value and opportunity

I have covered the current SPAC Mania already in a post in June on Nikola, but since then SPACs only seem to gather more steam.

VC legend Bill Gurley (Banchmark Capital, Uber) has released an interesting post on the three main venues for a company to go public: A “classic” IPO, a simple listing and finally the SPAC.

I’ll try to summarize his post:

• he argues that the IPO process is “broken” and rigged by the I-Banks. His proof is that on average, IPO’s are “Popping”  ~20% on the first day of trading which means that this difference, multiplied by the number of shares placed, is “stolen” from the previous owners (i.e. himself as a VC)
• on top of that, companies have to pay IPO fees
• The reason is that banks prefer special clients and do not really match demand and supply
• as direct listings (Spotify) do not allow to raise large amounts of money, reverse mergers with SPACs are preferable
• He argues that SPACs have “lower cost of capital” than IPOs but doesn’t give any examples. His main “proof” here is that there are so many SPACs now and that companies can negotiate really hard.
• and of course the way to public markets is a lot faster for a SPAC

Bill Gurley is clearly not an idiot as he most likely is now a billionaire following some very impressive investment successes (Uber) with Benchmark capital. However I do think that his arguments have some serious flaws.

Read more