November 24, 2019
A “Guaranteed IPO” From the Private-to-Public Equity (PPE)™, the Enhanced SPAC
An IPO represents the ultimate goal of many founders for their startups, but not everyone could make it. After what happened to WeWork, many multi-billion-dollar private companies planning to tap the public capital market, have delayed their IPOs. Airbnb is pushing back its IPO until 2020, and many other unicorns, including Robinhood and Stripe, are not going to hit stock exchanges in 2019 either. Wall Street is sending a wakeup call to Silicon Valley – heydays are over, time to prepare for the doom and gloom.
There is no doubt that IPOs have uncertainties. Many factors could impact a company in its IPO process – geo-politics, economics, interest rates, elections years, or even bad press on a company’s founder. There was a case of a startup in 2018 that hit the opening bell, but failed to complete the IPO, because a major investor backed at the very last minute. The geo-political tension between U.S. and China have created a rollercoaster ride in the market this year and talks of recession have emerged.
Even though companies might have invested a considerable amount of time in IPO preparation, there is no guarantee that they’ve picked the best timing to go public, simply because nobody could predict every future event that may kill the IPO process.
With so many external factors impacting a company’s valuation in an IPO these days, even the hottest company in the hottest sector could not be sure of a successful IPO, not to mention the sub-unicorn companies or those in less interesting verticals to the investors. For founders who desires an exit through IPO, this means there is no guarantee of cash returns. For founders who want to continue growing the company, this means the additional capital may not come as planned. That’s why they are actively searching for alternatives, and a Special Purpose Acquisition Company (SPAC) could be exactly the platform they are looking for.
SPAC allows a private company to become public in a fairly straightforward manner. It is a so called “blank check” company, formed for the purpose of effecting a business combination with an existing operating company. Essentially, the SPAC entity forms a corporation, raises capital in an IPO, searches out an appropriate target company, completes a definitive agreement to merge with that company, and then effects the merger. The target company will then become listed through a “reverse merge” mechanism and traded under the SPAC’s “ticker”. As such, the SPAC is designed to offer a guaranteed listing and assured access to public market. Unlike the traditional IPO, valuation is determined essentially as in a M&A. Thus, there isn’t a price discovery phase and it does not depend on so called “IPO window”. Founders will have full transparency on how much their company is worth when they sign the business combination agreement with the SPAC sponsors.
Because of its effectiveness in bring companies public, there has been an upward trend in SPAC IPOs since 2011, in both deal count and dollar amount raised. In 2018, SPACs counted for 24% of total U.S. IPO deals and 21% of IPO dollar value. As of October 2019, there are 90 active SPACs which raised total of $17.63 billion, out of which 20 have announced the combination targets and expect to close the deals.
As popular as SPAC has become, there are still some uncertainties in the de-SPACing process. We, at GigCapital, have developed the Private-to-Public Equity (PPE)™ process, which enhances the SPAC by removing those uncertainties. With PPE, founders are assured the access to the public market, to drive accelerated business growth, which in turn will offer their early investors greater return from the public equity ownership in their companies.