As an entrepreneur, you know the importance of raising capital. It provides opportunities to fund production increases and expansion through mergers and acquisitions. Capital facilitates asset sales plus other benefits. Usually, you and your team have a clear vision of the potential your startup offers. Regardless of the clear potential, it can be challenging to sell that vision to new investors or credit offering institutions.
Your traditional options to raise capital include taking on debt or offering part ownership of the company to investors. Partnerships keep your company private. To issue shares, you must go public.
Venture Capitalists
Venture capitalists are hard to find, and they may not have the time or expertise to support your company’s growth. At times, they and their teams have several businesses to focus on; you may not get the priority attention needed.
Initial Public Offering
Issuing an IPO is expensive and time-consuming, plus it may not raise the required capital. Underwriters often undervalue your company because regulations prevent them from discussing the future.
The investment bank or brokerage underwriting the IPO has to launch expansive roadshows. They, and other investment bank partners, embark on expensive roadshows targeting new investors. If the IPO is successful, they tend to pocket per share returns of between 3% and 7%. Those are enormous costs to absorb.
Direct Listing
Direct listing on a stock exchange eliminates the high IPO fee charged by brokerages and the time needed for a vibrant campaign.
Direct listing does not dilute existing shares with new share offers. During direct listings, company principals avail a portion of their existing shares for the public to purchase. Unfortunately, investors may lack interest in these shares, so there is no guarantee of raising money. Direct listings do not protect large shareholders from drastic share price changes. These may occur either before or after the listing process.
Special Purpose Acquisition Company
A SPAC or special-purpose acquisition company is a listed or publicly traded corporation. A SPACs sole purpose is to merge with a target company to take it public. A de-SPAC transaction is the merger‘s title.
Let’s take a closer look at what a SPAC is and how you and your company could benefit from a SPAC investment.
How Does a SPAC Work?
SPAC founders tend to be celebrity industry experts or investors with a strong reputation for business success. Once they identify a company to merge with, they use their good name to raise capital. Founders either issue an IPO or attract private equity. This process explains how SPACs earn the name “Blank Check” companies. Funds and individuals are willing to invest in SPACs based purely on the reputation of its founders. They will not receive any returns on investments until the de-SPAC merger occurs.
The funds shareholders invest in the SPAC go into a trust where they remain until negotiations with the company they seek to invest in conclude. SPACs cannot negotiate beyond two years, per Securities and Exchange Commission (SEC) regulations. If negotiations fail, they must return the money held in the trust to shareholders after banking fees.
Successful negotiations lead to the de-SPAC merger. Your private company and the publicly traded SPAC become a combined business earning shareholders of your private company shares in the SPAC and cash. Your private company then becomes a public corporation with a broad shareholder base.
Why Should You Partner with a SPAC
Traditional IPOs are expensive, and investors prefer seeing funds raised pumped back into the business. It is hard for principals to take cash out of it. Partnering with a SPAC costs nothing, and you may get significant cash payments.
SPACs only have two years to complete mergers. On average, a SPAC takes a company public six times faster than an IPO would. The specific time frame also removes uncertainty and facilitates planning.
Your leadership team gains experienced sector experts who can help increase the value and potential of your company.
When Do SPACs Not Fit
If your vision does not align with that of the SPAC founders and you intend to keep control of operations, then a SPAC may not be the best option. SPAC founders hold at least a 20% stake in your company, so they have strong voting rights and influence, unlike traditional IPO investors. In cases of little to no common ground, expect animosity and in-fighting that is hurtful to the business.
Conclusion
SPACs help startups raise capital efficiently and affordably. Like with traditional IPOs, regulations prevent SPACs from talking about the future, but the expertise of their founders makes them less likely to undervalue your company. A higher valuation could allow you to raise much more money than in an IPO.
Whatever option you choose to take your company public, prepare to accept influence from other stakeholders. With a SPAC, the influence is more pronounced. The founder‘s input is not necessarily a problem. Several SPACs have helped companies outperform stock exchange averages. If you would like your company to retain your vision, merge with a SPAC that shares your vision. If you cannot find that common ground, then another investment method may work better for you.