
With $600M 'Blank Check' IPO, VCs Experiment on Startup Listings - schintan
https://www.bloomberg.com/news/articles/2017-09-14/with-600-million-blank-check-ipo-vcs-experiment-on-startup-listings
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chollida1
So SPACs or blank cheque companies aren't new. They've been around for many
years.

[http://www.investopedia.com/terms/s/spac.asp](http://www.investopedia.com/terms/s/spac.asp)

Essentially people collect money upfront and then go deal hunting, after a
period of time, usually 2years or less, they then go back to the people who
put their money in the deal and give them the choice of pulling their money
out and taking a nominal interest rate gain, or putting their money into the
deal and collecting warrants along with the deal as a sweetener.

This is very common in the minerals and mining space where serial
entrepreneurs found an oil company, go drilling and then sell the company once
its got a well up to a big producer. It's a way for these deal makers who know
everyone in their industry to help smaller companies get liquidity, while of
course helping themselves and the unit holders to make money.

They benefit the unit holders because its a place for them to park alot of
money risk free with a decent call option on the upside.

Asa hedge fund in today's market the problem is often too much capital and too
few places to invest it. SPACS offer a way to park say $100 million in a
vehicle that has alot of upside with not alto of downside. It has a very
similar payoff to Venture Capital in that most SPAC's end up not working out
but the few that do make it worth while.

As a side note, if you ever work for a hedge fund or any investment company,
you'll get the idea of asymmetric risk drilled into your head. Meaning you
want your deals to have the potential for 10x upside with say 1x downside.

The key to running a successful SPAC is almost always:

\- who is running it, do they have deep industry connections and the ability
to get deals that no one else can

\- the company being acquired needs to be in need of capital and not in a
position to raise it. or put another way, it needs to be win/win for both
investors and the company owners.

This particular SPAC seems to solve neither of these needs as typically
silicon valley tech companies have no problems raising money nor do they have
any issues going public, so this SPAC fails the second test.

It also seems to fail the first test as I can't see why the founders are in
any better position to be deal rain makers than say Sequoia, KPCB, or A16Z.

~~~
indescions_2017
Off topic completely, but is there a long bull case for energy? Are we seeing
a bottom in oil and natgas prices or will secular changes and renewable
consumption dominate? And are infrastructure funds such as $ALPS, $ENFR a good
way to get exposure and long term income distributions? Thanks in advance!

As far as Chamath's Hedosophia, not sure I'd bet against him just yet. He's
got a pretty good track record of winning ;)

~~~
hendzen
Everyone looks like a genius in a bull market.

~~~
charlesdm
And everyone looks like an idiot in a bear market?

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schintan
Matt Levine doesn't think this is a good idea:
[https://www.bloomberg.com/view/articles/2017-09-15/icos-
vcs-...](https://www.bloomberg.com/view/articles/2017-09-15/icos-vcs-ipos-and-
spacs)

~~~
econner
Wow, yea, doesn't seem like a good idea:

 _A final thing about SPACs is that they are so expensive. Banks charge a rack
rate of about 7 percent for initial public offerings, though big sexy tech
IPOs tend to be done more cheaply. SPAC sponsors compensate themselves rather
more lavishly. Hedosophia 's sponsor -- a Cayman Islands company owned by
Palihapitiya and his co-founder -- invested $25,000 to found the SPAC. In
exchange for that nominal payment, and their work on finding a company to take
public, they get 20 percent of the SPAC's stock. (They are also are putting in
another $12 million or so to buy warrants in connection with its IPO.) A 20
percent fee for taking a company public is just ... more ... than a 7 percent
fee. And that's not even counting the 5.5 percent fee that Credit Suisse
charged for taking Hedosophia public! Something like a quarter of every dollar
that investors are putting into Hedosophia is going to compensate financiers
for doing the work of (ultimately) taking a unicorn public, which is a funny
way to make that process more efficient._

~~~
jedberg
REmber though that a retail investor can buy this stock, and pay 25% to get in
on a unicorn IPO.

To get in only paying 7% (i.e. at the IPO), you have to already be a wealthy
investor so you can get some of the IPO stock.

The 18% difference is your fee for deal access basically.

I'm not saying it's right, but it explains why it makes sense.

