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So SPACs or blank cheque companies aren't new. They've been around for many years. http://www.investopedia.com/terms/s/spac.asp http://www.investopedia.com/te
by chollida1 9y ago
So SPACs or blank cheque companies aren't new. They've been around for many years.
http://www.investopedia.com/terms/s/spac.asp http://www.investopedia.com/terms/s/spac.asp
Essentially people collect money upfront and then go deal hunting, after a period of time, usually 2years or less, they then go back to the people who put their money in the deal and give them the choice of pulling their money out and taking a nominal interest rate gain, or putting their money into the deal and collecting warrants along with the deal as a sweetener.
This is very common in the minerals and mining space where serial entrepreneurs found an oil company, go drilling and then sell the company once its got a well up to a big producer. It's a way for these deal makers who know everyone in their industry to help smaller companies get liquidity, while of course helping themselves and the unit holders to make money.
They benefit the unit holders because its a place for them to park alot of money risk free with a decent call option on the upside.
Asa hedge fund in today's market the problem is often too much capital and too few places to invest it. SPACS offer a way to park say $100 million in a vehicle that has alot of upside with not alto of downside. It has a very similar payoff to Venture Capital in that most SPAC's end up not working out but the few that do make it worth while.
As a side note, if you ever work for a hedge fund or any investment company, you'll get the idea of asymmetric risk drilled into your head. Meaning you want your deals to have the potential for 10x upside with say 1x downside.
The key to running a successful SPAC is almost always:
- who is running it, do they have deep industry connections and the ability to get deals that no one else can
- the company being acquired needs to be in need of capital and not in a position to raise it. or put another way, it needs to be win/win for both investors and the company owners.
This particular SPAC seems to solve neither of these needs as typically silicon valley tech companies have no problems raising money nor do they have any issues going public, so this SPAC fails the second test.
It also seems to fail the first test as I can't see why the founders are in any better position to be deal rain makers than say Sequoia, KPCB, or A16Z.
- tryckbarpingvin 9y agoThank you for the detail and experience based insight
- kamakazizuru 9y agoVery interesting insight! As for the sniff test - while I agree with your assessment, I wonder if the aspect of providing employees easier liquidity will make them more attractive than traditional VC deals? Essentially by "investing" in companies with a mix of SPAC stock and capital, making the SPAC stock available to employees to sell in order to liquidate some of their options / equity. Essentially giving them better access to deals than others (a variation of test 1) As for test 2 - I think this is true of many tech startups outside of the valley, maybe they will look outside the echo chamber.
- indescions_2017 9y agoOff topic completely, but is there a long bull case for energy? Are we seeing a bottom in oil and natgas prices or will secular changes and renewable consumption dominate? And are infrastructure funds such as $ALPS, $ENFR a good way to get exposure and long term income distributions? Thanks in advance! As far as Chamath's Hedosophia, not sure I'd bet against him just yet. He's got a pretty good track record of winning ;)
- hendzen 9y agoEveryone looks like a genius in a bull market.
- charlesdm 9y agoAnd everyone looks like an idiot in a bear market?
- pfarnsworth 9y agoOil prices are low because Saudia Arabia and the US want ISIS to be squeezed in terms of funding, and it's working. That's the only reason why prices are so manipulated. Expect prices to rise back to $100 once ISIS is gone.
- adventured 9y agoNo. Oil prices are semi-low for two reasons. 1) An endless oversupply due to the US oil boom. Even the OPEC cuts + Russia restraint + Saudi cuts to the US market + OPEC cut extension + modest demand growth have not been enough to inflate prices. There's vast supply perpetually waiting on the sidelines, between Russia + the US + OPEC, there's no scenario where $100 oil returns anytime soon. 2) The strong dollar. Commodities are largely priced in dollars globally. If the dollar goes up, oil goes down. Oil tanked exactly in line with the greatest dollar bull run in decades. July 1st 2014, the dollar index was at 80, eight months later it was at 100 - a massive move by the dollar. Over that time oil got cut in half. ISIS is entirely meaningless in this context.
- abakker 9y agoA side note - I work for a company that is/was a SPAC several years ago. There is a ore case which could benefit SV/startup types of firms: the ability to make multiple small acquisitions and very rapidly create a larger business. In the case of the company where I work, several smaller consultancies were bought and gave us better ability to deliver a broad array of services to our clients. In SV tech companies, especially small ones that deliver more feature/function type tech rather than fully fledged businesses, this could allow them to merge and cooperate. If the founder of the SPAC buys the right businesses, this could be substantially better than the standard IPO or acquihire.
- vm 9y agoRe: your second point, this SPAC is basically a $600M growth VC fund. Growth funds are common: Sequoia, KPCB, Accel, CRV, DFJ, Index, USV, IVP, Meritech, YCombinator, and more all have them. It's an intensely competitive market. SC is now joining the mix and their pitch of "get help from the team that built Facebook" is them marketing to entrepreneurs.
- callmeed 9y ago> typically silicon valley tech companies have no problems raising money I think you should qualify that with "good" tech companies (eg good team, good market, good product, good growth) ... crappy companies have plenty of trouble raising money.