Keith Teare on THAT WAS THE WEEK in tech

I never believed that a SPAC was a good idea for a company.

InFarm, where I was head of corporate development during its exploration of a SPAC filing, spent over 12 months assessing the viability of a SPAC and decided not to proceed. That was in 2019-21.

And only yesterday, Better.com listed its SPAC merger, and it fell 95% within the first day, wiping out all remaining investors.

From Fast Company

Shares of the Softbank-backed company plunged 93% as it began trading as BETR on the Nasdaq Thursday, falling more than $16 per share to $1.19 by mid-day. (Better went public via a merger with special purpose acquisition company [SPAC] Aurora Acquisition Corp.)

From Barrons:

The SPAC is still the vehicle taking Better public, but it's not the source of financing it once was. The money raised in the deal will come in the form of a second convertible note from a SoftBank affiliate.

But I am also not prepared to say SPACs were or are a bad idea in 2019 or today. And I do not believe sponsors form SPACs to defraud investors and enrich themselves. More on that below.

A class of company typically needs significant capital expenditure and a long-term view of success, for whom, in 2019 and 2020, a SPAC seemed a great path. Virgin Galactic comes to mind, and OpenDoor. And many others.

In 2019 and 2020, as capital markets were paying enormous multiples for business plans, it seemed an even better idea. Since mid-2020 that potential dried up as the likelihood of such valuations receded and then disappeared.

Chamath Palihapitiya was one of the key architects of those and many other SPACs.

Eric Newcomer published what I consider a hit job on Chamath this week and led with a chart showing the dire performance of the now-public SPACs since listing.

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Newcomer

The Scam in the Arena

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3 years ago · 103 likes · 3 comments · Eric Newcomer

His article - The Scam in the Arena - is clearly driven by some anger or passion. I have not spoken to Eric, and I do subscribe to Newcomer and admire and value him in general - but this quote kind of sums up his mood for me:

And the reality is that Palihapitiya got away with it. He's boastfully summering in Italy and reveling in his luxurious wedding on the All-In Podcast that he hosts. Elon Musk and Grimes were apparently in attendance.

To me, the SPAC mania was such an obvious cash grab and ego play that I couldn't get all that upset about it when it crumbled. The writing had been on the wall from the beginning.

In 2019, nobody saw the writing on the wall, except perhaps in an abstract sense that valuations were super high and possibly would not last forever. "The End is Nigh" kind of analysis.

What Eric is doing in his piece is known as Reading History Backwards. It attributes to the past an intent to create the outcomes we see in the present.

But when we take a current fact - SPACs have not worked out - and then seek to imply that those engaged in them both knew that would happen and worse, plotted to take money off investors for personal gain, despite that knowledge. Well, that is a hit job.

Eric is nothing less than full-throated in his purpose. It's a long read, but I recommend you see it for yourself.

Eric's broader conclusion is that Silicon Valley abandoned its principles in 2019-2022 and that SPACs were part of it.

From my vantage point, Silicon Valley's pivot to SPAC mania was part of a broader abandonment of the venture capital industry's principles by money-hungry pockets of the industry.

This is also wrong.

Silicon Valley really has no principles, and so never abandoned them.

The Valley is money seeking to make more money. SPACs were a way to do so.

Of course, the companies themselves had a broader purpose. However, investors should not be confused with operators and founders.

Investors can and must have a singular focus on money. That is the promise they make to their investors - Limited Partners.

It was not irrational to believe that SPACs could deliver value to both companies and investors at that time, and in the future, they may serve that purpose again.

Indeed, despite the stock price Better.com now has over half a billion dollars to execute from. Its market capitalization is under $20m at the current price. Less than 4% of its cash balance. The management has the opportunity to build a business with capital that would have been hard to raise in private markets.

Eric speaks about a SPAC as a shortcut for a loss-making company. The implication is that the purpose of the SPAC is the shortcut, and making a loss is a red flag. His narrative implies deceit, if not fraud.

But there is nothing wrong with a shortcut or making a loss. The actual purpose is to build a balance sheet to execute from (for the operator) and to get liquidity in the stock (for the investors).

Of course, if you always make a loss, then Eric is right.

But most big ideas need funding, and before they mature, they make investments to build future success. You could call that a "loss". But it is an investment in an outcome that requires time and effort.

The idea that public markets are not a good place for growth companies (another word for loss-making) is spurious and elitist. It implies that only rich people who qualify to be private investors should be able to invest in them.

A SPAC is a means of a team with a big idea that needs capital to grow to seek that capital from the public. The growth that the capital brings can then be shared by public investors. And that is why I think we will see SPACs again.

Eric ends with a comment:

Chamath! That was the trade that you were engaged in. You swapped your reputation for SPAC sponsor fees. You should have done some diligence on what you were getting yourself into. How were you underwriting the damage to your reputation?

I think it deserves a response on Chamath's behalf. Not that Chamath needs help.

Eric seems to have had a bad week. His claims are no better than a conspiracy theory. His wedding and celebrity references are really just a cheap shot and come across like jealousy.

Eric's attack implies forethought and planning intending to defraud investors. It really does not hold up.

Some diligence on the broader applicability of the SPAC as a mechanism to enable growth companies to execute long-term capital-intensive runways would be welcome. A lot of innovation requires this kind of financing.

This week's newsletter is full of IPO stories, Instacart is one, and many of them are loss-making. They will, and should, go public. Not as an exercise in self-serving money-making but because the capital available in public markets is sufficient to fund big ideas.

A call-out to the piece about IRRs being boosted by artificial early exits and to David Clark's piece on the Power Law of venture capital and how it works. My colleague Rob Hodginson's Series B Ecosystem report is good work.

Essays of the Week