Categories
Angel Investing Crowd Funding Finance Regulation Start Up

SPAC’kled

Or, why should Venture Capitalists have all the fun?

The new dawn of SPACs is here. These shell companies, as they are called, first raise money to the tune of hundreds of millions of dollars from institutional investors. The Founders of the SPAC also invest their own money. Then, they IPO the shell company and list the shares at $10/share. Retail investors can now buy shares of the SPAC in the open market. The SPAC keeps its funds in a trust until it can find a company to invest that money in and effect a merge. The SPAC has two years to do the merger. If it fails to merge, money is returned to all investors with interest. The merged company gets a new stock ticker and resumes trading. The original team that created the SPAC has to do some work to identify the target company and consummate the merger. It could get a sizable (median of 2-5%) in the merged entity. 

PIPE financing may also be done if the merged company needs to raise more money during the merging process or shortly thereafter. Big funders can provide PIPE financing in return for shares of the merged company. 

I am not a SPAC mechanics expert, but that’s a rough picture.

How can this impact the current VC and institutional model of financing of startup companies? A growing and successful startup usually raises a series of rounds from VCs and institutional investors while still remaining private. During this time, the success of the startup is often visible to the general public. Or for the curious, Crunchbase or Pitchbook tells the story. Retail investors, however, can’t buy shares of this startup until it goes public in some fashion.

The SPAC vehicle has the potential to accelerate the stage at which retail investors get to own shares of a startup company. We are talking possibly Series B/C/D stages that a company is suitable to be SPAC’kled allowing retail investors to invest in the majority of growth phase of the company. 

This allows retail investors to invest in an index of startup companies, diversifying risk. However, one should be cautious. SPACs are investing in moon shots and the target companies are not making revenue for decades. So, after getting de SPAC’kled (post merger), one could see big drops as investors get clarity on valuation and growth prospects. 

The first issue is that retail investors do not know beforehand the target company. They may know the target sector from the SPAC prospectus, but not much else. However, the SPAC gives voting rights and redemption rights to it’s investors once the target is announced. This allows the retail investor to get out if they don’t like the deal. There is a backstop redemption clause of $10/share in theory. As of this writing, I don’t know how well that is going to work

The second issue is the rigor of due diligence conducted by the SPAC. One goal of SPACs is to reduce burden on startup founders and companies and accelerate going public by limiting the need to disclose exhaustive information. As a retail investor in the SPAC, it is likely the case that you will not find details like you do in the S-1. So you have to trust the SPAC promoters that they are doing quality diligence and valuing the company fairly. 

By creating a lock up period for SPAC promoters to sell the merged company shares, it’s possible to reduce the motivation for them to flip. Some SPAC promoters are playing nice and adding lock up periods in their prospectus.

If SPACs work with good intent and are regulated efficiently, retail investors can stand to benefit. For VCs, it can act both ways. They could liquidate their “cash suckers” via the SPAC and breathe a sigh of relief. On the other hand, they don’t want to see their strongest performers go public before they can double down. They may still do that, but their control goes away.

Categories
Crowd Funding Fund Raising

Statue of Liberty and Crowdfunding

Today, we have various online platforms for crowdfunding. These platforms are mostly about individual or commercial projects, not for public projects.

In a recent trip to NYC, it was fascinating to hear that the Statue of Liberty was crowd funded in two nations – France and the USA. So far, I had believed that the statue was a gift from France to the United States. However, it seemed to be a joint effort. The majority of the funding and technical expertise came from France, but America was also on the hook for funding. I have not done any research to determine if this is the first instance of crowdfunding for a public cause.

Categories
Angellist Crowd Funding Entrepreneurship Fund Raising Start Up

Crowd Funding

Recently, I helped my company Cartogram list an investment offering on a public funding site – Flash Funders.

One should understand the difference between crowd funding and 506(c). A 506 (c) offering is open to only accredited investors and it’s the responsibility of the manager of the offering to verify accredited status of investors.  The nice thing about this offering is that Flash Funders will pool any investments less than the minimum in a LLC, so the entrepreneur does not have the daunting prospect of having to manage a big investor pool. Model is similar to an Angellist syndicate, but the key difference is that companies can list themselves, rather than needing an investor to syndicate. This is different from crowd funding sites like Kickstarter or Indiegogo as those entities don’t deal with equity and one does not have to be accredited investor to invest in Kickstarter or IndieGogo.

We found the Flash Funders tools very good and their team was quite responsive to us. They reviewed our documents thoroughly and pointed out a few gaps that we were able to fix easily. Going through the exercise itself has been very useful for Cartogram – especially in how much to reveal to a public audience and how to structure the presentation so it’s effective when just browsed. Sensitive information can be left out and provided to a prospective investor during due diligence.

We are in this era of greater access for entrepreneurs to fund their companies now. I listened to Naval Ravikant in a recent Tim Ferris podcast and he had some interesting things to say. His observation is that the communication and information revolution is breaking down the validity of the company as an organizational entity. Somehow, I believe that to truly build great things, the company structure is vital. How does one create a bold mission and attract people to that mission if everyone is just working virtually or free lancing? I am unable to fathom that, but who knows what the future holds.