SILICON VALLEY has thrived by inventing new ways of doing things, from searching for information to contacting friends. So it may come as no surprise that the Valley is eagerly embracing another sort of disruption: special-purpose acquisition companies (SPACs), as an alternative to the conventional initial public offering (IPO) for startups. “So many things have become cheaper and more efficient. Why are IPOs as expensive and inefficient as ever?” asks Roelof Botha, a partner at Sequoia Capital, a venture-capital firm. He describes the IPO process as “chicanery and grand larceny”.
With Wall Street banks allocating shares to top clients and encouraging companies to price their offerings low to ensure a rise on the first day, many in Silicon Valley feel the IPO “tax” is too great. Last year in America, underpricing led to $30bn of unrealised gains for newly public companies (and their employees). With SPACs and direct listings, another route to going public, there is no pressure for a price to pop.
Signs of the SPAC craze are now as common as sightings of unicorns in the Valley. A few venture-capital firms, including Khosla Ventures, have announced SPACs, as have hedge funds that invest in tech, and individual venture capitalists. Prominent tech firms, including 23andMe, a genetic-testing firm, and SoFi, a personal-finance platform, are going public through SPACs.
Though their impact will be felt across corporate America, SPACs will have a pronounced effect on the Valley. For one, they might help finance adolescent tech companies that struggle to attract more private investment, but are too small to do an IPO. Some point to Opendoor, a property-tech firm, as an example of a company that struggled to raise another round of funding but has thrived since going public through a SPAC. Valued at $4.8bn before its merger in September, it is now worth $18.1bn.
Blank-cheque firms may also fund technologies in need of long-term investment. “Deep tech” like autonomous vehicles, biotech and quantum computing could benefit. (Software companies, which make easy, quick margins, are less likely to be targets.) “A SPAC allows you to be valued on the hopes and dreams of tomorrow, versus the results of today,” says Nirav Tolia, the founder of Nextdoor, a social network, and an independent director of IPOD, a SPAC.
SPACs are opening up tech investing to retail investors, too. The fact that tech firms tended to delay listing meant that the lion’s share of returns had already been captured by venture capitalists even before startups reached public markets. SPACs that merge with early-stage firms could give more investors a chance to pile in. They “are the closest thing a retail investor can get to a venture investment”, says Mr Tolia. This lucrative but speculative kind of investing will bring punters both risk and reward.
This article appeared in the Finance & economics section of the print edition under the headline “Rain for the rainmakers”
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