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It's happening slowly but surely. With every passing week, more venture firms are beginning to announce SPACs, or special purpose acquisition companies formed to raise capital through an IPO in order to acquire and thus take public other companies.
The veritable blitz of SPACs formed by investor Chamath Palihapitiya notwithstanding, we've now seen a SPAC (or plans for a SPAC) revealed by Ribbit Capital, Lux Capital, the travel-focused venture firm Thayer Ventures, Tusk Ventures's founder Bradley Tusk, the SoftBank Vision Fund and FirstMark Capital, among others. Indeed, while many firms say they're still in the information-gathering phase of what could become a sweeping new trend, others are diving in headfirst.
To better understand what's happening out there, we talked on Friday with Amish Jani, the co-founder of FirstMark Capital in New York and the president of a new $360 million tech-focused blank-check company organized by Jani and his partner, Rick Heitzmann. We wanted to know why a venture firm that has historically focused on early-stage, privately held companies would be interested in public market investing, how Jani and Heitzmann will manage the regulatory requirements and whether the firm may encounter conflicts of interest, among other things.
If you're curious about starting a SPAC or investing in one, or just want to understand how they relate to venture firms, we hope it's useful reading. Our chat has been edited for length and clarity.
TC: Why SPACs right now? Is it fair to say it's a shortcut to a hot public market, in a time when no one quite knows when the markets could shift?
AJ: There are a couple of different threads that are coming together. I think the first one is the possibility that [SPACs] work, and really well. [Our portfolio company] DraftKings [reverse-merged into a SPAC] and did a [private investment in a public equity deal]; it was a fairly complicated transaction and they used this to go public, and the stock has done incredibly well.
In parallel, [privately held companies] over the last five or six years could raise large sums of capital, and that was pushing out the timeline [to going public] fairly substantially. [Now there are] tens of billions of dollars in value sitting in the private markets and [at the same time] an opportunity to go public and build trust with public shareholders and leverage the early tailwinds of growth.
TC: DraftKings was valued at $3 billion when it came out and it's now valued at $17 billion. What makes an ideal target for a SPAC versus a traditional IPO? Does having a consumer-facing business help get public market investors excited? That seems the case.
AJ: It comes down to the nature and the growth characteristics and the sustainability of the business. The early businesses that are going out, as you point out, tend to be consumer based, but I think there's as good an opportunity for enterprise software companies to use the SPAC to go public.
SPAC [targets] are very similar to what you would want in a traditional IPO: companies with large markets, extremely strong management teams, operating profiles that are attractive and long-term margin profiles that are sustainable, and to be able to articulate [all of that] and have the governance and infrastructure to operate in a public context. You need to be able to do that across any of these products that you use to get public.
TC: DraftKings CEO Jason Robins is an advisor on your SPAC. Why jump into sponsoring one of these yourselves?
AJ: When he was initially approached, we were, like most folks, pretty skeptical. But as the conversations evolved, and we began to understand the amount of customization and flexibility [a SPAC can offer], it felt very familiar. [Also] the whole point of backing entrepreneurs is they do things differently. They're disruptive, they like to try different formats and really innovate, and when we saw through the SPAC and the [actual merger] this complex transaction where you're going through an M&A and raising capital alongside that and it's all happening between an entrepreneur and a trusted partner, and they've coming to terms before even having to talk about all of these things very publicly, that felt like a really interesting avenue to create innovation.
For us, we're lead partners and directors in the companies that we're involved with. We start at the early stages at the seed [round] and Series A and work with these entrepreneurs for over a decade, and if we can step in with this product and innovate on behalf of our entrepreneurs and entrepreneurs in tech more broadly, we think there's a really great opportunity to push forward the process for how companies get public.
TC: You raised $360 million for your SPAC. Who are its investors? Are they the same institutional investors who invest in your venture fund? Are these hedge funds that are looking to deploy money and also potentially get their money out faster?
AJ: I think a bit of a misconception is this idea that most investors in the public markets want to be hot money or fast money. There are a lot of investors that are interested in being part of a company's journey and who've been frustrated because they've been frozen out of being able to access these companies as they've stayed private longer. So our investors are some of are our [limited partners], but the vast majority are long-only funds, alternative investment managers and people who are really excited about technology as a long-term disrupter and want to be aligned with this next generation of iconic companies.
TC: How big a transaction are you looking to make with what you've raised?
AJ: The targets that we're looking for are going to look very similar to the kind of dilution that a great company would take going public -- think of that 15%, plus or minus, around that envelope. As you do the math on that, you're looking at a company that's somewhere around $3 billion in value. We're going to have conversations with a lot of different folks who we know well, but that's generally what we're looking for.
TC: Can you talk about your "promote," meaning how the economics are going to work for your team?
AJ: Ours [terms] are very standard to the typical SPAC. We have 20% of the original founders' shares. And that's a very traditional structure as you think about venture funds and private equity firms and hedge funds: 20% is very typical.
TC: It sounds like your SPAC might be one in a series.
AJ: Well, one step at a time. The job is to do this really well and focus on this task. And then we'll see based on the reaction that we're getting as we talk to targets and how the world evolves whether we do a second or third one.
TC: How involved would you be with the management of the merged company, and if the answer is very, does that limit the number of companies that might want to reverse-merge into your SPAC?
AJ: The management teams of the companies that we will target will continue to run their businesses. When we talk about active involvement, it's very much consistent with how we operate as a venture firm, [meaning] we're a strong partner to the entrepreneur, we are a sounding board, we help them accelerate their businesses, we give them access to resources, and we leverage the FirstMark platform. When you go through the [merger], you look at what the existing board looks like, you look at our board and what we bring to bear there, and then you decide what makes the most sense going forward. And I think that's going to be the approach that we take.
TC: Chamath Palihapitiya tweeted yesterday about a day when there could be so many VCs with SPACs that two board members from the same portfolio company might approach it to take it public. Does that sound like a plausible scenario and if so, what would you do?
AJ: That's a really provocative and interesting idea and you could take that further and say, maybe they'll form a syndicate of SPACs. The way I think about it is that competition is a good thing. It's a great thing for entrepreneurship, it's a good thing overall.
The market is actually really broad. I think there's something like 700-plus private unicorns that are out there. And while there are a lot of headlines around the SPAC, if you think about technology-focused people with deep tech backgrounds, that pool gets very, very limited, very quickly. So we're pretty excited about the ability to go have these conversations.
You can listen in on more of this conversation, including around liquidation issues and whether FirstMark will target its own portfolio companies or a broader group or targets, here.