Angel Investing Crowd Funding Finance Regulation Start Up


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.

Finance Privacy Web

Capital Gains / Google

Two things of importance today:-

Capital Gains tax proposal is making it’s way through the Washington state Senate this week. Looks like it’s provisions are getting narrower, so that suggests compromise is in the works and it could pass.

What this means for Washingtonians:-

If you sell an asset and make gains of more than $250,000 as an individual and $500,000 as a couple, you will be subject to a 7% tax on the gain. Asset is mostly equities (stocks, bonds etc). Doesn’t include your house or commercial real estate for example. The Federal Government controls that one. The sale of a family-owned small business that makes less than $6 million a year would also be exempt.

I suspect this will pass the full House, as it has already passed the committee.

This is a brand new tax, rather than enhancing an existing one. After it passes, there will definitely be litigation against it with the claim that it’s unconstitutional, since the state prohibits and income tax in it’s constitution.

Most states have a form of capital gains tax, so this is not revolutionary. Given that capital gains are volatile, the annual collection could also vary widely. In the short term, asset sales may increase to avoid this tax.

On another positive note, Google said they will stop tracking us across the web using cookies or third party identifiers. Instead, they will use bread crumbs, which are more effective. OK, that last sentence was tongue in cheek. I will believe that when I really stop seeing ads for a product non stop for 10 days after I had just purchased it online. This could be momentous or a dud based on how much Google keeps to it’s promise.

Business Finance Technology

Ain’t a Snowflake

A snowflake is a political insult for someone who is perceived as too sensitive. This post is not about that.

Snowflake, the Bay Area company could become the largest software IPO of all time. It starts trading tomorrow.

It was initially priced between $75-$85, upped to $100-$110 and again upped to $120. At that price, it would be valued ~ $40B. Some banks are going to make a killing.

I started hearing about Snowflake a few years ago when a few data oriented startup companies mentioned them often. They were compared with Looker. Looker was acquired by Google in 2019 for $2.6B.

The other interesting tidbit was that Bob Muglia, an ex Microsoft veteran who last ran Server and Tools served as CEO for this company for three years until he was ousted in March 2019. His ouster apparently came a week after he said that Snowflake didn’t have to IPO soon as it had a ton of cash at hand. The guy who founded ServiceNow is now the CEO. Talk of the Hot Hand. On that note, the new book Hot Hand by Ben Cohen is a good read.

They had revenue of $265M last year, a 173% growth. NRR was 158%. It makes sense that NRR is that high. Being a complex data integration project, it’s hard for a customer to switch to another platform quickly.

Snowflake’s data cloud platform breaks down data silos, enabling customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data, delivered through a customer-centric, consumption-based business model, only charging customers for the resources they use. Snowflake allows companies to use/access data across the big three public cloud computing vendors AWS, Azure and Google Cloud. Snowflake is a customer and competitor to the large public cloud vendors, but their respective offerings don’t offer the agnostic cross platform capability, so its independence is a key differentiator.

Berkshire and Salesforce are each buying $250M in the offering. Convincing Berkshire to buy in the offering is indeed a coup.

If it opens at $200 / share, that would be like 100x sales.

If you are one of the lucky ones to get an allocation, hold onto it. Chasing this one is likely to take a strong gut.

Let it Snow! Let it Snow!

While Main Street is hobbling, tech IPOs and Wall Street are humming. The tale of two Americas.

Finance Politics Wall Street

Corona Virus | Crash of 2020 | Liz Warren

The corona virus (COVID-19) is front page news across the world. Originating in Wuhan, it has now caused quite a havoc in the globe. Thousands of folks in Wuhan province are dead and less than a hundred rest of the planet.

China seems to have effectively shut down and has undertaken extreme quarantine in Hubei province. That has caused a disruption in the global supply chain.It took a while for big companies and Wall Street to realize it. Eventually on Feb 23/24 the market adopted a risk on mode and sold off substantially. But some folks had been warning that the bull market since 2009 was getting too ahead of itself and asked people to raise more cash. I did a little bit of that, but not enough as I think about it on the evening of Feb 25 2020.

Last Saturday, my wife and I attended a rally for Elizabeth Warren. Her debate performance impressed us a great deal and we decided to check her out in person. There was a huge crowd at the Seattle Armory. It was a nice feeling to stand in line with a diverse, peace loving, polite crowd. The “Dream Big, Fight Hard” chants drowned out a guy, who persisted in reading from some religious text, the origins of which I was not curious about. We had to settle for the overflow room and a big screen to watch and hear her. Elizabeth Warren is very articulate, knowledgeable, and a gracious person. As I write this, I am not sure if she will make the nomination, but hope we shall. In a few hours, there will be another debate from South Carolina. Let’s hope her fortunes continue to improve.

Trump visited India this week. I’m really appalled by the over the top red carpet treatment that Modi threw for him. It was big let down.

Meanwhile, Cheers on Netflix keeps us going to bed smiling.