There are an unprecedented number of later stage funding opportunities out there — but with those come important decisions. Here, we’ll try to navigate those, sharing how we approach, and advise our founders to approach, this evolving market. In this first piece, the focus is on SPACs. While the market pauses for breath, we look at their unique proposition for founders. Next time, we’ll talk about what to expect from your VCs post-IPO.
Starting a company is unimaginably tough. There’s heartache, sacrifice and intense loneliness. And yet, there has never been a better time to be a founder. It is easier than ever before to start a tech company (with lower barriers to entry, an AWS economy and no need for ‘COGS’), you can generate value and wealth faster and quicker than ever before (Paul Graham has written an interesting piece on this), and the funding options for keeping your company alive and growing have never been so numerous.
Remembering this only serves to make even more impressive the fact that so many businesses are going from good to great more quickly than ever before. In B2B software, an industry I’ve been investing in for nearly 15 years, the fastest growing startups of the last decade are now dominating markets globally, improving the lives of millions of people everyday, at work and at home.
Meanwhile, financial markets, while unfairly getting a lot of bad press — blamed for when things (cyclically) go pear-shaped — continue to find ways to innovate (which they’ve been doing since the early days of joint stock companies) and, in doing so, helping to improve society at large.
I’ve been wanting to write about SPACs for a while now. The current hiatus, while the rules of engagement are honed and we collectively work out how to navigate the SEC’s view, provides a prime opportunity to take stock: now we’re over the initial furore, what is it about SPACs (which are not really ‘new’, having been around for almost two decades) that means founders should take note?
For founders, SPACs offer a new, and exciting, era.
And, there’s plenty of things that make them appealing: a — cheaper and faster — way to raise cash, build brand, increase credibility (via the right partner), and avoid the pricing malarkey and multiple counterparties associated with an IPO.
First, the crux of the SPAC’s appeal is that it enables a founder to tell the story of their company in a broader way than a ‘traditional’ IPO. By the time a company goes for an IPO, the machine is usually humming: they are marketing events for companies with established and watertight brands. SPACs, in part, offer an opportunity to get to that same point. Because they can be utilised earlier in a company’s journey, there is a greater opportunity to tell a traditional equity story. With an IPO, the story — due to the regs — is that you’ll continue doing more of the good stuff, more of the same awesomeness. A SPAC offers a different opportunity: the chance, even as a large company, to explain the vision around experimenting with a new product or direction. This will help draw a loyal base of investors — and a strategically apposite sponsor partner — around the business as it continues on to even greater heights.
Second, this partner, and getting them right, is vital. SPACs can shorten the time to going public by ‘borrowing’ credibility and skills from the sponsors. Care should be taken to find individuals who are clearly adding, especially where you might be relatively weaker in terms of public market perception. This may turn out to be Tony Hawk if you want to learn how to do a 900 on skateboard, but in B2B, it’s more likely to be industry veterans.
And third, SPACs are not subject to the same forward guidance restrictions that companies going for IPO are. While regulators prohibit companies from communicating forward guidance to private investors, leaving the latter to rely on historic financials, SPACs allow founders to educate investors in more depth about the future, walking them through product, market and vision. This is a tremendous boon: an opportunity to deepen understanding, trust and long-term strategic buy-in.
If you’re a B2B software founder, SPACs should be music to your ears. Most companies in our industry are mortar businesses — holding everything together, from enterprise stacks to global payments — but with quiet, relatively unknown brands. IPOs offer marketing events for companies that are sexy and known; SPACs provide the opportunity to become sexy and known, by telling your story, while democratising finance and investment and building a community and global brand.