Rotem helps companies pre-identify and mitigate manipulation and reputation attacks. CEO of Dolos and ARX, a corporate advisory and VC.
Discerning the right path to your initial public offering (IPO) can be a challenge, and there’s much that can be gained or even lost in the process. Smart companies look at the signals the market is sending and keep an eye on long-term profitability and success.
In recent years, special-purpose acquisition companies (SPACs) have lost their appeal to many entrepreneurs. SPACs are essentially publicly traded shell companies that are formed with the purpose of purchasing and merging with privately held firms and jumpstarting their IPOs. They have been a powerful tool for taking companies public for many decades, especially in the technology and biotech industries.
But now we are seeing SPACs being overvalued or taken advantage of by malicious venture capitalist (VCs) players who have it in their best interests to go slow while they inflate the market. These delayed IPOs don’t serve the long-term interests of the companies, however, just the VCs.
This new attitude toward SPACs is unfortunate, as they are still a useful vehicle for companies that want to go public fast while shortcutting the typical IPO bureaucracy. But it is an art to find honest investors who won’t redeem their short-term wins and walk away. It is also rare to find investment bankers who are willing to pop the bubble of startups’ valuation and expose the sometimes hidden problems behind their shining PR machine.
Going public has several advantages for startups. Even with prices trending down, an IPO creates notoriety and increases its public profile, generating brand awareness that staying private wouldn’t provide. It also rewards shareholders and employees who have been loyal since the founding of the company and gives them the option to profit from some of their shares. Finally, IPOs are an excellent opportunity for startups to raise the capital needed to fund the growth they desire.
Some companies may see the bear market and consider taking a more conservative approach to IPO by attempting to establish a bigger enterprise before going public. This is in line with what many VCs are recommending, but again, this option only has the VCs interest at heart.
Time is proving that the market for venture capitalists and private funding is more volatile than the public market. With private funding, the flow of capital is inconsistent. There are documented long spells where the availability of capital is scarce but with no rhyme or reason and many fewer alternative options than an IPO creates.
I believe a more aggressive and more profitable direction for tech startups is to go public earlier. A strategically timed IPO can allow entrepreneurs to meet the real valuation of their companies, which will better compensate founders and put them in a secure position with the knowledge that they will be able to find funding in the form of private investments in public equity (PIPEs) down the road.
The bottom line is that SPACs can be a great vehicle to shortcut bureaucracy. Find honest investors that won’t redeem it all and flee. Consult with VCs and investment banks that will hold a fiduciary obligation not only for the next round but also for the next five years.