IPO 2.0? — SPAC
State of the Private Technology Company Landscape
Many technology companies that are fundamentally changing the world are private. With emerging technologies like cloud computing, analytics platforms, and developer-focused software tools they affect rapid change in every major sector of the global economy. They are establishing new markets, creating new experiences and disrupting legacy industries.
Over the last decade, investors’ appetite for private tech companies has increased while IPOs for tech companies have declined. This let to increasing private technology company valuations as more and more investors wanted to get exposure to the fundamental economic shifts. A hunt for the next “unicorn“ company stared. Unicorns are companies that reach a valuation of over $1.0 billion. According to Social Capital, there were approximately 150 private U.S. technology companies with a valuation in excess of $1.0 billion in 2017. In comparison, there were only 200 public U.S. tech companies with a valuation of $1.0 billion.
The Current Technology IPO Paradigm
Despite the advantages of being in the public markets, there has been a range of factors that led many technology companies to remain private. U.S. tech IPOs decreased from an average of around 40 IPOs per year from 2010 to 2015 to approximately 30 IPOs per year between 2015 and 2016.
Vast capital in the private market
Many companies stayed private because of an increase in venture capital but also hedge and mutual funds have followed quickly. Historically, it was necessary to access public markets through an IPO to support further growth and get efficient shareholder liquidity. Now, the private market has matured to even develop secondary markets that are capable of providing liquidity to founders, employees, and investors.
The traditional IPO Process is broken
The traditional IPO process is broken. The hurdles of management distraction, suboptimal pricing of shares and negative long-term impacts for the company have kept many companies from going public. This is problematic as it only allows a few people and not the general public to participate in fundamental changes.
- Management distraction: The traditional IPO process requires the full attention of the management team. It requires a considerable amount of time to draft documents, select underwriters, and engage with investors. This commitment can potentially distract managers to focus on further product-market-fit, growth strategies, and customer acquisition.
- Unfavorable price discovery: Tech IPOs are very often mispriced. One of every third tech IPO is incorrectly valued. Leaving a considerable amount of money on the table. According to Social Capital Hedosophia, the average first-day trading performance for U.S. technology IPOs from 1998 to April 2017 stands at over +25% compared to U.S. non-technology IPOs at +15%.
- Longer-term impacts: An ineffective pricing and bringing short-term-focused shareholders can have long-term negative impacts on the company. With higher shareholder turnover, it can lead to more stock price volatility that can impair a management team’s ability to focus on long-term value creation.
IPO 2.0 — SPAC
At a certain stage, a company would normally experience material benefits from being publicly-traded. It increases brand awareness, enables a liquid acquisition currency and enables access to additional capital. Is there any effective way to get this for a tech company done?
In 2017, Chamath Palihapitiya, a famous Silicon Valley investor, formed a new investment vehicle to enable tech companies to go public. Chamath raised money via an IPO for a special purposed acquisition company (SPAC) called Social Capital Hedosophia that would acquire a promising target. Here are the details of the SPAC:
- Investors will buy 50 million units for $10/piece
- The SPAC will then acquire a private startup with the capital
- Target will exchange shares for shares of the SPAC
- Then they will effectively be public via the merger
Their mission is the following:
“Our mission is to create an alternative path to a traditional IPO for disruptive and agile technology companies to achieve their long-term objectives and overcome key deterrents to becoming public” (Social Capital Hedosophia)
Social Capital Hedosophia is offering in the process: operational excellence, broad, global reach, efficiency.
“We believe that a more streamlined and transparent path to the public market will encourage private companies, in the technology industry in particular, to go public while allowing them to remain operationally focused on long-term value creation. As a result, public market investors can gain more near-term, direct investment exposure to long-term technology themes.” (Social Capital Hedosophia, 2017)
After looking into 200 private unicorns, Social Capital Hedosophia engaged with Virgin Galactic, one of the pioneers in commercial space manufacturing with the vision to offer the first commercial spaceflights to regular customers. The due diligence took around 9 months. The team came to the conclusion that Virgin Galactic is “light-years” ahead of its competitors.
Via a merger, Virgin Galactic was recently listed on the New York Stock Exchange on October 28th becoming the first public space flight company. Social Capital Hedosophia bought a 49% stake at a $1.5 billion valuation.
As an investor, you can directly buy shares from Virgin Galactic under the SPCE ticker at the New York Stock Exchange (NYSE).
“For the first time, anyone will have the opportunity to invest in a human spaceflight company that is transforming the market.” (George Whitesides, CEO of Virgin Galactic)
At this current stage, I would compare this investment opportunity to a venture capital investment because the company has not delivered its service yet and thus has not earned any revenue. The company is right before its commercialization of space travel and raised capital from public investors to finally bring its technology to market. If you want to learn more about this investment opportunity, please read the following article: