3 Truths and 1 Lie About SPACs

As companies seek alternatives to the often lengthy IPO process, SPACs have skyrocketed in popularity.

By Blair Silverberg

Opinions expressed by Entrepreneur contributors are their own.

As companies seek alternatives to the often lengthy IPO process, SPACs have skyrocketed in popularity. Their speed and flexible options make them attractive to entrepreneurs, while their potential for appreciation at a time when the universe of public companies has halved has drawn in countless investors and SPAC founders who want a piece of the success.

But with all the hype surrounding SPACs, many entrepreneurs are left wondering: are SPACs all that they're made out to be?

What is a SPAC?

A SPAC, or Special Purpose Acquisition Company (historically called a blank check company), is a publicly listed company created solely to acquire another company. Because the SPAC is already public, when the SPAC purchases the target company, the target company also becomes public. This allows that company to become public without going through the traditional IPO process.

Truth 1: SPACs are simpler than traditional IPOs

SPACs offers entrepreneurs a much faster path to going public, with greater flexibility than a regular IPO. Because going public through a SPAC is a merger, the target company doesn't have to do a roadshow to encourage investors or negotiate with dozens of parties; the SPAC has already raised funds prior to engaging with the target company. The only negotiations happen between the founders and the SPAC.

That means that much of this process can be done online, which is a massive bonus during a pandemic.

Truth 2: SPAC deals can include forward guidance

In a traditional IPO, only historical financials are disclosed, meaning valuations are backward-looking. Your future plans, products, and projections can't be discussed. Entrepreneurs leading companies with ambitious ideas don't get credit for where they're headed, only where they are today.

But with a SPAC, there are no rules against getting forward guidance. Like in private financings, if your company has exciting work in the pipeline, you can get credit for those plans in the SPAC negotiations. This is ideal for promising companies that would otherwise be sorely undervalued in a traditional IPO, but also has the potential to lead to speculative excess if valuations are based too fully on the future.

Truth 3: There are plenty of SPACs to choose from

There are currently 300+ US-based SPACs to choose from. More than 200 new SPACs went public in 2020 alone, accounting for $64B+ in funding - almost as much as all of last year's IPOs combined. This is a massive amount of capital waiting to be deployed.

But SPACs aren't a perfect solution to every issue that entrepreneurs face.

The Lie: SPACs are the way of the future

Unfortunately, I don't think they are. The ease that makes SPACs so attractive will also be their downfall. In an effort to make more money, SPACs will look to acquire as many companies as possible. Naturally, this will include companies that shouldn't go public. SPACs will likely lose credibility, pushing them to the sidelines as a method for companies to go public.

This is becoming even more likely as more people start their own SPACs, including unconventional players such as Shaquille O'Neal and former House Speaker Paul Ryan. Everyone wants to cash in on SPACs. And that level of demand isn't sustainable forever.

How to Know if a SPAC is the Right Choice

Ultimately, the goal of working with a SPAC is to become a public company. Before you take a SPAC up on their sales pitch, you need to ask yourself: are we ready to be a public company? Are our financials ready? Can we comply with all of the requirements that come with being public? As with any financing deal, you need to ensure that you can uphold the commitments you're making. Calculate every scenario - will you be able to make money for your investors and meet performance expectations?

SPACs will not fix existing issues with your company. If your company isn't ready for an IPO, then it isn't ready for a SPAC. Consider your options carefully before diving head-first into a SPAC deal.

It's Ultimately Up to You

SPACs can be a great opportunity for entrepreneurs who don't want to wade through the traditional IPO process. They offer greater flexibility, forward guidance, and a simpler setup that fits the needs of many companies. Whether you choose a SPAC or traditional IPO, remember that the path matters less than the outcome. You'll have a public company either way. The real question is, are you ready for that?

Blair Silverberg

Co-Founder and CEO of Capital

Blair Silverberg is Capital's Co-Founder and CEO. Prior to Capital, Blair was a Principal at Draper, Fisher Jurvetson where he specialized in fintech and machine learning companies. Before DFJ, Blair was a product lead at Intuit and co-founded an online tutoring marketplace called TutorCloud.

Related Topics

Editor's Pick

This 61-Year-Old Grandma Who Made $35,000 in the Medical Field Now Earns 7 Figures in Retirement
A 'Quiet Promotion' Will Cost You a Lot — Use This Expert's 4-Step Strategy to Avoid It
3 Red Flags on Your LinkedIn Profile That Scare Clients Away
'Everyone Is Freaking Out.' What's Going On With Silicon Valley Bank? Federal Government Takes Control.

How to Detect a Liar in Seconds Using Nonverbal Communication

There are many ways to understand if someone is not honest with you. The following signs do not even require words and are all nonverbal queues.

Business News

Carnival Cruise Wants Passengers to Have Fun in the Sun — But Do This, and You'll Get Burned With a New $500 Fee

The cruise line's updated contract follows a spate of unruly guest behavior across the tourism industry.

Business News

Amtrak Introduces 'Night Owl' Prices With Some Routes As Low As $5

The new discounts apply to some rides between Washington D.C. and New York City.

Business News

Meta Employees Interrogate Mark Zuckerberg in Town Hall Meeting

The CEO fielded tough questions from rattled staffers at an all-hands meeting.

Business News

A Laid-Off Meta Employee Says She Wasn't Given Anything to Do: 'You Had to Fight to Find Work'

Claims about the company laying off thousands of employees who didn't have real jobs have been discussed online.

Business News

Dad Pisses Off Thousands With TikTok Explaining How to Hack Disney Ride Height Restrictions for Kids

TikTokers The Kelly Fam made platform shoes out of flip-flops and Gorilla glue so their 3-year-old could sneak onto big rides.