SPACs, long avoided in Silicon Valley, have become commonplace in technology

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

Now, the board of directors of each profile start-up is discussing special-purpose procurement companies as a legitimate way to go public, according to Jeff Crowe of Norwest Venture Partners.

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

“We have encouraged our top companies to take this seriously,” said Hebert, whose firm raised its own health SPAC in October and is looking for a target. “The vast majority of companies looking to make traditional public offerings are double-track SPACs.”

As part of Lux’s portfolio, 3D Desktop Metal printing company went public through a SPAC in December. Others, such as real estate software companies Latch and Matterport, have announced bids this year with so-called blank check companies.

The sudden explosion of SPACs reminds some of those who have long had the dot-com balloon in the late 1990s. Pre-revenue companies with distant goals become public at astronomical assessments, and famous athletes and other celebrities mingle. Mention the acronym of any known start-up CEO and you’ll probably hear about the non-stop calls they receive from sponsors with hundreds of millions of dollars to spend.

For Wall Street skeptics, it seems to be the financial industry’s latest scheme to make money from speculators in a low-interest environment, with the market at the top and investors starving for all things technological. SPACs have raised more than $ 44 billion so far this year for 144 transactions, according to SPACInsider. This equates to more than half of the money raised throughout 2020, which in itself was a record year.

Although there is an indisputable mania in the SPAC boom, there is another story that plays out in parallel. Technology companies backed by high-growth companies avoid the IPO process, which has its own flaws. Instead, they feel comfortable with the idea of ​​entering the market in a way that would have been incomprehensible just a year ago.

In a SPAC, a group of investors raise money for a shell company that has no underlying business. SPAC goes public, usually at $ 10 a share, and then starts hunting for a company to buy it. When it finds a target and a transaction is concluded, SPAC and the company attract external investors for what is called PIPE or private investment in public capital.

PIPE money enters the balance sheet of the target company in exchange for a large share. SPAC investors acquire shares in the acquired company, which becomes the publicly traded entity through what is known as -SPAC.

A major advantage: SPACs allow companies to provide anticipatory projections, which companies do not usually do in IPO prospectuses because of the risk of liability.

“An IPO is what I would call a look back,” said Betsy Cohen, who ran a SPAC that recently took the public from car insurer Metromile. “Because a SPAC is technically a merger, you are required to tell investors what the merged companies will look like after the merger and the project before.”

It is also a much faster process than an IPO, which involves spending many months with bankers and lawyers to develop a prospectus, educate the market, conduct a roadshow and build a book of institutional investors.

Many of SPAC’s best-known targets so far have been at the intersection of technology and financial services. For these companies, cash reduction rates are high, and real GAAP profits will not come for years, even in the best of circumstances.

Metromile, whose technology allows drivers to pay more than a monthly fee, began trading on Wednesday after merging with INSU Acquisition Corp. II, a SPAC run by Cohen and her son, Daniel. Chamath Palihapitiya, the venture capitalist, became the mega sponsor of SPAC, and billionaire Marc Cuban invested in a $ 160 million PIPE.

At the close on Friday, the shares were trading at $ 17.23, giving Metromile a valuation of over $ 2 billion, based on the number of shares completely diluted.

“Metromile is entering the insurance market at a time when telematics is being installed in almost every car in the future, so there is the possibility of looking at insurance on an individualized custom basis, which is huge,” Cohen said in an interview. “We considered it an important company to bring to the public markets and allow them to have access to capital, as insurance companies do.”

Cohen, who founded The Bancorp, said it will close seven SPACs by the end of this year, including payment company Payoneer and boutique investment bank Perella Weinberg.

Metromile CEO Dan Preston told CNBC this week that in mid-2020, as his board evaluates funding options, he expected to raise a large round of private equity and then go public in four to six. quarter. The company has been around for a decade and has raised hundreds of millions of dollars in funding.

Other insurance technology companies, such as Lemonade and Root, held traditional IPOs last year. But Preston says the more he learned about SPACs, the more he realized it was a better approach for his company, which faces high operating costs in the heavily regulated insurance industry. – and a pandemic that reduced the number of miles traveled.

“The sweet spot is companies that are close to being public, but that need more historical data to prepare,” Preston said.

Metromile said in the merger file that it expects insurance revenues to grow 39% to $ 142.1 million in 2021 and then grow 81% in 2022 and more than 100% in 2023. Adjusted gross profit will increase by to $ 11.1 million last year to $ 144 million in 2023, the file says.

Online lender SoFi said in January it would be released through a Palihapitiya-led SPAC in a deal that values ​​the company at $ 8.65 billion. In the merger agreement, SoFi projects annual revenues of $ 980 million this year, growing annually to $ 3.7 billion in 2025, while the contribution profit will exceed five times in that period to 1.5 billion. dollars.

In other funding SPACs, Palihapitiya led the reverse merger of digital real estate company Opendoor, which went public last year and is now worth more than $ 20 billion. He has done the same with health insurer Clover Health (which said this month it is being investigated by the SEC) and leads PIPE for solar financing provider Sunlight Financial.

It also makes software deals. In January, Palihapitiya was a PIPE investor in Latch, a developer of smart locking systems sold to real estate companies. Latch generates recurring software sales and said revenue in 2020 increased 49% from the previous year to $ 167 million.

Blackrock, Fidelity and Wellington are also part of PIPE, which means they will hold equity when Latch goes public. These names, seen as top public market investors, are becoming familiar with SPACs, with at least one of them appearing in PIPE for SoFi, Matterport, Opendoor and the consumer genetics company 23andMe.

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

In a SPAC, the target reaches up to 20% of the shares to sponsors and additional shares to PIPE investors. The rest remains primarily with those inside. When it is public, the company has the ability to raise capital later at market rates. For example, Opendoor has just announced that it is raising $ 770 million to $ 27 per share, marking a valuation increase of about 200% since the PIPE investment.

Norowe’s Crowe, whose firm was a venture investor in Opendoor and online therapy provider Talkspace, another SPAC target, said prices are favorable for the best companies because there are so many SPACs following them.

“The prices are crazy,” Crowe said. “There is a huge demand for all these companies. A lot of companies that would have gone public on a relatively uniform basis in 2021 and ’22, if the markets held up, are now all going crazy.”

Risk investors also participate. In addition to Lux, companies such as FirstMark Capital, Ribbit Capital, Khosla Ventures and SoftBank have set up their own SPACs. Separated from their firms, venture capitalists Steve Case, Reid Hoffman and Bradley Tusk followed Palihapitiya into the arena of SPAC sponsors.

Venture firm G Squared announced this week the closure of a $ 345 million SPAC. Founder Larry Aschebrook called it “just another tool in our toolbox” in an interview to help companies access capital. He said it can be a good option for a CEO who is ready to run a public company and a business that has raised a lot of money in the past and can benefit from easy access to capital markets.

“There is only one hand that we believe are high quality companies,” Aschebrook said of the SPAC technical transactions that have already been announced. “The companies we are interested in are based on profitability or are profitable and are logos that everyone knows.”

While Battery’s Lee no longer considers SPACs equivalent to a cursed word, he said it was not yet one of his company’s portfolio. However, Battery is an investor in Coinbase, which is published through a direct listing, following the example of Slack, Spotify and Palantir, allowing existing stakeholders to sell at the beginning, rather than issue new shares as a company.

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

“Direct listing was the first new thing that happened in the capital markets in 50 years – and rebranding SPAC is the second thing,” Lee said. “At the end of the day, you are still running a public business and you need to be able to resist rigor and control.”

CLOCK: The CEO of Matterport will be published through the SPAC transaction with Gores Group