CEO DailyCFO DailyBroadsheetData SheetTerm Sheet

The downfall of the SPAC: Why one CEO called it quits and more will follow

February 10, 2022, 4:56 PM UTC

It was hard to keep up with the endless slew of IPO filings last year—with some 400 companies adding a ticker to a U.S. stock exchange. Parsing through every S-1 each morning took me a couple hours, which is the precise reason I was first brought on to help with this newsletter.

Needless to say, those days are over. With tech stocks performing poorly on the Nasdaq and interest rates on the rise, the number of IPO filings has, unsurprisingly, skidded to a halt.

But the slowdown in an alternate and freshly popular means of going public—via a SPAC (a special purpose acquisition company) merger—was already well underway. We’ve seen a slew of companies call off their deals in the last few months: BBQGuys, Fertitta Entertainment, and Apex Clearing, to name a few.

Last year was unprecedented: There were about 150 SPAC listings in the U.S. But those days are long gone. Sure, fewer companies are seeking to go public in general because of the markets. But the underlying reasons for the diminished interest in SPACs—and even SPAC breakups—run deeper than that. Sean Harper, CEO and co-founder of homeowners insurance company Kin Insurance, who called off his planned SPAC merger the last week of January, explained to me why this is happening.

First, a brief and oversimplified reminder on how these deals work. A management team will set up a blank check company for the sole purpose of taking some unidentified company public. They file an S-1, disclosing who is on the management team, how much they plan to raise, and usually including some specific market (like health care or the electric vehicle industry) they will focus on when seeking a target company. The management team then raises cash from institutional investors and goes public. After that, the SPAC identifies a private company to merge with and, pending shareholder approval, de-SPACs.

It’s hard to pinpoint the exact trigger that propelled SPACs to sudden popularity. Back in 2016, there were just over a dozen of these deals. But people tend to agree on the appeal: It’s faster than a traditional IPO, privately negotiated with a set price, and companies are able to make forward-looking predictions on their performance, which isn’t typically allowed when going public. For private equity investors or hedge funds, it’s fast, and low-risk, cash.

All those reasons theoretically still exist, but something key has changed: redemption rates, according to Harper, who terminated Kin Insurance’s planned merger with Omnichannel Acquisition Corp. on January 26.

Here’s how redemptions work: Institutional investors purchase shares of a blank check company, and they get free warrants alongside that, giving them the right to buy their shares back at the value they invested after the SPAC goes public, but before the merger is complete.

So, for instance, if Hedge Fund A purchases 1,000,000 shares of SPAC XYZ for $10 per share, that $10,000,000 is put in a trust. When the SPAC goes public, if shares are trading at $10.05, Hedge Fund A can sell their shares and make a $50,000 profit. Woohoo! The money stays in the trust. If shares are trading at $9.50, however,  the hedge fund could redeem their shares at the $10 value and get their full money back—and that means money coming right back out of that trust.

“So you can see why it’s a good deal for them,” Harper says. “It’s just not a great deal for the companies.”

It’s expected that those original institutional investors will immediately sell their shares—either on the public markets or via redemptions, according to Harper.

“That’s one of the biggest problems with SPACs,” Harper says. While IPOs are paired with a traditional roadshow, where a company is pitching its business model to fundamental investors who hopefully believe in the long-term trajectory of a company, SPACs “basically inherit the shareholder base and lots of these flippers, who really don’t want to hold the stock.”

When Kin Insurance was discussing a SPAC merger last spring, redemption rates were very low, and it was likely a company would get to keep a nice chunk of the capital in the trust. “A bunch of retail investors were piling in and buying the shares away from the hedge funds… That sort of stopped during the summer,” Harper says. 

Part of this jump in redemption rates has likely been driven by how retail investor interest in SPAC deals has wavered, particularly after performance in a lot of the companies that went public via SPAC subsequently sunk. 

Here’s the problem for a company using this as a route to go public: If a deal closes, the SPAC sponsor, banker, and transaction fees remain: They “don’t scale down if there are a lot of redemptions,” Harper says. For Kin Insurance, those fees were going to equate to around $40 million. So, if redemptions surpassed 42%, the deal really wouldn’t make sense, Harper says, which is why the company originally negotiated to terminate the deal if redemptions were set to surpass that (which they ultimately were).

It all makes a lot of sense. A major reason companies look to the public markets is for capital. If they aren’t going to get it, many management teams will opt not to pay the corresponding fees and go through all that effort prepping their business for the Nasdaq.

“If you make the assumption that the redemptions will be low, it’s a perfectly fine route. But if you’re in this market, and you sort of know redemptions are going to be high, it’s really not a very good deal. And I think a lot of people have recognized that,” Harper says.

As for Kin Insurance, Harper is looking to raise another round of capital in the private markets, and hopes to raise about $100 million. He says the company will consider going public in the future when it makes sense.

