How SPACs Are Like Venture Capital For Public Markets: Loup

Venture capital firm Loup Ventures is out with commentary comparing SPACs to venture capital.

What Happened: Loup researcher Doug Clinton makes the case for SPACs being more like venture capital vehicles rather than an alternative to a traditional IPO.

“A SPAC isn’t just a vehicle to go public, it’s a vehicle for a company to raise a substantial amount of new capital to deploy toward some business purpose,” Clinton wrote in the post.

The point of the financial markets is for investors to allocate capital, Clinton added. SPACs are another way for investors to provide capital to companies and expect a return on the capital in the future.

“It’s common for high growth but unprofitable private tech companies to raise hundreds of millions to billions of dollars to achieve business goals,” Clinton said.

Unity Software U, Airbnb ABNB, Snowflake Inc SNOW, Palantir Technologies Inc PLTR and Affirm Holdings Inc AFRM were examples given by Clinton about recent IPOs from companies that wanted to raise more money to achieve business goals.

Related Link: Exclusive: New SPAC ETF Creator On SPACs, Management Teams, Top Holdings

Why It’s Important: Clinton cautions venture capital firms make many investments in companies with some failing and others creating strong returns on investment.

“All public market investors, institutional and retail, need to be prepared to contemplate zero as a potential outcome for aggressive growth companies, just as a venture capitalist would,” Clinton said.

A common criticism for SPACs is low quality, pre-revenue companies going public, Clinton added.

The researcher notes it is important to focus on the quality of the SPAC sponsors.

Benzinga’s Take: The note from Clinton provides a couple of points for SPAC investors to consider. Given the risk of some SPACs failing down the road, it could be important to hold a basket of SPACs to offset potential losses.

Investors could also consider investing in experienced SPAC teams, such as those including Chamath Palihapitiya, which have history of taking companies public via SPAC and also have produced strong returns for shareholders.

(Photo by Chronis Yan on Unsplash)