Early Investing

Why SPACs are Good for Startup Investors

Why SPACs are Good for Startup Investors

Have you ever been in a conversation or argument where you come up with the perfect response five minutes after the talk ends? It happens to me all the time. And I hate that empty feeling. You can’t return to the conversation to share your comeback or key point. That’s too petty. So you know you’re right — or just really funny — and there’s nothing you can do about it.

This happened to me recently at an investment conference. I was participating in a panel discussion when the topic of SPACs came up.

SPAC is short for special purpose acquisition company. They’re companies designed to merge with startups and take them public via an IPO (initial public offering). SPACs are all the rage these days. More than 240 SPACs went public in 2020. A quick Google News search this morning turned up four SPAC IPOs in the works right now — ridesharing company Grab, baseball card company Topps, COVID-19 test company LumiraDX and robotics company Sarcos

My fellow panelist was bearish on SPACs. He thought the SPACs were just tools used by startup founders and SPAC creators to make a quick buck. And that most of them weren’t worth investing in.

I disagreed. Plenty of good companies — like DraftKings, Virgin Galactic and ChargePoint — have gone the SPAC route. Plenty of companies I wouldn’t invest in have gone the traditional IPO route. So singling out SPACs as poor investments didn’t make sense. I did agree that the rate of SPACs taking companies public would go down soon (especially with the SEC starting to pay attention).

Five minutes after the panel discussion ended, I realized that I forgot to make the most important argument.

SPACs don’t just help founders make money quickly. They help startup investors realize enormous profits. And that makes SPACs good for investors like you and me.

Startup investors only make money when a company goes public or gets acquired. So for startup investors, the IPO is the holy grail. It’s the only thing that matters. Who cares how a startup performs as a public company if you’ve already booked gains of 50X or 100X on your original investment (in terms of percentages, that works out to increases of 4,900% and 9,900% respectively). 

My fellow panelist was only considering SPACs from the angle of how well the startup will perform post-IPO. But that doesn’t make sense. IPOs are celebrated for making early investors wealthy. So should SPACs. When public companies struggle, no one blames the IPO. And that same standard should hold true for SPACs. 

For startup investors, it doesn’t matter how a company performs as a public company. The only thing that matters is being rewarded for taking on the risk of investing early. 

So are SPACs good?  

Yes. For startup investors, SPACs are gold. And don’t let anyone tell you otherwise.

There are only three ways for a company to go public. SPACs are one of them. Let stock market investors worry about the long-term health of the company while you bank the money you made via the IPO. If you take the risk, you should get the reward. It’s only fair.

Top Posts on Early Investing