“I think it’s pretty unlikely that when we do eventually go public we will use a SPAC again, but who knows, right?” he says.

Rules, rules, rules… Yesterday the SEC passed a proposal that would require hedge funds and private equity funds to disclose basic conflicts of interest to their investors. There’s also the matter of annual audits as well as quarterly statements on fund performance, fees and expenses, and manager compensation. There is a two-month window to comment on the proposal before the federal regulator issues a final rule. Pushback expected. You can read more about that here.

Old habits die hard… If you remember the dismembering of Ozy Media (see here), you may recall a YouTube executive impersonation, purchased pageviews, skewed data, burned-out employees, broken partnerships, and erroneous claims about the media company’s audience—with employees pledging that CEO Carlos Watson had his fingers in it all. One way Ozy strove to drive attention to itself: Placing advertisements in another outlet, then later attributing quotes to that publication. 

It appears that Carlos Watson is back at it. ProPublica reporter Craig Silverman tweeted about a new article on the new iteration of Ozy that emerged on techbullion.com, a site that “makes it pretty clear on its website that it works with brands/companies etc to place paid content on its sites as part of PR and SEO campaigns.”

Looks like that article has now been taken down. Watson tweeted last night that he gave an interview with “the expectation the interview would be published in a mainstream business news outlet. It wasn’t and the author used a pseudonym. The content is all true. Great content, wrong delivery.”

Samples of mole at Red Iguana in Salt Lake City

Very significant announcement: For those of you who must know, I did indeed try the mole—in all its iterations—at Red Iguana in Salt Lake City. Thank you for the (many) recommendations to visit this place, because it sure did hit the spot. My favorite was the Mole Poblano, which features Guajillo and ancho-dried chiles, peanuts, sesame seeds, walnuts, raisins, bananas, and Mexican chocolate, and my fridge is filled with the remains.

Just a quick note that I will be off skiing tomorrow. Finance editor Lee Clifford and finance reporter Anne Sraders will kindly be shipping this newsletter into your inboxes in my absence. Needless to say: You’ll be in good hands.  

Until Monday,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com

VENTURE DEALS

- Ventus Therapeutics, a Montreal-based biopharmaceutical company utilizing structural biology and computational tools to identify and develop small molecule therapeutics, raised $140 million in Series C funding. SoftBank Vision Fund and RA Capital Management co-led the round and were joined by investors including Qatar Investment Authority, Andreessen Horowitz, BVF Partners, Casdin Capital, Cormorant Asset Management, Fonds de solidarité FTQ, Alexandria Venture Investments, GV, and Versant Ventures

- Seismic Therapeutic, a Waterton, Mass.-based biotechnology company that uses machine learning for immunology drug development, raised $101 million in Series A funding led by Lightspeed Venture Partners and was joined by investors including Timothy Springer, Polaris Partners, GV, Boxer Capital, and Samsara BioCapital.

- Seyna, a Paris-based insurance products and tools company, raised €33 million ($37.8 million) in Series A funding. White Star Capital and Elaia Partners led the round and were joined by investors including Global Founders Capital, Allianz, and la Financière St James

- Wander, an Austin, Tex.-based smart home operator, raised $20 million in Series A funding led by QED Investors and was joined by investors including Redpoint Ventures, Authentic Ventures, Fifthwall, Susa Ventures, Kevin Durant, and Thirty Five Ventures.

- Sardine, a San Francisco-based fraud and compliance platform for fintechs, raised $19.5 million in Series A funding from Andreessen Horowitz, NYCA, and Experian Ventures.

- Houwzer, a Philadelphia-based real estate brokerage with an all-W2 labor model and flat-fee pricing, raised $18 million in funding led by Edison Partners.

- m3ter, a London-based metering and pricing engine for SaaS companies, raised $17.5 million in funding from investors including Kindred Capital, Union Square Ventures, and Insight Partners.

- Calamu, a Clinton, N.J.-based virtual data harbors company for storing data, raised $16.5 million in Series A funding led by Insight Partners and was joined by Dell Technologies Capital.

- Expressable, an Austin, Tex.-based speech therapy company, raised $15 million in Series A funding led by F-Prime Capital

- ODAIA, a Toronto-based AI-powered commercial insights SaaS platform for pharmaceutical companies, raised $13.8 million in Series A funding led by Flint Capital and was joined by investors including Innospark Ventures, Alumni Ventures, Graphite Ventures, BDC Capital’s Women in Tech Fund, MaRS IAF, StandUp Ventures, and Panache Ventures.

- hOS, an AI technology startup, raised $12.8 million in seed funding led by NEA and was joined by investors including B5 Capital, Cortical Ventures, IA Ventures, and Sequoia.

- Odys Aviation, a Long Beach, Calif.-based aircraft startup making hybrid-electric vertical takeoff and landing (VTOL) aircraft for regional mobility, raised $12.4 million in seed funding from investors including Giant Ventures, Soma Capital, 11.2 Capital, and Countdown Capita.

