Before 2020, special purpose acquisition companies, or so-called blank-check companies, were a less-popular financial instrument, used to take private companies public. Most investors steered clear of them, and so did business leaders considering an IPO.
Then the pandemic hit. The Federal Reserve Board propped up asset markets with low interest rates and bond buys, U.S. politicians threw nearly $3 trillion in combined fiscal stimulus at the economy, and cash-flush retail investors piled into stocks.
At the same time, investor interest in next-gen tech surged as remote businesses and consumers pushed digital transformation into overdrive. Take Clari’s revenue operations platform, for example: Our business boomed in 2020 because of all the visibility Clari provides to revenue operations leaders who need to review trends, forecast, and see exactly what every team member is doing in a remote environment.
Seemingly overnight, a new, booming market emerged through the fog of the pandemic, and SPAC issuances were the go-to way to cash in quickly on the risk rally.
By March of 2021, SPAC deal volume topped $170 billion, according to Reuters—more than all of 2020’s $157 billion. Activity is concentrated in high-tech industries like electric cars, software, and aerospace. Notable SPACs include battery company Quantumscape, soon-to-be Tesla competitor Lucid Motors, and software firm Bannix.
With signs the frenzy may be cooling—some SPACs have begun to dip below their IPO price—we explain what SPACs are exactly, why they’re so popular, and what they mean for revenue teams.
What is a SPAC?
SPACs are publicly traded shell companies with a big pile of cash and a mandate to buy or merge with a private company to take it public.
Here’s how they work:
- Investors (and sometimes a celebrity or two, as the SEC notes) form a shell company with the purpose of merging with or acquiring a private firm to take it public. Usually the SPAC has some kind of stated area of expertise or a target industry, like green tech.
- The SPAC goes public and raises capital. Shares usually list for $10.
- The board typically has two years to find a target and merge with a private company, or buy it, otherwise they’ll have to return investors’ money.
- If they make a deal in time, the SPAC hands over its spot in the stock exchange to the newly acquired company, ticker symbol and all.
Why are SPACs so popular?
SPACs took off for a number of reasons, the bull market is chief among them. Interest rates are so low, that SPACs function as convertible debt with better yield.
On the business side, SPACs offer unique appeal to late-stage startups considering an IPO versus the typical route driven by investment banks, according to The Wall Street Journal.
Merging with a SPAC is a comparatively fast way to raise capital and gain access to everyday investors while the market is hot. As CrunchBase notes, SPACs require less paperwork and have fewer SEC requirements to meet, so they can accelerate public offerings by several months.
Valuations are negotiated privately with SPAC leaders behind closed doors, as opposed to a traditional IPO, where listing prices can change right up until the day before trading. In the same vein, because these deals are negotiated privately, companies have more control over the narrative about their valuation versus a typical IPO, where market sentiment carries the day.
To that end, business leaders considering a SPAC merger need to have their revenue forecasts buttoned up and ready for scrutiny if they’re to land the highest-possible valuation.
What revenue teams need to know about SPACs
In today’s market, a SPAC IPO is a legitimate path to tap capital markets.
Some 400 SPACs are still hunting for an acquisition target, according to the Wall Street Journal. So there's an enormous opportunity for companies to do SPAC IPOs.
If a SPAC comes knocking, business leaders need super-clean data and full visibility into all aspects of their revenue operations to be able to confidently forecast three, five, even ten years out.
The number one thing as a CFO that keeps you up at night is issuing guidance—specifically, the right guidance. Clari can help call your number and give you more confidence in your forecast.
There are signs the C-suite is paying closer attention to forecasting amid the frenzy. Total executive time spent in Clari increased 50% as executives sought more forward visibility into their revenue process, and forecasting nearly doubled year-over-year.
Look for the trend to continue as revenue teams double down on next-gen forecasting tools to keep pace with the fast-moving market, and as eligible late-stage startups are scooped up by SPACs as the IPO frenzy soldiers on through 2021.
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