RESEARCH TRIANGLE PARK – The increasing use of SPACs as capital funding mechanisms for companies in need of growth capital is a hot topic these days, and two headline investors issueed warnings about them at the virtual CED Venture Connect Summit on Wednesday.
Jeff Ubben, the founder and managing partner at Inclusive Capital Partners, and Bill Hawkins, the retired chairman and CEO of Medtronic who is also actively investing in early-stage companies as an angel investor, talked SPACs with Polina Marinova, the founder of The Profile.
First, why have SPACs become so popular?
“You need capital to build businesses,” said Hawkins, noting that the U.S. economy operates in macroeconomic market cycles that change how companies can access and deploy capital. These are beyond company control.
“I get involved, now, in a lot of earlier stage companies, where venture capital is important,” he added. Due to the relative uncertainty of the future of the regulatory environment during the past five to ten years, many of the companies in which he’s invested went through a period “where it was really, very difficult to raise money through venture capital groups.”
“Five years ago, the public markets were shrinking aggressively,” he explained. “You had a robust venture capital community that was funding companies longer and longer, and it was easier to say ‘don’t go public, I can get you private capital’.”
This was concerning to Ubben.
“It turns out that venture capitalists aren’t interested in big balance sheet problems, they would rather do software, which is what they’ve been successful with in the last ten or 15 years,” said Ubben, “There’s just a quicker way to a bigger return if you invest in an asset-based business, at least historically.”
Yet the problems that we’re facing as a country, and as a global community, are large, global in scale, and contain significant challenges when it comes to the balance sheet, he noted. That’s especially important given the pressure on public companies to perform on short-term time horizons, said Ubben.
Enter the special purpose acquisition company or SPAC.
“The role of a SPAC is to get these long-duration end-solution companies public, with access to capital sooner, that otherwise wouldn’t have been available from the venture community,” said Ubben. “It is a little bit of a firehose to the mouth to take these companies to the public markets because they’re really not ready.”
But the ability to access capital is there, and that’s a compelling incentive, noted Hawkins.
“If the SPAC opportunity is there, to early on get and fill the ballast full of cash to give you some runway, then I’m okay with that, but you have to realize that in some of these newer models, you have to realize what you’re going to give up to get access to that capital,” he said. “Though IPOs are tried and true methods, it’s not as easy today to get money back, which tells you something in itself.”
Both Hawkins and Ubben are wary, however, and advised caution to founders and leadership teams considering pursuing a merger with a SPAC, given the current fee structure and interest from financial institutions.
“Like everything, Wall Street, when they see a bunch of fees attached, is going to overdo it, and they’re already overdoing it,” said Ubben. “I would be really careful right now.”
“We’re in a bit of a SPAC craze, described Hawkins. “Right now, when there is, sort of, if you will, blood in the water, you will see a lot of sharks out there to try to grab their piece, here, so I would be a little careful with what is going on with SPACs,” he advised.