~~~
pgwhalen
Interesting thought, You should email Matt, I'm sure he would have a response
that he would put in his column.

~~~
jedberg
Ok, done!

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martinshen
For startups... the biggest disadvantage to a SPAC is fee structure. The
biggest advantage for a SPAC is timing. In tech startup-landia I believe
timing greatly outweighs ~13% fee difference.

Many startups start the IPO process which takes 6-12 months from start to
finish only to find that their IPO will be delayed due to unfavorable market
timing. In tech IPOs, this can mean upwards of 20% pricing differences.

I'm surprised at how well this SPAC is trading at given how generally
unsuccessful SPACs have been historically.

I believe there's a lot of opportunity in SPAC's little brother, the RTO on
TSX-V, for startups. There are plenty of good startups that are no longer in a
venture-fundable state (going after markets of sub $500M with less than 20%
YoY growth) where liquidity and investment could help all stakeholders. If you
know companies that fit this profile: $3M-$10M revenue, breakeven and 7-25%
YoY growth... let me know.

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dkhenry
Here is what I don't get. If a company can IPO just for the sake of having a
publicly tradable security, what is the big overhead for a large company. I am
really starting to believe the only reason companies aren't IPO'ing isn't
because its hard or expensive, but because they are getting stupid good deals
from private investors to burn through cash.

~~~
adventured
> isn't because its hard or expensive, but because they are getting stupid
> good deals from private investors to burn through cash.

It's actually both reasons combined. It is more challenging to be a public
company today vs 20 years ago, in terms of regulatory compliance and investor
pressure. And the private capital markets have massively expanded in that
time, effectively enabling any sum of capital required by a private company
(as demonstrated so well by Uber). If you're a successful private company, you
do not _need_ the public capital markets except as the final liquidation exit.
The public market has become the last stop on the exit train, because that
capital has the greatest annoyances / friction / pressure / activism with it.

Let's say you're a successful, Yelp-like company. You're not Uber or Facebook.
You IPO. You're growing solidly. But uh oh, you miss your quarterly number,
you deliver respectable 22% growth instead of 27% growth that was pegged by
analysts. And forbid you dare to lower guidance so much as a penny. Your stock
is gonna tank. Follow that up with a few quarters of good growth that doesn't
hit the expectations, and you're going to find a pile of big activist types
pushing for a sale of the company (that is still growing nicely). If you're a
private company, and you barely miss growth expectations, your valuation is
not going to get cut in half.

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raiyu
It's not a new concept that's for sure, but this just seems like another VC
fund with not much of a difference.

When you get past the fees discussion and everything else what you end up with
is $600MM in capital to invest.

That isn't enough to buy a single unicorn, regardless of valuation, so you are
buying a secondary stake, but then the shares you purchased still don't have
liquidity until the company itself decides to IPO.

So this doesn't really do anything to improve the IPO landscape, and it's just
a fancy shell for buying secondary shares.

Unless, through their purchase of secondary shares they are also going to
receive updated financials which they will be reporting under their umbrella
company. But without those other companies being public, the data doesn't
undergo as many controls and scrutiny, and without a controlling stake of the
company they invested in, they can't force much change or anything else, so
ultimately you still end up with little transparency into the financials of
the underlying companies.

If anything, this just delays the IPO landscape further as now there is
another secondary market to sell shares, which means founders and other key
people can cash out, and wait on the eventual IPO.

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zallarak
I think that if a VC is using the public markets to raise capital, then we're
in a stock market bubble.

