From the start, Hims & Hers CEO Andrew Dudum had imagined he would take his startup public by way of a standard IPO. However final month, the direct-to-consumer well being startup ended up taking a special route.
The startup merged with a special-purpose acquisition company fashioned by Oaktree Capital Administration, successfully a shell firm that goes public with the aim of discovering and buying a goal firm. The deal netted Hims & Hers a $1.6 billion valuation and $330 million in money.
“As we began having critical conversations about taking Hims & Hers public, we began to higher perceive the completely different modalities and realized extra in regards to the SPAC construction throughout this time,” Dudum wrote in an e mail. “The SPAC construction was tremendous fascinating to us, but it surely was a special street than we anticipated to take. As a crew, we sat down and debated the professionals and cons lots. Finally although, we determined the SPAC construction was extra useful for us.”
Different healthcare startups got here to an analogous conclusion in 2020, together with Clover Well being and Butterfly Community. And extra have shared that they plan to go public by way of a SPAC this yr with eye-popping valuations, together with Sharecare ($3.9 billion), Talkspace ($1.4 billion), and 23&Me ($3.5 billion).
Are we in a bubble? Some traders see SPACs as a very good alternative, whereas others query whether or not the tempo — and the value — may be sustained by the general public markets.
Everybody will get a SPAC
Although SPACs themselves aren’t new, the quantity of offers is eye-popping. Up to now, SPACs had a little bit of a special status. They had been seen as a “backdoor” to the general public markets, and sometimes didn’t carry out in addition to firms that went public by way of conventional avenues.
However of late, they’ve been the following buzzy funding possibility, with everybody from SoftBank to Shaquille O’Neal sponsoring a SPAC.
For some healthcare startups, SPACS may be an interesting possibility as they will increase extra funding than in a later-stage spherical and may negotiate their valuation with extra certainty than a standard IPO, Ernst & Younger SPAC Co-Chief and Associate Alex Zuluaga wrote in an e mail.
Like with Hims, different startups have cited the agency or particular person sponsoring the deal as the rationale for selecting to go the SPAC route, as extra well-known VCs or trade executives launch their very own blank-check firms. For instance, final yr, former Livongo executives Glen Tullman and Dr. Jennifer Schneider labored with Common Catalyst to form a SPAC to take a healthcare company public. A whole bunch of SPACs are being underwritten by Jefferies, Cowen and Cantor Fitzgerald.
Even crossover traders, such as RA Capital, which spend money on each privately held and publicly traded firms, are spinning up their very own blank-check firms.
“Every one of many high 15 crossovers have a SPAC. We’re seeing various enterprise corporations which can be very historically private-company venture-backed-focused which have raised their very own,” stated Jonathan Norris, a managing director with Silicon Valley Financial institution’s healthcare apply.
Of the startups that closed massive mezzanine rounds final yr, not all of them will have the ability to make it into the general public market, leaving a possible alternative for SPACs. However as extra SPACs are created, there are solely so many out there firms — or targets — they will take public. A complete of 248 SPACs went public final yr, 159 of that are nonetheless looking for targets, and one other 176 went public in 2021, according to data from SPACInsider.
“Everybody who’s elevating a SPAC must discover a firm or an asset. So there’s competitors there,” he stated. “The out there pool feels prefer it’s actually large proper now. However as these offers get introduced, how does that have an effect on issues?”
In some instances, this could culminate in a “SPAC-off,” the place a number of SPACs compete for an organization to see who will supply the best worth for its shares.
The exuberant dealmaking, together with a booming IPO market, can be affecting early-stage traders. Within the final two years, costs earlier than a collection A spherical closes have elevated 25%, stated Austin Duke, a senior enterprise affiliate with UnityPoint Ventures.
“As an early-stage investor, we’re not writing checks and anticipating exists within the subsequent yr or two,” he stated in a telephone interview. “Daily we now have to ask ourselves… will we count on this pattern to proceed or are we in a bubble that’s about to pop?”
Dilution and deal construction
It isn’t simply the sheer variety of deal-seekers that leads some traders to take a look at SPACs with a cautious eye, but in addition the way in which the offers themselves are structured. Generally — although not all — the sponsoring firm will get a 20% stake within the SPAC.
Buyers that purchase shares of the blank-check firm, that are sometimes priced at $10, additionally get a free warrant. So, even when they don’t just like the goal firm that the SPAC is taking public, they will redeem their shares however preserve the warrants and rights. To offset this dilution, personal firms search a better buy worth as they negotiate the merger, stated Michael Ohlrogge, an assistant professor at NYU Regulation, who recently published a paper that discovered most SPACs see their share worth drop by a 3rd or extra after the merger closes.
“It’s straightforward to see why sponsors would wish to launch them — in the event that they full a merger, they get a big sum of money. Buyers don’t have a lot danger. … Most simply exit earlier than the merger,” he stated in a telephone interview. “SPAC mergers are constantly good for the sponsors, for the IPO stage traders who get out earlier than the merger, and for the goal firms. However they’ve been constantly dangerous for traders who personal previous the merger.”
SPACs even have somewhat bit extra regulatory lenience than conventional IPOs in some respects. As an example, they’ve decrease legal responsibility danger for errors or omissions made to traders in IPO disclosures, and likewise extra flexibility to share future earnings projections, which may make a deal extra enticing — particularly with pre-revenue firms.
Will the SPACs of 2020 and 2021 do higher than their predecessors? Up to now, it’s too early to inform.
Hims, which closed its merger at $15.20 on Jan. 22, traded at $15.02 on Thursday. After facing a scathing report from short-seller Hindenburg Analysis, and now an investigation by the SEC, insurer Clover Well being has seen its inventory drop from $15.90 on Jan. 8 to $9.71 on Thursday.
“For the previous 10 years, each single yr, SPACs have carried out horrible post-merger. It appears completely different this yr — is it a blip or will costs fall down?” Ohlrogge stated. “When you’re an organization seeking to go public, you’re going to get some huge cash from a SPAC. The query is that if that’s going to be sustainable.”
Picture credit score: zoom-zoom, Getty Photographs