Old Tool, New Tricks: The Surprising Tech Investing Disruptor

The internet has had a profound impact on investing, especially for retail investors. It has revolutionized trading by introducing electronic markets and automatic order execution, resulting in lower fees, more efficient markets, and greater transparency for investors. Similarly, the recent explosion in SPACs (special purpose acquisition companies) has become the hottest way to raise capital, especially in the tech sector. SPACs offer smaller, innovative and big-idea companies a way to get enough capital to become independent businesses. SPACs are essentially a back door to taking a start-up public, an alternative to a traditional IPO.

SPACs are a back door to taking a start-up public, an alternative to a traditional IPO

SPAC stands for Special Purpose Acquisition Company. SPACs are a way for companies to go public without the costs associated with an IPO. They are often referred to as "blank cheque companies" because the target company is unknown to investors at the time of the IPO.

SPACs are shell companies that go public with the express purpose of raising money to buy a private company. They are formed with the goal of acquiring an unspecified company within two years. The target company becomes public through the merger.

SPACs have several advantages over IPOs. They are faster, with mergers usually taking 3-6 months on average compared to 12-18 months for an IPO. They also offer upfront price discovery, as the pricing is negotiated with the SPAC before the transaction closes, which is advantageous in a volatile market. SPAC sponsors can also raise additional capital to fuel growth for the combined company.

However, there are also some challenges and risks associated with SPACs. One of the greatest challenges is finding the best-fit SPAC sponsor. There is also the risk of shareholding dilution, as SPAC sponsors typically own a 20% stake in the SPAC. Capital shortfall is another potential issue, as initial SPAC investors may redeem their shares, leading to cash availability issues.

SPACs have become increasingly popular, with more companies choosing them over IPOs. In just the first two months of 2021, 189 SPACs listed on major stock exchanges, according to data from University of Florida professor and IPO expert Jay Ritter. As of March 2021, SPACs had raised $64 billion, just $20 billion shy of their record 2020 total.

SPACs offer smaller, innovative companies a way to get enough capital to become independent

SPACs, or "special purpose acquisition companies", are an alternative to a traditional IPO. They are a way for smaller, innovative companies to raise enough capital to become independent. SPACs are formed with a so-called "blank cheque" to acquire an unspecified company within two years. The target company becomes public through the merger.

SPACs have become an increasingly popular way to raise capital, especially in the tech sector. In 2020, more than $30 billion was raised through 75 SPACs, more than double the previous year. This popularity is due in part to SPACs being a faster way to go public with less scrutiny, as well as prominent figures in the tech world, such as Chamath Palihapitiya, advocating for their use.

SPACs offer smaller companies a way to gain enough capital to become independent and avoid being acquired by larger companies. Examples of companies that have recently merged with a SPAC include the 3D printing company Desktop Metal and the fantasy sports and betting company DraftKings.

SPACs offer a flexible option for companies looking to raise capital, with more choices available to investors and executives. They also provide a refuge from the underpricing of IPOs, which can leave money on the table that should go to the companies themselves.

SPACs are now seen as a way to go public with less scrutiny and more speed

SPACs, or "special purpose acquisition companies", have become an increasingly popular way for companies, particularly in the tech sector, to raise capital and go public. SPACs are essentially a backdoor way for a company to go public without undergoing a traditional IPO (initial public offering).

The process involves forming an acquisition fund with a "blank check" goal to acquire an unspecified company within two years. The target company becomes public through a merger with the SPAC. This method offers several advantages that have made it attractive to many forward-leaning companies.

Firstly, SPACs provide smaller, innovative, and big-idea companies with a way to access the capital needed to establish themselves as independent businesses and avoid being acquired by larger companies. Secondly, SPACs offer a way to go public with less scrutiny and more speed than a traditional IPO. This is particularly appealing to companies that need to raise capital quickly and want to avoid the lengthy and rigorous process of an IPO, which can involve significant costs and loss of control over the process.

The popularity of SPACs has been further spurred by prominent figures in the tech and investment sectors, such as Chamath Palihapitiya, who have advocated for the use of SPAC "sponsors" instead of traditional investment banks. Palihapitiya, for example, has successfully raised billions of dollars through multiple SPACs, including one that merged with Virgin Galactic.

The increasing trend of companies choosing SPACs over IPOs has led to a boom in the creation of SPACs, with a wide range of investors, from Silicon Valley moneybags to sports managers, getting involved. This has resulted in increased competition among SPACs to find interesting target companies, with examples including the 3-D printing company Desktop Metal and the fantasy sports and betting company DraftKings.

While SPACs offer many benefits, there are also potential downsides and possibilities for abuse. However, for companies seeking to raise capital and go public, SPACs currently present a flexible and attractive third option, in addition to the traditional IPO and the more recent direct listing method.

SPACs offer more flexibility than direct listings, which don't allow companies to raise capital at the same time

Special Purpose Acquisition Companies (SPACs) are a popular alternative to the traditional IPO process, which has been criticised for its expense and for leaving money on the table. SPACs are a more flexible option than direct listings, which do not allow companies to raise capital at the same time.

SPACs are a type of "blank check" company, which raises money through an IPO and then acquires another company. They are a faster and less scrutinised way of going public, and they are particularly attractive to smaller, innovative companies that want to avoid being bought by bigger companies.

Direct listings are a cost-effective way for companies to go public, but they do not allow companies to raise new capital at the same time. This is because, in a direct listing, existing shares are listed on the public market, rather than new shares being issued.

SPACs, on the other hand, allow companies to go public without the costs associated with an IPO. This is because all the fees and underwriting costs are covered before the target company is involved. SPACs also benefit from greater predictability, as they are contingent on the flat amount raised from investors, rather than the shifting price of shares under an IPO or direct listing.

While SPACs offer more flexibility than direct listings, they are not without their pitfalls. For example, participants in a SPAC can withdraw their investment if they don't like the target company, which means that funding is never guaranteed.

The internet has revolutionised investing by providing greater transparency and lower fees

For example, individuals can now compare house prices in different markets to determine the true price of a home. Similarly, investors can compare the fees and performance of different investment options to make more informed decisions about their investments. This increased transparency has led to a growing demand for clean shares, which are mutual fund shares that do not include any distribution or marketing fees. Clean shares provide investors with greater clarity and simplicity, allowing them to understand the fees they are paying and make better investment choices.

The internet has also made it possible for investors to purchase assets themselves, without the need for brokers and the associated commission fees. This has further lowered the costs of investing and given investors more control over their investment decisions.

In addition to greater transparency and lower fees, the internet has also improved the efficiency of financial markets. Investors and traders can now make faster decisions and capture real-time prices, leading to better investment outcomes.

Overall, the internet has revolutionised investing by providing greater transparency, lower fees, and improved efficiency. It has empowered individuals by giving them access to information and tools that were previously only available to professionals. This has resulted in a more efficient and accessible investing landscape.

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