Investors love SPACs
This is a big year for SPACs (special purpose acquisition companies). The way a SPAC works is…
- Someone raises money for a “shell company” through an IPO
- The money in the company is used to “acquire” a private company, taking the acquired company public and giving it the cash
- This allows the company that wants to go public to agree to a deal with just one investor, instead of dozens on an IPO roadshow
- At the time of the transaction, SPAC shareholders can get shares of the acquired company or get their cash back if they don’t like the deal
- Virgin Galactic, Draft Kings, and Nikola all went public through SPAC acquisitions
Last week, Bill Ackman (the hedge fund dude who made $2.6B on a $27M investment in March) raised $4B for the largest SPAC ever. And Craig McCaw is also creating a new SPAC (in Seattle) called Holicity, which is planning to raise $250M and acquire a technology business.
The cool thing about SPACs is you get the opportunity to invest in one of these investor’s deals and have the option to get your money back if you don’t like the deal. So if you think Chamath, Bill, Craig, or whoever is smart and makes good investments, you don’t have to invest in their VC/PE/hedge fund, you can just buy shares of their SPAC to get a piece of their next deal.
It’ll be interesting to see which companies decide to choose SPACs over an IPO. So far there haven’t been any enterprise software companies that went down this route (probably because there is so much investor demand for those companies), but maybe that will change this year.