As the popularity of using special purpose acquisition companies (SPACs) as a financing mechanism continues through 2021, it is important to consider the nuances and fundamentals of SPACs before choosing this option. The following article is a result of insights shared during a MaRS webinar that highlighted perspectives from a top U.S. investment bank and a CEO whose business recently went public using a SPAC.
Part of the popularity and favourability of SPACs over traditional IPOs can be attributed to two factors: the private investment in public equity (PIPE) transaction and the opportunity to discuss valuation.
A PIPE is used to raise capital and help validate the transaction and valuation with institutional investors. It is a critical success factor and the next step after finding the right SPAC partner. With a PIPE, a business can share the valuation, explain the valuation thesis and provide projections that can be discussed in relation to comparables and as part of the registration statement that goes into — and is unique to — the SPAC. This transaction allows ventures to have a more robust discussion with institutional investors. Disruptive businesses in particular can cut across traditional verticals more powerfully than if they were to use another channel.
When comparing SPACs to private capital, the dilution of both transactions can ultimately be managed to be identical. However, with a SPAC, companies have to be public, have a path ready to report and think about their financial statements going forward. In comparison to a reverse takeover, a SPAC transaction tends to be bigger, making a SPAC a great vehicle for a company that needs a larger amount of capital (at least $350 million).
Special purpose acquisition companies work well for disruptive businesses that have strong intellectual property and a unique business model and/or brand. These companies tend to be extremely high-growth and have the ability to transform a category. Some notable examples have been in the electric vehicle, autonomous vehicle and cleantech spaces. It is possible for companies that do not have a lot of (or any) revenue to be acquired by a SPAC because of their disruptive plan, based on their business principles, demonstrable IP and defensible business model. It’s also possible to have a small revenue base but still be valued attractively in the SPAC market — companies that tend to do well are able to deploy and require a lot of capital to rapidly grow their business over a period of three to five years.
Think about your business needs and readiness: The decision to go down the SPAC route should be made with the business objectives and public market readiness taken into account.
Choose the right team and advisors: A SPAC is a highly structured transaction that requires a lot of people who have SPAC and sector acumen — be thoughtful about the selection because success can come down to having the right people.
Be thoughtful about your SPAC partner selection: Though it varies by deal, partners are people who could potentially become members of your board. So be thoughtful about who this partner is and what value they add. Be sure to consider your needs and how that partnership can facilitate your objectives.