How VCs and founders are riding the SPAC wave into 2021

An explainer on the hottest new financial vehicle, and how the decision makers from both sides of the startup ecosystem are leveraging it for big gains.

How does a SPAC work?

The history of SPACs — What has changed?

While SPACs have existed for years, they have cycled in and out of favor with investors. In the 1980s and ’90s, SPACs were criticized by some, occasionally drawing comparisons to fraudulent shell companies.

The rise of SPACs. Why now?

SPAC issuance in 2020 has broken all previous records.

For Private Companies

Price Certainty: From a private company standpoint, finding the right window to debut on Wall Street via traditional IPO can be tricky and costly, especially in unstable market conditions. The price of the stock may suffer simply because the market was down the day the company goes public. On the other hand, if a company is too conservative and prices its offering too low, the company risks leaving money at the table. SPAC solves those issues due to its ability to lock in a price and shields the company’s value from market volatility.

For Investors

  1. Institutional Investors:

The VC view of SPACs

With a creative and disruptive nature in its DNA, the venture capital industry continuously searches for alternative exit routes to achieve liquidity for long term investors. Given some of the challenges inherent in executing an IPO, VCs have been exploring other ways to ease the process of taking companies public and allow more public investors to be a part of the investment journey at an earlier stage.

SPAC Disclaimers

It’s important to keep in mind that merging with a SPAC is not a silver bullet for all private companies. There is a cost of going public and being public which involves a tremendous amount of time, management attention, and financial cost to meet higher reporting requirements and adhere to more stringent and complex accounting rules. Whether a company chooses to go public via a traditional IPO, a direct listing or a de-SPAC merger, we need to make sure that it is fundamentally ready to face the scrutiny of public market investors.

The outlook on SPACs

The class of 2020 SPACs is under the gun to strike deals and the pace of SPAC formation shows no sign of ebbing. We are encouraged by the momentum driving innovation around public listings. We will be watching the evolution of SPACs with greater interest and expect the financial institutions entering the space will make mergers with SPACs a more attractive transaction option.

Disclosure

Information provided in this paper is for educational and illustrative purposes only. The material presented represents the opinions of Fuel Venture Capital, as of the date of this report. The information and opinions presented have been obtained or derived from sources believed to be reliable; however, the accuracy and completeness of such information expressed herein cannot be guaranteed. Opinions are subject to change without notice, and Fuel Venture Capital assumes no responsibility to update or amend any information or opinions contained herein. Keep in mind that past performance is not indicative of future results, and there can be no assurance that the Fund will achieve comparable results, achieve its investment objective, implement its investment strategy or avoid losses.

Through our investments, Fuel Venture Capital empowers inventors who challenge accepted ideas to build new economies.

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