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Hello, Limited Partners. Today, we have a very requested episode, a primer on SPACs, or Special Purpose Acquisition Companies, with Kevin Hartz and Troy Steckenreiter.
As folks who have been following the recent news know, Troy and Kevin have a SPAC of their own called One that they just brought public last week. It's a $200 million SPAC. We won't do Kevin's full bio since you likely just heard it in the Eventbrite episode, but Kevin Hartz is a part of the PayPal mafia, having invested early in PayPal and also started Zoom with an ex, an international payments company that IPO'd.
and would go on to sell to PayPal in 2013. He's the founder and first CEO, later succeeded by his wife Julia on Eventbrite, where he's now chairman of the board. He is also an investor and advisor to Pinterest, Uber, Airbnb, Trulia, Thumbtack, Gusto, and many more. And most relevant for this episode, of course, the recent proud father of one of the many SPACs that are out there. And I think we'll talk about how this landscape is quickly evolving.
Troy is Kevin's co-founder on their SPAC1. Troy was most recently the COO at real estate startup ZeroDown, it's a YC company, and was the director of capital markets at Opendoor before that. He
He has a former private equity and consulting background from Bain Capital and McKinsey. Welcome both of you and thanks for joining us. Great to be here. So the very first way that we're going to start this episode, other than talking about Kevin and Troy's SPAC,
and sort of getting into a lot of the analysis of why this is happening right now is we want to sort of deconstruct it and talk about the mechanics because I think a lot of people have read things like blank check company or you understand that there's a lot more of them now than there were before or you might even understand it's a reverse merger and it's an easier way to go public because the sort of empty shell SPAC merges with the company that has full-fledged operations but like how the heck does that all happen?
And the very first thing that I'll say is if this is interesting to you, we've put a link in the show notes. John Luddig has a Substack piece that goes through the mechanics that I know both Troy and Kevin weighed in on and helped look over before publishing. So it's a great piece. If you want more after listening to this episode, you should go check it out.
So I thought a great place to start is to talk chronologically about a SPAC and then the steps that it will go through to eventually bring a currently private company public. So Kevin or Troy, I don't know which one of you wants to take this, but take us through sort of what's the very first thing that happens to form a SPAC?
Well, I'll let Troy take this because he's the professor. He's really the SPAC professor and will give those kind of technical details and give them to you in a very simple and straightforward manner, which we all kind of scratch our head. What is the SPAC thing? So, Troy, why don't you take it away?
Sure. Happy to, Kevin. And I think you oversell my knowledge of this. Happy to explain it to those listening. So the process of a SPAC begins with a sponsor team deciding to do it. It's actually relatively easy. You then hire your attorneys and your bankers, and those are kind of the biggest selection decisions to be made.
Once you do that, you begin drafting an S-1. That can take anywhere from two weeks to a month or longer. And then you submit that S-1 to the SEC for review. Typically because these are relatively form documents, because at the end of the day, you're just raising a pool of money, you tend not to get too many comments or delays there.
Once the SEC is done with its review, you then publicly file it. And you'll see those publicly filed S1s pop up more and more these days as different people announce their SPACs. You then begin a roadshow and discuss it with investors. And then you start an IPO, very similar to traditional IPO. You build a book of investors and then look to fund it from those investors as they purchase into the SPAC. Which
What's a little bit distinct here is unlike primary capital that would normally go to the company's balance sheet to be used for general working purposes, with a SPAC, the IPO proceeds all go into a trust account. And that trust account is held unaccessible to the sponsor management team for the future deal. With the closing of the IPO, the management team is put on the clock. Typically, it's two years to find and consummate a merger transaction.
If they don't do that transaction, if they don't complete one, that money is actually returned to the original investors. And so that trust structure really has helped de-risk SPACs for the broader investing public because they have that ability to get their money back in a way that other investments don't really provide. Just to make sure I fully understand up to here.
