SPAC SPAC SPAC SPAC SPAC

I think I have tipped you off that this post is about SPAC’s.

I have mentioned SPAC’s over the year on this blog, but it was February of this year that one finally caught my attention – the post was titled ‘A Little Froth Is Fun‘. I was referring to the Virgin Galactic SPAC ($SPCE).

Flash forward five months and there is a SPAC a day. The people wanted SPAC’s and oh boy they are about the be besieged. I read yesterday that we will soon have a SPAC ETF with the ticker $SPAK – naturally…

One person who was ahead of this curve was Chamath who orchestrated the Virgin Galactic SPAC.

Alex Danco has the backstory in his great weekly newsletter, this one titled ‘Spac Man Begins‘. The gist of the story:

Three years ago, Chamath sat us all down at a Social Capital all hands meeting and told us about this great new thing we were gonna do. It was called a SPAC.

A SPAC (“Special Purpose Acquisition Company”, or “blank check company”), he told us, was a new way we were going to help take big tech companies public. Going public is an important moment in a company’s life. It’s a transition from one state to another, it’s a stressful but monumental transition, and the current way we do it – the Initial Public Offering – stinks. Our SPAC, the thinking went, would create a new path for tech companies to go public that could compete with the IPO, and win.

It took a few years, but Chamath got this one really right. At the time, hardly anyone in Silicon Valley had ever heard of SPACs before. But now they’re having their moment, from Wall Street (Bill Ackman’s $4 billion SPAC for finding a “mature unicorn”, lol; David Ubben and Nikola stock making even Elon blush) to Sand Hill Road (Ribbit Capital just raised $600m for a fintech SPAC, and Chamath is doing two more, with more to follow I’m sure.)

SPACs aren’t new; they’ve just traditionally been a grimy, off-Broadway kind of financing. I have some fond memories of heading home to Canada and then talking to these 21 year old university students who were like, “SPACs? Oh yeah, we know what those are. I worked on one during my co-op semester, trying to take a fake mining company public.” (As an aside: did you know that Canada has a stock exchange specially for scams?)

Alex ends with this…

If Chamath can earn a reputation for pulling these things off, does he become as valuable as the investment banks’ IPO businesses? If we can repeatedly go directly to the retail public and sell these things, what happens if he lowers his 20% fee, to say, 10? Once you really have this process down, could a SPAC start to compete on cost? The conventional answer would say no: you’re still paying the blank check fee to go public, M&A fees for the deal itself, not to mention the promoter fee. But you’d be surprised where cost savings can get found in a new, hungry industry that hasn’t ossified into its Generally Accepted Margins.

SPACs today might just look like a rearrangement of banker fees into a different structure, with costs being disguised rather than saved. That’s fair. But there’s no way you can convince me that you can’t find some real economies of scale in taking the same blank check company public 20 times in a row. Get out of here. At some point, a bank will break ranks and get into the wholesale SPAC listing business. Then we’ll see what the margins actually look like.

Anyway, I can’t wait to see where this all goes, and I especially can’t wait for synthetic biology SPACs to hit the mainstream so we can have some companies that absolutely no one understands get taken public on the pure brand strength of a sponsor. We’re about to learn a whole lot about some questions no one ever thought to ask about only a few years ago! And also keep an eye out for those Canadian junior I-bankers. If you’re looking for targets, they are here to help.

I’ve asked many smart friends from the big banks, but my favorite answer is from my friend Doug Horlick who said the following:

‘Yes this is crazy fast, but it still feels early. SPAC focus will end up the same way as hedge funds. SPAC’s will get the best and brightest, and will also get the polar opposite that are hacks that want a short cut. Investors will get smoked not doing the homework necessary to differentiate.