The SPAC market is here to stay, but like any trend or technology, it will endure various phases of the hype cycle. A few of the SPAC mergers that push tech risk into the public markets will go bust and create a class of sour investors, but those that survive will be great businesses.
The end game for SPAC's will be competing with direct listings as a new form of IPO. As the energy transition story matures and solidifies, growth equity returns to the private market. It likely resembles the mature growth equity from enterprise software, only with additional investment criteria determined by the different risks of investing in deeptech and asset heavy industries.
Three trends will be worth watching as this market develops over the next few years.
Will retail investors remain patient?
The hurdles we've seen this week in the Switchback/Chargepoint merger highlight the importance of the retail investor for SPACs.
Some public market investors are hungry to invest in technology companies that can tell an appealing narrative, but will they have the stomach to ride out potentially poor, or in some cases non-existent, financials in the coming years?
QuantumScape sounds great today, but will investors remain patient when revenues are near-zero once the hype subsides?
Will SPAC's spur a new wave of M&A?
A new term shows up more frequently in SPAC S-4's lately- inorganic growth.
Desktop Metal is the perfect example of this trend. Its organic growth stalled and revenues declined in 2020. But, the new capital received via SPAC enabled Desktop Metal to start an acquisition spree.
SPAC activity is most apparent in potentially massive subsectors with no definitive leader, but with 3-5 companies that could potentially dominate for decades to come.
As a result, the classic "land grab" strategy unfolds. Companies that SPAC will use that capital to acquire other competitors and/or suppliers creating a new wave of M&A.
The second-order consequence of this trend will be an acceleration of SPACs in the short-term as companies compete to keep up with each other's balance sheets.
How will deal structures evolve?
SPAC structures are evolving rapidly. Last night, Khosla Ventures announced three SPACs in which no warrants will be available to the public.
Sponsor warrants have decreased in numbers from 1/2 share per warrant to 1/4 share per warrant in most cases. New structures are being created to further align management and investors.
We've also seen no correlation between the quality of a business and post-money valuation. Businesses with solid fundamentals AND a compelling story are valued no differently than those with ONLY a compelling narrative.
This will change as the market matures and more post-lockup data points come to light. That process begins in earnest late-April to late-May.
There will be more to come from me on SPACs moving forward. If there's something you'd like me to take a look at, drop me a note on Twitter @kevindstevens.