So you don't raise the money in, let's say it's a $200 million SPAC. You don't raise the $200 million from investors before pricing the IPO, right? You talk to investors, you get a sense of demand, you quote unquote, build the book, and then you go public. And that's the point at which all of those investors actually invest into the SPAC on IPO day, much like they would in any normal IPO. Yeah.
That's exactly right. And so the other thing, too, to keep in mind is that pricing in a SPAC is a little bit different. Unlike a traditional book building process for an IPO where talking to investors sets the price, with SPACs, market convention is to go out at $10 a share or $10 a unit.
And so to some degree, what you're doing when you're talking to investors is making sure that you get to have an investor base you like and that will participate through the D-SPAC transaction. When we did our SPAC, we looked to find strategic partners who could be helpful in potentially pipe transactions on the back end and help us think through potential investments. It's not like a traditional IPO where you just look for the highest price possible because, again, almost regardless of demand, you're going to go out at $10 per unit.
And you say pipe transaction on the back, and I know we'll get there, but just for folks who are sort of wondering what that is, when the SPAC reverse merges with a company that it sort of brings in and then relabels the whole thing as the big unicorn-type company that it acquires, it's the SPAC's money plus the enterprise value of the startup plus additional new money from investors in the form of a pipe or a private placement into a public equity that adds... Private investment into a public...
entity. Is that right, Troy? I think it's public equity. Darn it. You were right. Sorry about that. But I'm not 100%. Anyway, there's this third piece that you need to sort of know is coming later down the line if you've done your job right of working with the right set of investors that on top of the SPAC, the entity that you've raised money for and taken public, you're going to hopefully get
effectively leveraged equity or more, and Troy, you can browbeat me later for using that term, you can raise more money in the form of a pipe to be invested along with the SPAC money into the newer combined company.
That's exactly right. And we can touch through the benefits of that pipe structure in a little bit if you want to cover it then. But I would say, as it's relevant to the IPO process, it does help you just think through what investors you want to participate and partner with. And we really did kind of take that partnership mentality as we discussed this with various investors. Historically, SPACs were much the domain of the merger ARB hedge funds. Because there is a warrant embedded in the traditional IPO offering, there are opportunities to kind of ARB the warrant against the shares. And so,
You're seeing a transition away from those type of ARBs more towards long-only investors who really view the SPAC IPO as a way to get a foothold and to start building a relationship with the management team. Again, with the hope of really partnering on the pipe on the back end. It's like a price of entry. People invest in the SPAC so that they...
are the one of the lucky few who get the placement of the pipe. I think that that's kind of the way that people view it now. And again, I think, you know, it is about kind of building that long term partnership. And to some degree, people who really like, you know, investors who like the sponsor team are excited to back them on both the SPAC IPO as well as in the pipe. I should point out, though, that a great majority of the long only fabled brand name investors like a
T. Rowe Price or Fidelity or Wellington or Bailey Gifford have yet to cross over, Capital Group included, have yet to cross over where they do invest in SPACs. And the reason is, is their charter is to focus on a company with real fundamentals and metrics. And the pipe doesn't have that. Now, we think that will change as this
legitimizes and comes into the mainstream consciousness because of the notion that this is a great way to get into effectively an IPO and build a position in a pipe which right now in the traditional IPO market the supply is so constrained to few companies going public with very little allocations.
And just to maybe clarify something that Kevin said, these traditional long-only funds, some of them, as you mentioned, don't have this mandate to invest in the SPAC IPO upfront, but they do typically have the ability to invest in the pipe on the backend.
Is it fair to say maybe that like, because SPACs have been around for a long time. I mean, gosh, I remember being an investment banker on Wall Street in the mid 2000s and SPACs where we had a SPAC group and, you know, as did every bank. But of course, they've come back into vogue in a big way now. Is it fair to say, Troy, it sounds like if I'm hearing you right, SPACs used to really be like about merger arb and a...
tool in a transaction. And now it's moving more towards not a fund, obviously, maybe a search fund is more the appropriate analogy, but a relationship with
a management team that you hope and expect to be long-term and potentially across multiple companies and transactions. Is that kind of a fair characterization of what's going on now? I think that's absolutely right. Historically, SPACs really were kind of, as you might remember back from your banking experience, a little bit of a backwater, very much a four-letter word, typically not targeting the best companies and not always run by the best sponsors.
