Will VCs go 'full stack' with a SPAC?
Biz Carson
Protocol
October 17, 2020
We know how SoftBank can't resist playing around in the markets, so it was inevitable that SoftBank announced this week that it, too, will be launching a SPAC. It's joining everyone from Shaquille O'Neal to Paul Ryan in hopping on this year's biggest trend of taking companies public through a reverse merger rather than the traditional IPO process.
Venture firms are jumping into the fray, too — and are divided on whether they will take their own companies public.
Firms like Ribbit Capital, FirstMark, SoftBank and Lux Capital are all launching their own SPACs. And big players in venture like Peter Thiel and Reid Hoffman created new investment groups for SPACs.SoftBank said it won't be eyeing its own companies, so maybe my previous prediction of WeWork to go public with a SPAC won't happen this year. But FirstMark said it's open to taking one of its own portfolio companies public if they're interested.The firm had a front-row seat when its portfolio company DraftKings went public via SPAC in early 2020, and now has more of its entrepreneurs looking for that alternative path and wanting a trusted partner to do it, FirstMark's Rick Heitzmann told me. "If you look across the continuum, a lot of [portfolio] companies that will go public with a SPAC would like to go public with us and have FirstMark leading the round, no different than when we lead their growth private rounds," Heitzmann said.
One popular theory is that this could be a reaction to the public market moving in earlier in the private markets. Public market investment in private market startups has been growing for years, and we've seen Tiger and Fidelity pumping in cash to later-stage companies.
This in turn led to a "cram down," where later-stage VCs were only good for a few growth rounds before startups would start courting the bigger public market investors. Now, VCs are seeing the opportunity to go play in the public markets instead and capture some of those returns before the Fidelitys of the world move in.But Heitzmann said his firm's decision isn't really in response to the public markets entering venture's turf, although he acknowledged that's been a big trend in keeping companies private longer. Instead, he thinks entrepreneurs have realized there could be a more controlled path to going public and that maybe being public is a natural part of the maturation of a company, not an event to be prolonged at all costs.
It's more likely that this will shatter the "stay private longer" meme that's dominated narratives in tech for the last decade.
"As companies were waiting longer to go public and raising bigger private rounds, there was suspicion of the public markets and the traditional IPO process was taken as broken," Heintzmann said.That "stay private" orthodoxy is crumbling, wrote my colleague Shakeel Hashim. There's been a slight tightening in the availability of private market capital and the public markets are having an outstanding year with tech companies outperforming. That, combined with easier and potentially more founder-friendly ways, like a SPAC, to go public, could mean we'll see more companies choose to go public — although Shakeel doesn't think we'll see a "go public sooner" trend take its place.
Having a SPAC could be the next competitive advantage for firms. The industry has gone through trends such as being a platform like Andreessen Horowitz to adding on perks like pitch design.
Heitzmann had started calling FirstMark a "full-stack firm" as a bit of fun, but what surprised him is the level of interest from its founders, a VC's customers, which has vindicated the decision to launch the SPAC. "I think people want to have deep relationships, they want to have true partners," he said. "I think you're right, and other firms will follow us and try to emulate us, and it's probably harder than they think it is."Reid Hoffman, who launched a SPAC alongside Mark Pincus, sees it as an opportunity to "venture at scale." He argued in a LinkedIn post that going public is really just the second inning for a startup, "yet once a company goes public, it's typical for its VC board members to roll off, leaving the CEO without someone to play an analogous role as an experienced partner," he wrote. "What's missing is a major financial investor with patient capital who will partner with the CEO for the long term (i.e. the next 10 years) to take the necessary risks to reinvent the business and capitalize on opportunities for innovation and growth." And that's where he thinks VCs like himself can play a role.
Then there's a fun hypothetical, as first posed by Chamath Palihapitiya: If venture firms keep launching SPACs, will we get to a place where there are multiple directors on a board, each with a SPAC for their firm, who want to take their portfolio company public?
It's unlikely we'd get to that point anytime soon, Heitzmann said, but he doesn't rule it out entirely. Instead, he imagines boards would deal with it like how they approach competing growth funds from investors.That reality may not be quite as far off as he thinks, though, if having a SPAC does become the new competitive edge. Then we'll see the real SPAC battles begin
https://www.protocol.com/newsletters/pipeline/spac-and-going-full-stack?rebelltitem=1#rebelltitem1 |