- Epicore Biosystems, a Cambridge, Mass.-based microfluidic sensors company, raised $10 million in Series A funding from investors including Chevron Technology Ventures, Alumni Ventures, and Joyance Partners.

- Kyro Digital, a Web3 multi-chain services platform, raised $10 million in Series A funding from investors including Avalanche (Blizzard), Polygon, Rally, and Tezos.

- Allure Security, an online brand abuse detection and protection solution, raised $6.8 million in seed funding led by Gutbrain Ventures and was joined by PBJ Capital, Impellent Ventures, Glasswing Ventures, Zetta Venture Partners, and Portage Partners.

- Enable Dental, an Austin, Tex.-based dental care services company, raised $5.4 million in funding led by CareQuest Innovation Partners and was joined by FCA Venture Partners.

- BasiGo, a Nairobi, Kenya-based electric vehicle company, raised $4.3 million in seed funding led by Novastar Ventures and was joined by investors including Moxxie Ventures, Nimble Partners, Spring Ventures, Climate Capital, and Third Derivative.

- Orthox Limited, an Oxfordshire, U.K.-based medical implant developer for repairing damaged knee articular cartilage and other orthopedic injuries, raised $4.3 million in funding led by Parkwalk and was joined by investors including Oxford Technology & Innovations EIS Fund, Perivoli Innovations, and Additio Investment Group.

- WingRiders, a decentralized exchange platform, raised $4.5 million in seed funding from investors including cFund, Spartan Group, Coti, and Longhash.

- MetaStreet, a liquidity routing and scaling solution for NFT collateralization platforms, raised $3 million in seed funding led by Dragonfly Capital and was joined by investors including Ethereal Ventures, Sfermion, Nascent Capital, Delphi INFINFT, Alliance, Seed Club Ventures, Animoca Brands, Republic Realm, Volt Capital, Kerve Capital, CMT Digital, Bitscale Capital, QCP Capital, BigBrainHoldings, and Taureon.

- AiVidens, a Brussels-based AI-powered debt collection startup, raised €1.5 million ($1.7 million) in funding led by Faraday Venture Partners and was joined by investors including The Faktory Fund and Finance.Brussels.

- Respira Labs, a Mountain View, Calif.-based medical technology company specializing in respiratory care, raised $1 million pre-seed funding led by Zentynel Frontier Investments and was joined by investors including VentureWell and ImpactAssets

PRIVATE EQUITY

- Checkr, backed by Durable Capital Partners, Fidelity, and Accel, agreed to acquire ModoHR, a Canada-based background check company. Financial terms were not disclosed.

- Clearview Capital acquired Portu-Sunberg Marketing, a Minneapolis, Minn.-based sales and marketing, creative services, and data insights company for consumer brands and private label suppliers. And merged it with portfolio company Infinity Worlds and Belmont Partners. Financial terms were not disclosed.

- Credit Bureau Connection, backed by Capstreet Group, acquired Dealer Safeguard Solutions, a McKinney, Tex.-based SaaS provider of compliance and workflow solutions for the automotive retail industry. Financial terms were not disclosed. 

- Guardian Life acquired a minority stake in HPS Investment Partners, a New York-based private equity firm. Financial terms were not disclosed.

- Insight Partners acquired a minority stake in Gamma Technologies, a Westmont, Ill.-based multi-physics system simulation software provider. TA Associates, a previous backer, also invested in this round. Financial terms were not disclosed.

- Integrated Global Services, a J.F. Lehman & Company portfolio company, acquired Tube Tech, an international cleaning and inspections solutions provider. Financial terms were not disclosed.

EXITS

- symplr, backed by Clearlake Capital Group and Charlesbank Capital Partners, acquired Midas Health Analytics Solutions, a Florham Park, N.J.-based health analytics solution warehouse, from Conduent.

OTHER

- TotalEnergies agreed to acquire SunPower’s Commercial and Industrial Solutions business for $250 million.

- Binance agreed to acquire a $200 million stake in Forbes, a Jersey City-based magazine and digital publisher.

- Vontier acquired Driivz, a Hod Hasharon, Israel-based EV charging and energy management software provider. Financial terms were not disclosed.

SPAC

- Syniverse Technologies, a Tampa, Fla.-based communications technology company, terminated its $2.9 billion SPAC merger with M3-Brigade Acquisition II Corp. Carlyle Group backs the firm.

FUNDS + FUNDS OF FUNDS

- Cortical Ventures, a San Francisco-based venture capital firm, raised $50 million for its first fund focused on next generation AI companies.

PEOPLE

- Summit Partners, a Boston-based alternative investment firm, promoted David Schiller to managing director, and Luke Parsons and Steven Twomey to principal.

This is the web version of Term Sheet, a daily newsletter on the biggest deals and dealmakers. Sign up to get it delivered free to your inbox.