We had a great webinar with Mike Jones from Science. You can view the whole webinar below:
Or you can read our write up below, co-written with Alex Brown:
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SPACs have been around since the early 90’s, when they were dominated by a small New York City-based securities firm GKN. Since, then, SPACs have had modest periods of resurgence, but nothing like the explosion they had in 2020. There were more funds raised via SPACs in 2020 ($83B) then in the entire previous decade:
To better understand what’s driving this spectacular rise in SPAcs, we held a webinar featuring Michael Jones CEO of Los Angeles based Science, a “Startup Studio and Early Stage Venture Capital Fund.” In January, Science successfully held an IPO for the SPAC, Science Strategic Acquisition Corp, a newly incorporated blank check company for the purpose of effecting a merger.
Mike, former CEO of Myspace, formed Science which has driven strong investor returns with over $2 billion in exits like Dollar Shave Club (now part of Unilever), DogVacay (now part of Rover), FameBit (now part of Google). Clearly, Mike and his company are a high-quality management team. For the SPAC, Science is focused on acquiring a company in sectors including direct-to-consumer brands, direct-to-consumer services, as well as mobile and social entertainment.
Below are 7 highlights from the Webinar
- SPACs are efficient — The process of raising capital through a SPAC is more efficient than a traditional IPO. Traditional IPO’s can be a long process and have a lot of fees attached. SPACs, on the other hand, raise capital in anticipation of purchasing a company which will automatically be public when the acquisition is completed rather than going through a long “going-public” process. The following chart indicates the massive shift from traditional IPO’s to SPAC’s.
2. SPACs Are Pretty Simple & Straightforward Vehicles — Most SPACs price at $10, entitling the investor to one share of stock and one warrant. Once the acquisition has been identified, a Unit can be separated into a share of stock and the warrant. The dollars invested are held in a trust account and can only be used to fund a shareholder-approved business combination or to return capital to the SPAC shareholders if a transaction is not approved and completed.
3. The SPAC Sponsor Has At Risk Capital— This is capital that the sponsoring management team needs to contribute into the SPAC vehicle. If the founding team fails over a designated period of time to identify an appropriate SPAC target and obtain shareholder approval, the management sponsor is last in line to get any remaining capital back.
4. SPACs Have Risen In Popularity Due To The Strong Reputations of SPAC Sponsors & The Strong Management Teams They’re Investing In—In addition to significant liquidity, a major difference between SPACs and reverse mergers is that SPAC sponsors are generally savvy investors, and they are finding stellar management teams. Typically, reverse mergers have weaker market liquidity, less seasoned managers and fewer institutional investors. The investor base for SPAC’s are typically family offices, hedge funds and other domestic and international institutional investors.
5. Raising Money Is The Easy Part, Finding A Great Company To Merge With Is A Process— Following the completion of a SPAC IPO, management compiles a list of target companies in certain industries mandated in their SPAC documents. The SPAC team contacts these companies to gauge their interest in selling and better understand their businesses. If interested, the SPAC team will conduct detailed financial analysis and due diligence of the business. Overall, synergy between the SPAC and the target company are critical to the success of the acquisition. With the substantial amount of capital raised and a finite number of targets, SPAC managers must convince target companies that they bring more value to the target companies that just capital.
6. The SPAC Sponsor Generally Gets 20% OF the Equity Post Merger — The SPAC is usually led by an experienced management team with prior private equity, mergers, and acquisitions, and/or operating experience. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. This equity vests once an acquisition is completed.
7. The Sponsors Are The Big Losers If No Merger Is Consummated— The investor capital is held in escrow pending the pursuit of an acquisition. Prior to an acquisition, no salaries, finder’s fees, or other cash compensation are paid to the management team. The management team does not participate in a liquidating distribution if it fails to consummate a successful business combination. In many cases, management teams are responsible for the expenses in excess of the investor capital held in trust if there is a liquidation of the SPAC because no target has been found.
SPACs are a thing. A very big thing. That said, while there are many compelling reasons why SPACs could be here to stay (e.g. the quality of SPAC sponsors and targets), they have historically been viable only during bull markets. Time will tell if this time it’s different.
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