It's happening slowly but surely. Every week more ventures are starting to announce SPACs. Notwithstanding the true flash of SPACs formed by investor Chamath Palihapitiya, we've now seen a SPAC (or plans for a SPAC) run by Ribbit Capital, Lux Capital, travel-focused venture company Thayer Ventures, founder of Tusk Ventures , Bradley Tusk, the SoftBank Vision Fund and FirstMark Capital, among other. While many companies say they are still in the information-gathering phase, which could become a major new trend, others are diving headfirst.
To better understand what's going on out there, we spoke to Amish Jani on Friday. The co-founder of FirstMark Capital in New York and the president of a new, technology-focused, $ 360 million blank check company run by Jani and his partner Rick Heitzmann. We wanted to know why a venture company that has historically focused on early-stage privately held companies is interested in public market investments, how Jani and Heitzmann manage the regulatory requirements, and whether the company may encounter conflicts of interest, among other things.
If you're curious about starting or investing in a SPAC, or just want to understand how they relate to venture businesses, we hope this is useful read. Our chat has been edited for length and clarity.
TC: Why SPACs? Is it fair to say that it is a shortcut to a hot public market at a time when no one knows exactly when the markets might shift?
AJ: There are a couple of different topics that come together. I think the first is the ability (SPACs) to work and really well. (Our portfolio company) DraftKings (merged retrospectively into a SPAC) and made (private investment in public equity deal); It was a pretty complicated transaction and they used that to go public, and the stock has done incredibly well.
In parallel, (privately owned companies) have been able to raise large amounts of capital over the past five or six years, which has shifted the schedule (for going public) quite a bit. (Now there are) tens of billions of dollars in value in the private markets and (at the same time) the opportunity to go public and build trust with public shareholders and take advantage of the early tailwind of growth.
TC: DraftKings was worth $ 3 billion when it came out, and it's now worth $ 17 billion, so it has done really, really well. What makes an ideal target for a SPAC versus a traditional IPO? Does a consumer-centric company help inspire investors in the public market? That seems to be the case.
AJ: It depends on the nature and the growth characteristics and sustainability of the business. As you pointed out earlier, the early going out companies tend to be consumer driven, but I think enterprise software companies have the option to use the SPAC to go public.
SPAC (goals) are very similar to what you would want in a traditional IPO: companies with large markets, extremely strong management teams, attractive operating profiles, and sustainable long-term margin profiles that are able to articulate (all of) and have the governance and infrastructure to work in a public context. You need to be able to do this for all of these products that you get out there with.
TC: Jason Robins, CEO of DraftKings, is a consultant for your SPAC. Why should you sponsor one of these yourself?
AJ: When he was initially approached, like most people, we were quite skeptical. But as the conversations developed and we began to understand how much customization and flexibility (a SPAC can offer), it felt very familiar. (Also) the whole point of supporting entrepreneurs is that they do things differently. They are disruptive, like to try different formats and are really innovative. When we looked through the SPAC and the (actual merger) of this complex deal where you're going through an M&A and raising capital on the side, everything happens between being an entrepreneur and a trusted partner, and they have come to terms before they even go public about anything had to speak these things. That seemed like a really interesting way to innovate.
For us, we are leading partners and directors in the companies we work with. We start in the early stages of the Seed (Round) and Serie A and have worked with these entrepreneurs for over a decade. If we can get into this product and innovate in the tech field on behalf of our entrepreneurs and entrepreneurs, we think there is a really great opportunity to move the process forward for companies going public.
TC: You raised $ 360 million for your SPAC. Who are its investors? Are the same institutional investors who invest in your venture fund? Are these hedge funds that are putting money in and might want to get their money out of it faster?
AJ: I think a bit of a misunderstanding is the idea that most of the investors in the public markets want to be hot or fast money. You know there are plenty of investors interested in being part of a company's journey who have become frustrated because they have been unable to access these companies because they have long been private. Our investors are some of ours (limited partners), but the vast majority are long-only funds, alternative investment managers, and people who are passionate about technology as a long-term disruptor and want to prepare for this next generation of iconic companies.
TC: How big is your transaction with what you have collected?
AJ: The goals we're looking for are going to be very similar to the kind of dilution that would bring a great company public – think that 15% plus or minus around that envelope. If you do the math, you look at a company worth about $ 3 billion. We'll have conversations with a lot of different people who we know well, but that's generally what we're looking for.
TC: Can you talk about your "promotion" which means how the economy will work for your team?
AJ: Our (terms) are very standard for the typical SPAC. We have 20% of the original founder's shares. And that's a very traditional structure when you think of venture funds, private equity firms, and hedge funds: 20% is very typical.
TC: It sounds like your SPAC is one in a row.
AJ: Well, step by step. The job is to do this really well and focus on that task. And then we'll see from the reaction we get when we talk to goals and how the world goes, whether we do a second or a third.
TC: How much would you be involved in the management of the merged company and if the answer is a lot, does this limit the number of companies that might want to reverse merge into your SPAC?
AJ: The management teams of the companies we are targeting will continue to do business. When we talk about active engagement, it fits in very well with what we do as a venture company. That said, we are a strong partner to the entrepreneur, we are a sounding board, we help them accelerate their business, we give them access to use resources, and we use the FirstMark platform. When you go through the (Fusion) 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 in the future. And I think that's going to be the approach we're taking.
TC: Chamath Palihapitiya tweeted yesterday about a day when there could be so many VCs with SPACs that two directors of the same portfolio company could reach out to him to get him 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 go ahead and say, maybe they're forming a SPAC syndicate. I think competition is a good thing. It's a great thing for entrepreneurship, it's a good thing overall.
The market is actually very broad. I think there are more than 700 private unicorns out there. And while there are a lot of headlines on the SPAC, that pool gets very, very limited, very quickly when you think of technology-minded people with deep technical backgrounds. We are very excited about the opportunity to have these discussions.
You can overhear more of that conversation here, including liquidation issues and whether FirstMark is targeting its own portfolio companies or a broader group or goals.