I think what you've seen is that really shifted over the past, call it 10 years. You know, you've seen much more experienced sponsors get involved. You've seen much more kind of experienced banks and traditional banks get involved. You know, the league tables now are dominated by the Goldman's and the UBS's and the CS's of the world rather than some of the smaller banks. It warms my heart for you to say UBS as a lead banker, as a UBS alumni myself. Yeah.
So the quality of the sponsor teams have changed, the quality of the banks have changed. And I think the quality of the targets has really changed as well. To some degree, a lot of the original SPACs were almost public LBOs. You know, they were used as a proxy for that, where the sponsor would come in off of the private equity background and kind of run the private equity playbook on a really high debt loads approach.
on top of the SPAC in transaction, and a pretty healthy carry in the form of the promote. And I think what you're seeing now is more of a shift as certainly what we're hoping to do is make it more of an alternative to an IPO rather than an alternative to an LDO. Because we think it offers a number of benefits to technology companies to get into the public markets, but we really view it as
That's what our competition is, is much more of the IPOs or direct listings versus kind of a standard private equity debt-laden transaction. And I'm going to keep serving as translator here to myself before I read a bunch about SPACs. So when you say LBO, that's, of course, a leveraged buyout for anyone who's read sort of the like Barbarians of the Gates. That's sort of what you're referring to there. Okay.
The other thing that I want to quickly define is, Troy, when you say ARB, can you talk about, of course, what that's short for, but what it means in the context that you're using it? Sure. So, you know, when we talked about the SPAC IPO, maybe it's helpful to kind of start with what the person actually is buying in that IPO. It's a little bit different than a traditional share. So in a SPAC IPO, what the IPO investor purchases is actually a unit. And that unit consists of two things. One is a share and one is a warrant.
And so the share allows the investor to participate in that new company. And that share is also redeemable, as I mentioned, for that original kind of $10 investment. So they get their money back on that kind of if they choose not to participate in the deal or if the sponsor doesn't find a transaction.
They also receive a warrant. And this is, again, a place where you've seen trends kind of really evolve in the market. Historically, the unit consisted of one share and one unit. Then it moved to one share and about a half a unit. Now it's closer to one share and a third of a unit. And we actually just priced this week at a share and a quarter of a unit.
So really kind of driving down that cost of capital. And ultimately, that's the way we view it. And the reason that your listener should be thinking about that warrant coverage is it does impact dilution if the company performs. Because these warrants kind of remain outstanding. And so even in the event of the transaction going through, those warrants will potentially convert if the company trades up post-demerger.
And so by driving down the number of warrants outstanding, it really just does reduce the total amount of dilution that the demerger entity will have.
And if for anyone listening this who works at a tech company and doesn't has never heard of warrants before, you can kind of think about it like a stock option, but for the investor instead of the employee. So like the fact that the investor is getting a share in the SPAC and they're also getting one warrant for every four shares that they're getting, it's sort of like they get this option later to purchase. I assume there's some strike price, but purchase additional shares at
a strike price later on if the company is going well. So if you run an upside scenario and a downside scenario, in the downside scenario, the investor never exercises the warrant and doesn't lose any money. And in the upside scenario, it does create that dilution for everybody else on the cap table.
