New gold rush is spelled SPAC
SPACs are a hot commodity right now… and the first official “momentum masters” of 2021. Everyone and their Davey Day Trading brother is discussing & debating these anti-IPOs.
For those of you who’ve been sleeping… SPAC stands for Special Purpose Acquisition Companies. They help take companies public. What’s the difference? Think of it this way: IPOs are a company looking for money, whereas SPACs are money looking for a company.
ON THE UP: SPACs
The SPAC gold rush is upon us. We first wrote about the SPAC trend five weeks ago, and since then momentum continues to surge, up from an MFactor of 40 in January to 47 this week.
In 2020, 178 SPACs went public to the tune of $65 billion — surpassing the value of such deals in the last ten years COMBINED. Mergers through SPACs account for 50% of IPOs this past year.
Why are they surging in momentum? When we first started talking about SPACs, momentum was driven by business news about how they’re disrupting the IPO process and benefiting companies who want to find a more efficient route to going public.
Now the continued surge in cultural relevance is fueled by broader conversations spanning three topics:
- The armchair day-trader craze… TikTok, Twitter, Reddit (and now ClubHouse) conversations are moving from memestocks (Gamestop & AMC) to SPAC speculation.
- Celebs and public figures like Jay-Z, Colin Kaepernick, Mark Cuban, and Bradly Tusk starting their own SPACs
- The tension between old school Wall Street vs. new guard investors
Love it or hate it, this trend is not slowing down.
THE DECODE
Here’s why SPACs are having a momentum moment & what brands and businesses can learn from it:
Disruption: SPACs are challenging the IPO status quo. Cutting out the “middleman,” aka the traditional, lengthy & expensive IPO process (road shows and all) benefits the investors and the companies going public.
Companies that normally wouldn’t be able to go public through IPO like young start ups, cannabis companies, and entertainment groups (like Big Hit Entertainment, home of K-pop group BTS) can now reap the rewards of being publicly traded.
Former political strategist turned venture investor Bradley Tusk recently formed a SPAC, IG Acquisition Corp., targeting businesses in the leisure, gaming and hospitality industries. Tusk sees SPACs as an efficient and assuring method for both companies looking for money and investors looking to invest:
“This is a really efficient way to raise capital. Investors like it because it gives them a lot of optionality — they can always choose not to participate and get their money back. And people like me like it because it’s a way to raise a lot of venture money in one shot. … I did three days of meetings and raised $300 million with a SPAC.”
Innovation & FOMO: Suddenly everyone has a “blank check” to get in on the investing game.
With “amateur” investors taking & giving advice via the twitterverse (and Reddit, TikTok & Club House), investing is getting gamified and “FOMO” from social media keeps upping the ante. And not just for retail investors. It is only a matter of time until social media influences the institutional investors driving SPACs.
Polarization: The war between fans and foes keeps the SPAC flame burning (and momentum rising).
SPAC fans say it’s a smart, efficient way to invest and take companies public. Those who are anti believe the bubble will burst. As SPACs become more mainstream, tensions will continue to rise.
Stickiness: Because of the “blank check model” pre-acquisition institutional investors are buying into the SPAC’s mission and purpose (not the business going public).
Investment banks driving the IPO process hook investors by promoting the company they are taking public. The opposite is true with pre-acquisition SPACs because the company going public is TBD. The “blank check model” is inherently risky for investors, so it is essential that SPACs communicate their mission, values & purpose to build trust and get investor buy-in.
Social Impact: SPACs are inherently “purpose” and values driven.
They raise funds while raising awareness for companies that align with consumer & investor values. SPACs aren’t just for companies looking to give Tesla a run for their EV money. They raise funding across all sectors, most notably among social justice initiatives.
What does this mean for the companies / brands going public via SPAC?
- Pay attention to the “DTC” investors: Investment banks are not the only ones making decisions anymore. Anyone can start & influence a SPAC. It is more important than ever to understand your broader set of “stakeholders”
- Harness the power of social media: Social media platforms like Twitter, Reddit, TikTok and ClubHouse are becoming increasingly more influential over investment decisions. Meet new school investors where they are.
- Promote your values, mission & the potential opportunity: Investors are investing with purpose and are looking for companies that align with their own values.
ON THE DOWN: Old school Wall Street ways
Investors have more optionality, control & information than ever when it comes to the companies they want to invest in.
