From the beginning, Hims & Hers CEO Andrew Dudum had imagined he would take his startup public through a traditional IPO. But last month, the direct-to-consumer health startup ended up taking a different route.
The startup merged with a special-purpose acquisition company formed by Oaktree Capital Management, effectively a shell company that goes public with the purpose of finding and acquiring a target company. The deal netted Hims & Hers a $1.6 billion valuation and $330 million in cash.
“As we started having serious conversations about taking Hims & Hers public, we started to better understand the different modalities and learned more about the SPAC structure during this time,” Dudum wrote in an email. “The SPAC structure was super interesting to us, but it was a different road than we expected to take. As a team, we sat down and debated the pros and cons a lot. Ultimately though, we decided the SPAC structure was more beneficial for us.”
Other healthcare startups came to a similar conclusion in 2020, including Clover Health and Butterfly Network. And more have shared that they plan to go public via a SPAC this year with eye-popping valuations, including Sharecare ($3.9 billion), Talkspace ($1.4 billion), and 23&Me ($3.5 billion).
Are we in a bubble? Some investors see SPACs as a good opportunity, while others question whether the pace — and the price — can be sustained by the public markets.
Everyone gets a SPAC
Though SPACs themselves are not new, the volume of deals is eye-popping. In the past, SPACs had a bit of a different reputation. They were seen as a “backdoor” to the public markets, and typically didn’t perform as well as companies that went public through traditional avenues.
But of late, they’ve been the next buzzy investment option, with everyone from SoftBank to Shaquille O’Neal sponsoring a SPAC.
For some healthcare startups, SPACS can be an appealing option as they can raise more funding than in a later-stage round and can negotiate their valuation with more certainty than a traditional IPO, Ernst & Young SPAC Co-Leader and Partner Alex Zuluaga wrote in an email.
Like with Hims, other startups have cited the firm or individual sponsoring the deal as the reason for choosing to go the SPAC route, as more well-known VCs or industry executives launch their own blank-check companies. For example, last year, former Livongo executives Glen Tullman and Dr. Jennifer Schneider worked with General Catalyst to form a SPAC to take a healthcare company public. Hundreds of SPACs are being underwritten by Jefferies, Cowen and Cantor Fitzgerald.
Even crossover investors, such as RA Capital, which invest in both privately held and publicly traded companies, are spinning up their own blank-check companies.
“Each one of the top 15 crossovers have a SPAC. We are seeing a number of venture firms that are very traditionally private-company venture-backed-focused that have raised their own,” said Jonathan Norris, a managing director with Silicon Valley Bank’s healthcare practice.
Of the startups that closed large mezzanine rounds last year, not all of them will be able to make it into the public market, leaving a potential opportunity for SPACs. But as more SPACs are created, there are only so many available companies — or targets — they can take public. A total of 248 SPACs went public last year, 159 of which are still searching for targets, and another 176 went public in 2021, according to data from SPACInsider.
“Everyone who is raising a SPAC needs to find a company or an asset. So there’s competition there,” he said. “The available pool feels like it’s really big right now. But as these deals get announced, how does that affect things?”
In some cases, this can culminate in a “SPAC-off,” where multiple SPACs compete for a company to see who will offer the highest price for its shares.
The exuberant dealmaking, along with a booming IPO market, is also affecting early-stage investors. In the last two years, prices before a series A round closes have increased 25%, said Austin Duke, a senior venture associate with UnityPoint Ventures.
“As an early-stage investor, we’re not writing checks and expecting exists in the next year or two,” he said in a phone interview. “Every day we have to ask ourselves… do we expect this trend to continue or are we in a bubble that’s about to pop?”
Dilution and deal structure
It isn’t just the sheer number of deal-seekers that leads some investors to look at SPACs with a careful eye, but also the way the deals themselves are structured. In most cases — though not all — the sponsoring company gets a 20% stake in the SPAC.
Investors that buy shares of the blank-check company, which are typically priced at $10, also get a free warrant. So, even if they don’t like the target company that the SPAC is taking public, they can redeem their shares but keep the warrants and rights. To offset this dilution, private companies seek a higher purchase price as they negotiate the merger, said Michael Ohlrogge, an assistant professor at NYU Law, who recently published a paper that found most SPACs see their share value drop by a third or more after the merger closes.
“It’s easy to see why sponsors would want to launch them — if they complete a merger, they get a large amount of money. Investors don’t have much risk. … Most just exit before the merger,” he said in a phone interview. “SPAC mergers are consistently good for the sponsors, for the IPO stage investors who get out before the merger, and for the target companies. But they’ve been consistently bad for investors who own past the merger.”
SPACs also have a little bit more regulatory lenience than traditional IPOs in some respects. For instance, they have lower liability risk for mistakes or omissions made to investors in IPO disclosures, and also more flexibility to share future earnings projections, which can make a deal more attractive — especially with pre-revenue companies.
Will the SPACs of 2020 and 2021 do better than their predecessors? So far, it’s too early to tell.
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 Research, and now an investigation by the SEC, insurer Clover Health has seen its stock drop from $15.90 on Jan. 8 to $9.71 on Thursday.
“For the past 10 years, every single year, SPACs have done terrible post-merger. It seems different this year — is it a blip or will prices fall down?” Ohlrogge said. “If you’re a company looking to go public, you’re going to get a lot of money from a SPAC. The question is if that’s going to be sustainable.”
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