SPACs were seen as financing of last resort, but have now gained credibility

Privately-held companies sometimes achieve a liquidity event by way of a merger or acquisition. Otherwise, there are multiple paths to liquidity, namely:
– Direct listing
– SPACs.

First, some definitions:

According to Investopedia: “initial public offerings and direct listings are two methods for a company to raise capital by listing shares on a public exchange. While many companies choose to do an initial public offering (IPO), in which new shares are created, underwritten and sold to the public, some companies choose a direct listing, in which no new shares are created and only existing, outstanding shares are sold with no underwriters involved.”

Meanwhile, a SPAC is a special purpose acquisition company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as “blank check companies,” SPACs have been around for decades. In recent years, they’ve become more popular, attracting big-name underwriters and investors and raising a record amount of IPO money in 2019. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.” In that vein, technically a SPAC is a type of merger or acquisition (M&A).

SPACs Enter the Mainstream

In early 2018, I was having breakfast with the former president of a major media company and he asked me about SPACs. For a while I would refer to it as SCAPEs, until years later someone corrected. Until 2019, SPACs were seen as a path to liquidity of last resort, but times have changed.

SPACs were further popularized by investors like Chamath Palihapitiya and others who had access to capital and wanted to bypass more traditional means. In theory, since the dawn of time, either investors approach operators to partner and target companies, or operators solicit investors to target companies. In that sense, SPACs are nothing different.

The nature of VC and PE investing is that both need liquidity events to return capital to their investors, or limited partners.

Media Attracts SPAC’s Attention

This year, SPACs have expanded industries and entered the media landscape. Recently Group Nine launched a SPAC (I bought some shares to better educate myself and go for the ride, admittedly, as a learning tool but also possibly because I remain bullish on the secular trends favoring digital media).

Why have SPACs become popular amongst media investors and privately held firms?

Nine Women Can’t Have a Baby in a Month

During the mid 2010s, digital media companies caught the attention of institutional who poured massive amounts of money into the likes of Vice Media, VOX and Buzzfeed. Vice commanded a $5.7 billion valuation. Buzzfeed and Vox scored hundreds of millions of dollars from strategics and growth capital firms. But before long, the “capital as a strategy” didn’t pan out.

As I’ve long said: what scale overnight isn’t usually sustainable, and what is sustainable doesn’t scale overnight. Indeed, putting nine women in a room and asking them to deliver a baby in a month isn’t possible.

In late 2017, Mashable was acquired in a “fire sale” by IGN Entertainment. Once valued at $200 million, the $50 million exit, aka liquidity event, was the sound of a bubble bursting.

You could argue that Mashable was never really actually worth $200 million. Indeed, the “valuation racket” of pointing to a rise in paper value propped by a bubble in private money came back to haunt these media companies when investors showed up with the tab. Protected by liquidation preferences, investors had downside protection (i.e. they get their money out before management does).

To me, valuation is moot in some ways, unless it’s when you sell a business and a buyer puts a value on your business and pays full price for the whole asset. I can sell you 1% of my fax machine for $10, that doesn’t really mean the fax machine is actually worth $1,000 (but if you want to pay me $10 for 1% of my fax machine, hit me up).

So, what does this all have to do with SPACs?

The Great Reset

Covid was many things, including a reset, albeit the third one. However, it may have been a case of three steps back, one giant leap forward.

After the Mashable “fire sale,” the major digital media bellwethers (who technically are our larger competitors and comparables) saw the writing on the wall. By way of disclosure: I would meet with some of their investors who’d cite frustration at their losses. We were small[er], but profitable, with a massive organic audience and deep engagement. As such, slowly but surely they began to cut costs, a lot of costs. Meanwhile, as digital media benefited from the shift of TV advertising dollars, they grew revenues.

For very different reasons, the #MeToo, BLM protests and Covid reset forced these firms to cut costs, and – if we can be candid – gave them cover to part ways with expensive talent. In the process, they also had to address culture issues.

The combination of a free rein to cut costs with an acceleration of revenue growth suddenly made these on-the-ropes (in 2018) one-time darlings to become more attractive.

So Why Are SPACs the Favored Path For Liquidity?

While media companies do not offer the same kind of revenue growth or top-line upside than tech firms, I think there’s another reason why a few are favoring SPACs. Recall that in an IPO, new shares are created, underwritten and sold to the public. Meanwhile, in a direct listing, no new shares are created and only existing, outstanding shares are sold with no underwriters involved. In that sense, companies with convoluted cap table (highlighting who owns what, in what sequence and waterfall) would likely not necessarily embrace either, because there’s no guarantee that the new shares would be priced above what the previous investors got.

However, in theory, in a SPAC, there’s a chance for everyone to be made whole over time.

Notwithstanding that an IPO roadshow is not ideal during a pandemic, I think a SPAC is akin to dropping a large floatation device in the water, letting it stabilize… and then over time propping another company on top of it, or mooring it together. In that sense, unlike tying two bricks together (that is an expression, I’m not suggesting these companies are bricks in any negative sense; in fact, Buzzfeed/Vice/VOX have brands, and over time, if they right the P&L ship, they should be fine) and hoping they float, here you combine an operating business with a financial vehicle in the hope that this arranged marriage spawns a child in due time.