurt once the bubble dynamic fades.