Business

'The market seems crazy': startups wrestle with flood of offers

"Special purpose acquisition companies" hounding startups, recruiting celebrities to go public from private

The New York Times

March 21, 2021 at 7:00PM

David Barrett, chief executive of the startup Expensify. As a deal frenzy mounts, propelled by financial vehicles known as SPACs, startups have become the prey. (Mason Trinca • New York Times/The Minnesota Star Tribune)

SAN FRANCISCO — Ryan Schaffer, chief financial officer of Expensify, a startup that makes business expense-reporting software, has been relentlessly hounded since last year.

It started with Expensify's board. In the fall, members asked Schaffer whether the company would be interested in merging with a "special purpose acquisition company," or SPAC, a type of financial vehicle that private companies were increasingly using to go public. If so, they told him, they could provide introductions. Expensify was considering going public in 2021, so Schaffer said yes.

That opened the floodgates. Dozens of SPACs began e-mailing Schaffer through their advisers, investors, bankers and other middlemen. Eventually, the interest became so overwhelming that, he said, he stopped responding to new inquiries. Even his accountant had a SPAC hookup.

"The market seems crazy," Schaffer said. "They want to go so fast."

Many startups are being similarly deluged, as SPACs have kicked off an extraordinary deal-making frenzy. In recent months, these investment vehicles — also known as "blank-check companies" — have pulled out all sorts of tactics to make deals with target companies. Their strategies include offering stratospheric values, dangling incentive bonuses and recruiting celebrities such as Sammy Hagar and Shaquille O'Neal to their advisory boards to lend some star power.

And if all else fails? They badger the startups.

The activity has ramped up as SPACs have proliferated and chase a limited pool of potential targets. The financial vehicles, which are publicly traded shell companies with no operations, are structured to hunt for deals. They raise money from investors, take the shell company public and promise that they will find a private company to merge with. If that is successful, the target company then takes over the shell and becomes publicly traded. The sponsor gets a stake, typically 20%, of the shell company.

For years, these vehicles had a shady reputation. That changed last year as the market surged — and there may now be too many SPACs. So far this year, 264 of them have raised $76.7 billion in public offerings, topping the $75.5 billion that was raised in all of 2020, according to Renaissance Capital, which tracks listings. The blank-check companies have outnumbered traditional initial public offerings — which are also booming — by nearly a 4-1 ratio.

Not having enough startups to merge with is a problem because SPACs face a ticking clock. If they do not complete a deal within two years, the special-purpose vehicle dissolves and investors get their money back.

"There is intense pressure to find good targets," said Julie Copeland, a partner at StoneTurn, which advises companies and investors on regulatory and compliance issues. "Not a lot of firms want to say, 'Gee, we couldn't find a target.' "

The supply-demand imbalance has pushed many of the blank-check companies to chase younger, untested startups. Last month, Joby Aviation and Archer Aviation, which are both electric air-taxi companies that do not expect any revenue for years, said they planned to go public via SPACs that valued them at $6.6 billion and $3.8 billion, respectively.

The frenzy has already led to trouble. The stock of Nikola, an electric-car startup that went public via a SPAC in June, has plunged more than 80% after Hindenburg Research, an investment fund, accused the company in September of lying about its technology, overstating business deals and deceptively rolling a truck down a hill in a product video. Trevor Milton, Nikola's founder and chair, resigned, and the Securities and Exchange Commission and Justice Department have started investigating the company.

The SEC has also opened inquiries into Clover Health, a health insurance startup, and Lordstown Motors, an electric-truck startup, which both went public through blank-check companies in recent months. On March 10, the SEC warned that SPACs face distinct risks and potential conflicts of interest. The agency was particularly critical of those backed by celebrities, concluding that "celebrities, like anyone else, can be lured into participating in a risky investment."

For now, the special-purpose vehicles remain on the prowl for targets.

Jedidiah Yueh, CEO of Delphix, a data-infrastructure company in Redwood City, Calif., has experienced the interest firsthand. Yueh, who founded Delphix 13 years ago, said SPACs began reaching out last summer as his business picked up in the pandemic.

The company, which helps customers process and automate data, recently became profitable and is a candidate to go public.

But Yueh said he had not decided if Delphix would go public through a traditional offering or another route, such as a "direct listing" or SPAC. As he has sorted through the options, SPACs have flooded his inbox with messages almost every day.