3 Truths and 1 Lie About SPACs

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?