The wrong kind of IPO is getting all the attention these days. And the right kind is being virtually ignored.
The much praised — but highly flawed — special-purpose acquisition company (SPAC) is the talk of the town right now. SPACs are shell companies that raise money in an IPO to merge with a privately held company that then becomes publicly traded. These are just some of the headlines I saw yesterday…
- SPAC to take digital health startup Sharecare public (Fierce Healthcare)
- SPAC reportedly taking battery recycler Li-Cycle public (Reuters)
- SPAC to take mobile banking startup MoneyLion public (Pitchbook)
- The SPAC-celebrity complex (NYT)
- Institutional demand buoys socially conscious SPACs (Pitchbook)
- Clearing house Apex mulls SPAC merge (Pitchbook)
- Lucid Motors nears SPAC deal as Klein launches financing (Reuters)
- Butterfly Network merges with Glenview-backed SPAC and goes public (PE Hub)
- Indonesian Travel Startup Traveloka Looks To Enter Public Markets Via SPAC (pymnts.com)
Again, these are just the headlines from one Tuesday! And by no means is it an exhaustive list. In case you think this is just hype, you should know that SPACs are not just a media creation. Their popularity among investors is spreading like wildfire. They raised a record $82 billion last year. And 2021 is easily shaping up as another record-breaking year. Just six weeks into the new year, SPACs — 144 of them — have raised $45.7 billion. Last Friday, 28 investor groups filed to raise new blank-check acquisition companies — a record for single-day filings. SPACs are red hot.
But don’t be fooled. SPACs are not your friend. They’re a nice deal for institutional investors. But SPACs provide very little for everyday investors. Everyday investors can’t opt out if they don’t like the privately held company chosen to merge with the shell company. And they can’t double-down on the SPAC if its price is rising. Institutional investors can do both of those things — which gives them a major advantage. For more reasons why you should avoid SPACs, read the article I wrote a month ago.
There was one IPO announcement this week that barely got any media attention — although it should have. Startup company PensionBee is planning an IPO with an interesting twist for later in the year. PensionBee will let its customers buy shares alongside large institutional investors on the first day of its IPO.
PensionBee’s plan breaks from a longstanding practice that prevents everyday investors from buying shares at the opening price.
Typically, only institutional investors are allowed to buy stock at the opening price of an IPO. And that opening price comes with a discount to encourage them to buy more shares. If prices surge during day one, it’s extremely difficult for everyday investors to grab shares and join the profit party. Just like in SPACs, everyday investors are placed at a disadvantage compared to deeper-pocketed investors.
So PensionBee’s IPO is a big deal. But the idea behind it is very familiar to crowdfunders. PensionBee founder Romina Savova says she wants to “provide customers with an opportunity to share in [the company’s] growth journey.” She says that “customers can too often be an afterthought during an IPO.”
Founders of early-stage companies have been doing the same thing for years. Crowdfunding gives their customers a way to financially benefit from their future growth… a way to tap into a new source of capital from people who like your company the best. When they invest, they often become more enthusiastic customers. They understand that their purchases contribute to sales growth, which drives up the price of the company. As customers, they can appreciate the popularity of the company’s products better than professional investors.
I’m not spilling any secrets here. This dynamic is pretty much taken for granted in the crowdfunding community. It was just a matter of time before companies launching IPOs realized the idea’s potential.
A level playing field between large institutional investors and everyday investors is also standard procedure in crowdfunding. Both crowdfunders and institutional investors invest with the same deal terms — no favoritism or special discounts. Backroom wheeling and dealing with VC investors is not tolerated. And while it’s true that institutional lead investors help founders set a valuation for their company, they don’t give themselves a discount. Whatever valuation is decided, it applies both to institutional and everyday investors alike.
Sadly, PensionBee is a British company — and its IPO will be on the London Stock Exchange. But its IPO follows in the footsteps of a well-known American startup Airbnb. Last December, it offered 3.5 million shares to its hosts. That’s 7% of Airbnb’s total shares made available in the IPO. Airbnb’s landlords and hosts — and not just its institutional investors — got to share in the company’s subsequent price explosion from the IPO opening price of $68 to the current price of around $209.
I hope to see more of these kinds of IPOs. They do have some downside — but it’s small. Airbnb did risk the ire of its users, if the stock had headed south instead of making a steep climb. Even now, that day cannot be entirely ruled out down the road.
But that’s the nature of investing. There are no guarantees. Airbnb’s hosts and landlords aren’t dummies. They know this. They also understand their hosting business isn’t bulletproof. The pandemic certainly brought home that point. I think they’d take a price downturn in stride.
Crowdfunding has unleashed the power of the crowd — the power of amassing small checks into powerful capital flow. It’s about time the crowdfunding ethos seeps into staid and elitist IPO practices. Companies launching IPOs are finally discovering they can tap into the power of the crowd while increasing the loyalty of their customers. I expect Airbnb’s IPO and PensionBee’s IPO plans to be the start of a new and welcome trend.