Yeah. And those warrants are actually relatively long-term. So it's typically a five-year warrant, which again, if you think about kind of a traditional call option that you might buy in the public markets or on Robinhood, those long duration warrants or options tend to be pretty expensive. And so it is kind of a nice benefit to the IPO investors to get that extra sweetener. But at the same time, it does create that dilution for the eventual partner company. And so a lot of the SPAC's goal is to kind of balance those needs
between what a quality investor base wants to participate in the IPO and what the partner company wants from a dilution perspective for the demerger. Of course, you mentioned dilution. We'll get into this in a minute. But if you're going public in a traditional IPO with an investment bank, they're, of course, taking their fees and their equity allocation. So I imagine a lot of this is also a big portion of it is the trade-off in dilution between these various paths for a company to get public, right? That's right.
So Troy, going back to arb, so can you talk about how you were using that word a couple minutes ago?
Sure. So again, SPACs used to be a little bit more of an investment backwater. And so there were some interesting trading strategies where a hedge fund could buy the unit and potentially sell off the warrant, or depending on where the shares were trading, buy or sell the warrant and buy or sell the shares if there was a mispricing. Because those instruments are fundamentally linked, the share offers upside in the company, the warrant offers upside in the company. And so you can imagine that as both trade, there may be some...
dislocations that result in one being cheaper or more expensive than the other. But because they are economically linked, there is an ability to arbitrage the difference. Awesome. I had lots of confusion. And so thank you for bringing that. I now get it.
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Chronologically, we've gone through the point where there's soft conversations that happen between a SPAC sponsor and a potential investor base. They sort of have an idea of how much they want to raise. They decide to submit the S-1. The SEC reviews that. The IPO happens and the pricing happens, which of course is really silly because almost every single time it's, "Hey, it's 10 bucks a share because this company doesn't own anything, so let's just keep it at a value we all sort of understand that's similar to all the other SPACs that are doing the same sort of thing."
The thing that's different is, of course, what you mentioned, the warrant coverage. So the SPAC that you're running is only asking for one warrant for every four shares instead of every three or two. So you could think of this maybe as margin compression, whereas more and more SPACs come into the market.
and the economic shift to being more founder-friendly or company-friendly, that there would be pressure on SPACs to take less economics as those companies would have more and more options for who to go with. This is where one is right now. As you guys have just IPO'd, you have this, I think it's $200 million in a trust. What happens from here?
So it now begins basically a traditional search process that looks very similar to a search fund, as you mentioned, or kind of a growth equity or private equity firm, where we now look to partner with a great company, do a standard kind of diligence process, and then ultimately make a bid and go through the demerger transaction with them, resulting in them ending up as a public company. It's a 24-month clock, and that's, again, kind of market standard. And
You know, the traditional transaction with a company can take anywhere from three to four months by the time you include the SEC regulatory approvals.
We compare that, though, to an IPO, and we can talk later about the advantages versus the traditional IPO. But, you know, the traditional IPO is a six month to 12 month process. And so because of the merger structure, it is a little bit faster than the alternative. It's also just less disruptive to the company because you don't have the publicity and the leaks and, you know, the financial advisors and realtors calling your employees.
in the same way. It looks far more just like a growth equity round where it's very much between the management team of the sponsor and the management team of the company. You know, it can be done much more quietly, allowing the rest of the company to focus on their business.
Because the SPAC is already public, right? The SPAC is already trading. So you've already gone through making the book, making the market. It's all out there. It's all liquid. It's all trading. The company doesn't have to go through that, right? That's exactly right. Okay. How many targets do you identify at this point? And then how do you start narrowing it down? This might be more of a Kevin question.
Well, to start off, we want to change the lexicon of SPACs because it's just as tasteful in many ways. And the conventional term target sounds like we're out to assassinate somebody. So we're changing the lexicon. Well, it comes from the LBO world, right? You literally are targeting a takeover in that scenario. Yeah.