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bandrami
Ah crap, it's 1999 again.

~~~
SkyMarshal
No, this is the exact opposite, it's the anti-1999. He's offering late stage
companies this deal - _don 't IPO_, stay private, avoid the IPO and the making
a bunch of connected Wall Streeters rich on your IPO pop (money that should
have gone to the startup instead), and sell a large portion of your equity to
us instead. We'll not only make a large enough investment that it's a viable
alternative to what you would take in an IPO, but we'll also act as active
advisor that helps scale your business (and we're the team that scaled
Facebook so we know what we're doing).

It's a compelling offer for any founding team still in control of their
unicorn startup and who is still in it to build a great business.

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danielahn
For asset managers, the reason you form a SPAC is because you will get upside
in the form of convertible warrants that will net you ~20% ownership,
essentially for free (cost of your time to find and close a deal, and minimal
upfront cost), assuming the stock price outperforms the original issue price.

You should ask yourself why an existing owner who believes in the future of
their company would be willing to give up 20% upside to avoid the cost of an
IPO. I would suggest that the very act of giving up this 20% promote for a
'hot' unicorn tells you something about the valuation that the SPAC eventually
does a deal at.

~~~
probe
Or a company is raising a normal round of funding and this is suddenly a much
better option - 1) funding, 2) liquidity in public markets, 3) backing of SC
and whatever help they may offer. If I was raising 600M anyways, these added
benefits seem like a good deal to me.

~~~
danielahn
Why not just ask Social Capital to invest out of their VC fund? The only
difference is liquidity in public markets, and if that's all you want, why are
you giving up 20% of the upside from your current valuation when it would cost
you less than 1% of your current to IPO yourself?

~~~
probe
I'm not sure where you're getting the 20% number...?

The ownership stake is dependent on how the negotiations go and how much the
company is looking to raise at what valuation/terms. Social Capital will argue
a liquidity premium should be applied, and I'm sure the company will say what
you're saying (they can IPO <1%). However, they could both stand to benefit,
so I see a deal happening with this SPAC

~~~
danielahn
SPACs issue units to their founders that will convert into approximately 20%
ownership upon the successful completion of a deal

~~~
probe
No it's the founders of the SPAC (Chamath et. al) get 20% of the SPAC, which
will then be diluted once they merge with the target startup.

I do think you do raise a fair question of what stake Chamath et. al should
get for sourcing a deal. 20% is definitely high, and I think a typical SPAC is
something like 5% sourcing stake for the owners.

~~~
danielahn
Sorry for late reply!

20% is standard SPAC comp.

Also yes, I apologize, you are right - they get 20% of the value of the SPAC,
so if they buy 10% of a company, they are only getting 20% promote on that
10%.

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mrleiter
I recently stumbled upon a "project" called Own Austria, which promises you to
own a part of Austria's products. Essentially you buy partial ownership of a
fund that only invests in Austrian companies. The selection criteria? A)They
must be Austrian and b)"be important in regards to jobs and revenue". There is
no clear investment strategy. I chuckled and moved on.

This somehow looks a bit the same, although the people behind this are quite
promising.

~~~
icebraining
Is that essentially different from buying in to the S&P 500?

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Geekette
The special purpose vehicle described doesn't add up. By definition, "unicorn"
references a $1billion valuation minimum and a 600M fund isn't sufficient to
acquire it. Unless they mean the principals will identify and acquire startups
with unicorn possibilities _before_ the companies reach that stage. ...Which
is what regular VC does anyway.

Also confusing that they tout ability to help build product market fit as an
advantage for targets when in almost all cases, a unicorn startup would have
achieved that: _“We, i.e. the team that helped build Facebook, will help you
build a bottom up understanding of product market fit”_

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heisenbit
Distributed ledgers may be a better way to manage ownership. But that
innovation is best suited for standardized stakes subject to audits,
regulation and oversight. Startups is where everything is non standard and no
track record has been established. Innovation in contract mechanics adds
little value and the way it is done at the moment it takes away a lot of the
already limited transparency and accountability.

Expect to get hurt once the bubble dynamic fades.

~~~
tryckbarpingvin
It sounds like you're thinking of ICO, but this article is about IPO

