05/06/2021
Maintaining the rapid growth required to build a true global category leader out of Europe isn't easy.
To keep growing, some founders turn to the capital markets but the path to taking a company public via a traditional IPO in Europe is daunting.
As a result, fewer and fewer companies are going public and founders are often forced to sell their companies too early and miss out on all the future value creation to come.
An alternative to the traditional IPO called a SPAC (Special purpose acquisition company) has increased in popularity over the past 12 months.
In this post, we’ll explore the benefits that SPACs have to offer founders of fast-growing EU tech unicorns.
Founder Benefit #1: You and your management team can stay focused on what matters.
The traditional IPO process takes six to eighteen months.
When you are managing a fast-growing company, having you and your management team spend a year or more working on the IPO is an incredibly costly distraction. Every hour spent on the IPO is an hour spent away from executing your strategy and maintaining your growth.
Going public via a SPAC takes two to four months. For high-growth companies, this time savings alone can make SPACs the far better choice.
Founder Benefit #2: You can choose strategic value-add investors who believe in your vision.
In a traditional IPO, the book building and allocation happens hours before the IPO which means you don't have much control over who your investors are and oftentimes, you have no idea who these investors are.
When you go public via a SPAC, you have more control of your cap table and can be selective in choosing who you partner with. This is very similar to what you’d find when doing a private late stage financing round.
This allows you to have more control of who your investors are so you can ensure you get investors on-board who believe in your overall long-term vision and can add strategic value to support turning that vision into a reality.
Founder Benefit #3: You can decide the price of your company.
In a traditional IPO, you have little control over the price of your company. You don’t know what it will be priced at until the night of the IPO and companies are often at the mercy of outside market forces that can dramatically impact their price on the day of the IPO.
This is what leads to what’s known as an “IPO pop” where a company sees their share price increase on the day of the IPO. The average IPO pop on day one is 38%.
While this is great for the investors who come in and flip the stock on day one, it comes at the expense of existing shareholders such as founders and early employees.
With a SPAC, founders get to negotiate directly with the SPAC sponsors on the agreed-upon price the same way that a founder has been agreeing on past financing rounds with investors.
Founder Benefit #4: You decide on the timing.
With a traditional IPO, your IPO window can close quickly. That’s what happened to Dominik Richter, our founder and chairman when he first tried to take HelloFresh public in 2015.
External market forces, which had nothing to do with their business, quickly changed and the IPO window closed, delaying their IPO by two years. (They went public in 2017 and today are valued at over $10 billion).
With a SPAC, because you are merging with a company that is already publicly traded, the process is able to move much more quickly and you are less dependent on IPO timing windows.
Founder Benefit #5: You save money and reduce dilution.
Costs are an important part of the consideration of how to go public for Founders. Next to the indirect costs we highlighted above, there are also direct costs, mainly the fees you pay to banks as well as the dilution. Let's start with the direct expenses
In a traditional IPO, the investment bank is paid an underwriting fee of around 5-7% of the total capital raised. In a US-listed SPAC you approx. pay 3.5% in deferred fees and approximately only 1% on the funds raised via a PIPE, effectively meaning a cash-out fee of 2-2.5% on all the funds raised in our example - saving a lot of money that would otherwise flow out of the business.
In a traditional IPO, the investment bank’s fees are cash-driven. In a SPAC, the fees are more heavily equity-based, which means the SPAC sponsors and the founders of the target company are in complete alignment towards the success of the company in the public markets.
Hence let’s turn to the second direct cost factor: Dilution.
In the case of the traditional IPO, the dilution is coming via the typical first-day IPO price-pop which for tech stocks has been 38% on average last year. This is real value that is being transferred on one single day from founders, employees, and other existing shareholders to hedge funds and other investors who have good enough relationships with the underwriter bank to get an allocation at a discounted enterprise value.
In a SPAC, the sponsors receive 20% in equity of the original size of the SPAC (excluding the PIPE amount) — a variable compensation that comes with a lock-up period.
The SPAC fees come on top of the Enterprise value of the company and the money raised — so you could argue, just like with VC or PE funds that the cost is borne by public market investors. For the simplicity of the argument, let's assume that the dilution is borne by existing shareholders.
In the above example case the dilution amounts to approx. 3.7% of the enterprise value. This compares to an average cost of 11.4% of dilution due to the first-day-IPO-pop with the traditional route.
And as a final point to consider: The SPAC sponsors as well as the anchor investors in the SPAC and the PIPE investors all have lock-ups, meaning they cannot sell their shares for a certain period of time but are rather, just like founders and management, long-term shareholders and hence are much more incentive aligned then the traditional IPO investor.
Founder Benefit #6: You can go deep on your vision.
In a traditional IPO process, you’re limited in what you can share with potential investors.
You cannot share financial projections and you cannot share anything that’s not stated in your S-1 — the long dry document written by your army of lawyers that gets publicly filed with the SEC or local regulators.
With a SPAC, you are able to really dive deep with investors and sell your vision and overall strategy for what you think the company can achieve in the future. This leads to attracting more long-term investors who believe in your vision and who will hold their shares long after the IPO.
What Matters Most to Founders: Control
All these benefits really tie back to one essential idea: Being in control. SPACs give you more control over the timing, pricing, and most importantly, who your investors and partners are.
Choosing the Right SPAC to Partner With
The SPAC market is booming and there have been over 300 in Q1 this year alone in the US.
A SPAC traditionally has a window of 24 months to find a target, which means if you have a successful fast-growing company, you will likely be contacted by a SPAC (if you haven't already).
Just like in the world of venture capital, not all investors are equal. For founders considering going public via a SPAC, we recommend that you evaluate based on the following:
- How much experience do the sponsors have founding and building high-growth technology startups?
- How much public market success have the sponsors had with technology companies they founded?
- How long-term minded are the investors they bring to the table?
- Are the sponsors in this for the long term?
Founders don’t just need someone who can take them public, they need a long-term partner who is there through the entire journey. This is why we recommend choosing to partner with SPACs that are led by founders.
Founder-led SPACs have proven to perform better in the market than non-founder-led SPACs.
At Tio Tech, we’ve just completed a $345 million Nasdaq listing and our mission is to provide founders of a fast-growing European tech company with an efficient and fair way to enter and find success in the public markets so they can continue building their vision and become a global category leader.
As founders of fast-growing EU tech companies ourselves, we believe you will find no better long-term partner to go public.
We will help you prepare for a public listing, articulate your growth strategy, find the right set of long-term public investors, and support you in making the transition from private to publicly-listed company.
Want to learn more about Tio Tech?
Check out our webinar with Tio Tech's founders Roman Kirsch and Dominik Richter as they explore the vision, mission, and everything else you need to know about the purpose behind Tio Tech.
