Consumer technology is an inherently risky investment area: even the best idea can fall flat if the product story is not sold properly to the end user. Statistics can only take you so far, and ultimately, customers want to trust the product.
Traditionally, companies that have successfully told their story and become market leaders have followed the path of the initial public offering – presenting their story to institutional investors on banker-led road shows rather than people buying their products. do.
But the last 18 months have opened a new door for companies seeking to leave bankers, partnering with good managers, and gaining a more direct path to public capital: the merger with the Special Purpose Acquisition Company, or SPAAC.
For true consumer technology companies – for which the story is often the same, if not more important, than financial data – the SPAAC deal provides more direct access to public capital. Instead of walking institutional investors through P&L, these companies can spend more time telling investors what the company can do long term, including retail investors using the products.
There is no denying the growing popularity of this avenue for public exchanges: in 2020 more than 200 companies went public through an SPAAC deal. But as with any property that heats up, parties will be expected to blow up.
Lessons have been learned and we are probably coming more, but those who consider SPX as a sign of the end of the economic recovery are mistaken. These vehicles provide a legitimate route to the public markets, removing traditional gatekeepers and allowing individual investors to decide whether they want to buy or sell the company’s story.
SPAC Bubble Claim
First, it is important to address the concerns of naysayers. Given the meteorite increase in SPAC activity, analysts predict that this trend is high; He argues that companies are getting listed very quickly and before they are worth it, the lack of money is reaching public capital.
But when is it “too early” to enter the public market? DraftKings, one of the most successful SPAC stories of 2020, went public almost eight years after its founding, and Facebook was private for a similar length before its IPO. Meanwhile, Apple, the world’s most profitable company, was listed less than four years after its founding. Tenure can be a factor in the minds of investors, but in the absence of it, no company is ever prevented from listing in the public markets.
Profitability has also rarely been a requirement for IPOs. Uber, Tesla and Amazon are all prime examples of unprofitable businesses that are listed when reporting losses.
In all of these examples, clear, consistent vision, strong-led teams, and the patience of investors to see leaders implementing their vision exceeds the traditional financial barometer of success.
The market knows the importance of a story
Public markets suffer from quarterly results. A company may miss analysts’ expectations for earnings of just one percent per share and its stock will be sent for tumbling. However, not all companies are evaluated in this way: Many companies are valued for their vision for the future and progress towards their goals. SPACs are an effective way to invest in a strong team or vision, even when there is not enough financial data to back traditional investments.
The biotech firm is an excellent and timely example of the way investors are looking at the market, especially in the aftermath of an epidemic. Biotech usually describes a treatment they are developing and can help patients with it; They provide an estimate of the addressable market, the price they can charge, and the time they can expect to achieve through clinical trials. However, an early-stage biotech can get away with selling any drugs, let alone turning a profit. The FDA estimates the time to complete Phase II and Phase III trials, the final stage before applying for approval, to be up to six years.
Nevertheless, investors invest money in these companies. Analysts have speculated the possibility of a drug going forward in its tests after a detailed investigation, but these companies may look at their stocks for years while losing money. Markets will expect high returns to take these risks, but they can still arrive at value.
Consumer technology storyteller
The SPAC route is a match made in heaven for consumer tech companies: SPACs focused more on vision than the management team and traditional IPOs, which is a boon for the sector, as the industry has always been dominated by visionaries. is.
Looking ahead, the largest investors in SPAC are focusing on direct-to-consumer technology, but not in the traditional, limited sense of D2C.
Consumers are looking for goods and services that they can use faster and reliably than ever before. Easily, companies that succeed in meeting these options through technology are natural storytellers who know how to deliver their product directly to the end-user. Essentially, these firms are going to be on the radar of SPAC investors.
For example, Fintech has, in many ways, become a direct-to-consumer as it provides banking facilities directly to customers on their phones. Over the past year, innovation in telemedicine has brought most healthcare appointments from the waiting room to the living room, and forced older healthcare administration practices to adopt digital systems.
Products that you can only buy at physical stores, such as mattresses, can now be delivered directly to your doorstep with companies such as Casper and Purple. Some auto companies will allow you to easily design and buy a car to order pizza.
The COVID-19 epidemic has only intensified this trend, highlighting the need for faster, technology-driven access to services, and our “return to normalcy” means that this trend is only going upward. SPACs will be around to meet the demand to these companies to bring these ideas to market faster and provide capital.
the road ahead
Despite speculation, naysaying and “bubble” talk, SPACs have been around for decades and are not going to disappear in a flash. In fact, SPAC deals may slow down and carry higher risk premiums, as the trend continues, but like changes in consumer technology, SPACs will evolve to serve their own consumers.
In many ways, the SPAC model is similar to the way consumer technology is developed: it encourages the disintegration of established constructions. What’s more, investors in pre-acquisition SPACs traditionally get access to opportunities such as ventures without the necessary capital for such investments.
In the end, the success of a company will depend on whether it is meeting or exceeding the target, or if some demand is carried forward. The rules have not changed, nor is there a risk or reward.