Re-inventing the SPAC
One of the hottest topics in the technology and finance world right now is an old idea that has suddenly found new life, the special purpose acquisition company or “SPAC.” SPACs, which are sometimes referred to as blank check companies, are entities that go public and raise money from investors so that the IPO proceeds can be used to invest in and acquire companies. In 2014, SPACs raised $1.8 billion. Last year, it was $13.6 billion. And this year, in 2020, it’s $40 billion and counting, with a full quarter yet to go.
The reason I think SPACs are hot right now is the lack of innovation in the IPO process. Most IPOs are managed by a handful of investment banks who run a roadshow to sell stock to risk-averse institutional investors. The result is a slow, expensive process that transfers value from the startups and their shareholders to the banks and their clients.
SPACs offer a different path to going public, and SPAC organizers or “sponsors” are using the instrument to innovate in various ways. For example, in comparison to IPOs, SPACs have the cardinal blitzscaling virtue of speed. By allowing companies to go public quickly and with greater price certainty, the SPAC approach offers a faster path to using important tools in the blitzscaling toolkit, like having an acquisition currency or attracting great employees.
But while it’s certainly possible to use SPACs for financial engineering, Reinvent Technology Partners, the SPAC that I sponsored with Mark Pincus and Michael Thompson, is focused on a very different opportunity, which we refer to as “venture capital at scale,” which offers greater and more sustainable benefits.
Venture capital is incredibly important to the technology startup process; every one of the top American technology companies had great venture capital investors to help the founders navigate the stressful and challenging stages of growth. If you consider the classic stages of blitzscaling (Family, Tribe, Village, City, Nation), traditional venture capitalists invest at the Family (1–9 employees) and Tribe (10–99 employees) stages, then guide the founders until the company is acquired or goes public, often at the City (1,000–9,999 employees) or Nation stage (10,000+ employees).
But an IPO isn’t the end of a company’s story. In many cases, it’s just the second inning. Yet once a company goes public, it’s typical for its VC board members to roll off, leaving the CEO without someone to play an analogous role as an experienced partner. What’s missing is a major financial investor with patient capital who will partner with the CEO for the long term (i.e. the next 10 years) to take the necessary risks to reinvent the business and capitalize on opportunities for innovation and growth.
This “venture capital at scale” approach also addresses one of the main criticisms of SPACs, which is that as an asset class, they have historically underperformed the market. By investing in companies that are poised to reinvent themselves and grow, and by providing guidance from experienced operators like Mark and me, we believe Reinvent Technology Partners will behave more like a venture capitalist than a traditional public market investor. Rather than offering a one-time service of going public, Reinvent is a long-term financial co-founder. The historical precedent is on our side; McKinsey recently wrote that the subset of operator-led SPACs outperformed their market sector and strongly outperformed non-operator-led SPACs.
Our vision is that SPACs like Reinvent Technology Partners will be able to take the proverbial startup baton from great venture investors that have spent a decade helping build a great business. Reinvent will take the company public, and then guide it through its next decade of growth and reinvention. This kind of reinvention is essential, whether in the case of Netflix shifting from mailing movies on DVD to streaming original programing, or Amazon launching AWS and becoming a cloud computing platform as well as “the everything store.”
On a personal level, I’m excited to take the lessons I’ve learned from operating companies like PayPal and LinkedIn, or investing in companies like Facebook and Airbnb, and apply them at scale. Mark and I are often asked for our advice on our respective areas of expertise, but what’s missing is strong alignment. Yes, I could invest in a public company, but that doesn’t create enough of an aligned incentive for me to jump into the foxhole with the CEO and help with a reinvention. The concentrated position that Reinvent will acquire creates that alignment.
What we really care about is creating companies that endure and grow, bring quality products and services into the world, generate a lot of interesting jobs, and otherwise help transform industries. And I think we will see a set of SPACs that will be central to doing this within the “venture capital at scale” thesis. Obviously we hope that Reinvent Technology Partners is the shining example of this, but I think and hope that others will also use SPACs to create new and differentiated alternatives for creating great public companies.
This essay is based on my conversation with my Blitzscaling co-author Chris Yeh about reinventing the SPAC. You can listen to it here on The Chris Yeh Podcast.