SPACs used to be a joke in Silicon Valley — now they're going mainstream


  • Venture capitalists point to SPAC announcements by SoFi, 23andMe, Desktop Metal and Matterport as a clear sign that higher-quality companies are choosing that route to the public market.
  • The surging number of SPACs on the market coupled with participation by top institutional investors have made the process cost-efficient and credible.
  • SPACs are “stealing from the 2021 IPO calendar,” said Peter Hebert, co-founder of Venture firm Lux Capital.

Roger Lee of Battery Ventures says that “SPAC” used to be a “bad four-letter word” in Silicon Valley.

Now, the board of every high-profile start-up is discussing special purpose acquisition 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 are “stealing from the 2021 IPO calendar.”

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

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

The sudden burst of SPACs reminds some long-timers of the dot-com bubble in the late 1990s. Pre-revenue businesses with far-out goals are going public at astronomical valuations, and famous athletes and other celebrities are getting in the mix. Mention the acronym to any well-known start-up CEO and you’ll likely hear about the non-stop calls they receive from sponsors with hundreds of millions of dollars to spend.

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To Wall Street skeptics, it looks like the finance industry’s latest scheme to make money from speculators in a low interest rate environment with the market at a peak and investors hungry for all things tech. SPACs have raised more than $44 billion so far this year for 144 deals, according to SPACInsider. That’s equal to more than half the money raised in all of 2020, which itself was a record year.

While there’s undeniable mania in the SPAC boom, there’s another story playing out in parallel. Venture-backed tech companies with high-growth prospects are shunning the IPO process, which has its own flaws. Instead they’re getting comfortable with the idea of hitting the market in a way that would have been unfathomable just a year ago.

In a SPAC, a group of investors raise money for a shell company with no underlying business. The SPAC goes public, generally at $10 a share, and then starts hunting for a company to acquire. When it finds a target and a deal is agreed upon, the SPAC and the company pull in outside investors for what’s called a PIPE, or private investment in public equity.

The PIPE money goes onto the target company’s balance sheet in exchange for a big equity stake. The SPAC investors get stock in the acquired company, which becomes the publicly-traded entity through what’s known as the de-SPAC.

One major advantage: SPACs allow companies to provide forward-looking projections, which companies typically don’t do in IPO prospectuses because of liability risk.

“An IPO is what I would call backward-looking,” said Betsy Cohen, who led a SPAC that recently took car insurer Metromile public. “Because a SPAC is technically a merger, you’re required to tell investors what the merged companies will look like after the merger and project forward.”

It’s also a much faster process than the IPO, which involves spending many months with bankers and lawyers to draft a prospectus, educate the market, carry out a roadshow and build a book of institutional investors.


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