That's exactly right. And that's where it needs to change. Just one of the many areas is where you're looking to find a partner company. You're not looking to kidnap or assassinate. You're looking to find a partner that we would like to work with, that a SPAC should be working with for the long term as a partner equity holder, just as a TRO or a
Fidelity or Wellington or any of these other very long public, long-only investors. The SEC prohibits looking for partner companies before in building a list and having conversation or actually really more having those direct conversations with a potential partner company before going public. I think we still have
24 hours or so based on the fact that we went public yesterday. We have another 48 hour waiting period and then we can start reaching out to companies. But we do our homework in the background before then.
What's the purpose of that, Kevin? Is it that the SEC wants to avoid people being out there claiming like, oh, yeah, we're going to have a SPAC and getting a company all spun up that this transaction is going to happen, but then they don't actually raise the capital? Because it seems pretty draconian. What other business plan would you start a company and not talk to customers beforehand? Yeah.
Well, the notion is it's supposed to come out with this neutrality. And I don't know the origins, perhaps Troy does, of why this evolved this way. But the idea that you could just launch and on day one say, here's our deal, is somehow frowned upon by the SEC. Troy, perhaps you have some insights on the history of this.
Yeah, I mean, I think it really comes down to the purpose of a SPAC is this idea of this blank check acquisition company. If you knew that you were going to buy WidgetCo, then WidgetCo should just IPO and be required to do the standard S1 disclosures. And so I think what the SEC is very conscious of is, you know, if you have a pre-agreement with WidgetCo that the SPAC is going to take it public, then the SPAC should have to disclose that and WidgetCo should do all the standard S1 disclosures publicly.
It just looks too much like a backdoor IPO. Whereas the whole point of a SPAC is that you're raising, the sponsor's really raising a fund or a pool of capital to go invest on behalf of the public market investors. And so can't have an idea in mind. Again, otherwise it should be disclosing that to investors because the public market investors in the SPAC obviously have a right to know if there is an agreement to go buy a specific company. Yeah.
The point is you guys should be more... Look more like Silver Lake and less like a backdoor IPO vehicle. It's a private equity fund of one. No, that's exactly right. And maybe if we hearken and talk about the name...
Our parent company or our sponsor company is called A*. It's merely an A and an asterisk. And it serves two purposes or it has really this dual definition. One is that that's a 1968 developed search algorithm out of Stanford University. And so it's a shout out to our geek cred that we're really focused on the technology sector, the innovation economy.
Only we're not going to go after oil and gas or anything else. We've been born and bred here in the valley. We have these deep relationships, thus a star. It's also the algorithm is the optimal path to the truth or the answer. And that's really what we want to find that great enduring business.
And then our first vehicle, which is akin to, you know, Sequoia Capital will have Fund 1 and Fund 2. Our first vehicle is called 1, O-N-E, all lowercase letters. And so it's not as complex as the ASTAR algorithm, but you can imagine there's after 1, we'll have 2 and 3. We're really in this to build an enduring franchise.
You've earned the geek rad and we're just laughing at the oversimplicity of the fun names. And I guess the obvious then point being much like Sequoia has Sequoia Capital One, Sequoia Capital Two, Silver Lake or Vista or whatever as Vista One, Vista Two, Vista Three. You guys can do the same thing. It's just at a much more atomic level on a...
per company basis. That's exactly right. We really admire investors in franchises like Sequoia Capital, like Benchmark. We want to build an enduring franchise and thus we want to have one, two, three, four, and five and so on in this really interesting manner of one great company at a time. And it reminds me of that notion that Sequoia and others have invested through is you're only as good as your next investment. And that's kind of our mindset today.
We also see this as a sea change.
So you would look at other phenomenon that have been around for decades. I mean venture capital was around for decades before really taking off in the 90s and becoming what it was today It was something that if you were a New York investor in the 60s 70s and 80s and you came out To the west coast and went to the peach orchards of Silicon Valley and started investing it was considered Throwing your career away. This is what Arthur acted. I
Yeah. So Arthur Rock, all the pioneers in this space, Don Valentine and so on. And then we just saw how incredibly important or I'll say fruitful because of the peach orchards of Silicon Valley, how incredibly important it is to our tech ecosystem. So venture into tech had been around ever.
And then we saw 90s, this real takeoff, and then into the 2000s and to where it is today. And the other very interesting attribute about it was that venture, if you recall back in the early days, were these really onerous vehicles where you would get these like 3X liquidation prefs
And you take 50% of the company. Exactly. And that has reformed. And despite having massively reformed and aligned with startups and with technology companies has been so incredibly powerful and moved the world.
to the extent that both sides really benefit, both the investor and that company. I mean, we're in a world today where the innovation economy, just today, we saw Apple hit $2 trillion in market cap.
We see Microsoft and we see Amazon moving towards that direction. What we also saw was a lot of incubators and accelerators, then really Y Combinator getting that right and really helping to build a model that is also really buffered and buttressed the tech ecosystem.
We see SPACs very much the same way. It's been this, as Troy pointed out, and you pointed out, this strange little backwater that has these onerous terms. We're looking to reform it. We are looking to bring the economics in line and not replace the traditional IPO, not replace the direct listing, but really be another vehicle to get into the public markets.
And we think that's incredibly powerful. It can only be done once the sponsor economics are brought in line. They're too egregious now, which is insane. Like I'm a terrible negotiator to just be the first to say that the SPAC economics are way too high. I was going to say, you're still on the tip of the spear here. So you have pretty good economics. What are you doing?
Well, we'll say it out front is we want to Amazonify the economics. We want it to bring in line to be the right cost of capital that is fair to our partner company that we look to join with. And only then will this become a mainstream vehicle. But it will become that. We'll drive these economics down. And you're starting to see this greater legitimization happening already. You saw actually last week
Dragoneer led by Mark Stodd with a $600 million SPAC come out and he has a spectacular late stage investment record. You see the rumors of Mickey over at Rivet Capital with a $600 million SPAC coming down the pipeline.
that's been written up about. So we just see that it's so important to bring this into the mainstream. I'd even liken it to the internet. The internet kicked around as this DARPA project. It then became this thing that had this dark underbelly. And then in the 90s really took off and has transformed, or even Bitcoin back in 2008 to where it is today. And we see the same thing. And it's our job
in the technology segment. It's our role to find new phenomenon. And so why is, you know, Troy, Second Rider, and Kevin Hartz working on a SPAC and not out building companies? Because we see this as a revolutionary vehicle of the future to really change the tech ecosystem and the innovation economy for the better. Get companies out in the public market sooner. Before we sort of finish up the chronological process with Troy, since we've opened the can of worms, Kevin, I want to dive into it. The
Pro-SPAC argument is this is a faster, maybe cheaper, definitely faster way to go public without all the crap associated with it, all the disclosure and S1 and banker stuff and roadshow. And there's even more that we can go on and on about where basically that has in part contributed to the stay private longer era where we've got these 10%
freaking 15-year companies long in the tooth that have just raised so much private capital that there's no money left for people who invest in the public companies to take advantage of that growth. The whole point of the public stock market is if you bet on innovation early as a Joe on the street, you get to benefit from the long-term upside of those companies. And if that's being captured all in the first 15 years of staying private, it hurts the average American. Okay. The bear case is...
S1s exist for a reason, and gosh, it would be kind of bad if there were all these companies running around that were publicly traded that never had to go out with an initial disclosure document and never had to make their case to investors. I assume you think that S1s are laden with over-disclosures at this point because you're like, look, some vehicle needs to exist to make it more frictionless to be publicly traded. But I'd love to get your view on that tension. Yeah.
Well, it's a great question and it's the right question. First is we're being pulled to earlier liquidity. The world is changing. And as you know, in the world of capitalism, the pendulum swings back and forth. So it was John Doerr in the 90s that said a tech company should have six quarters of increasing revenue growth and should be out in the public markets.
The average for so long had been four years from start to launching as a public company. And we've swung... Funny side note, that is why the average vesting period for employees is four years. I didn't know that. That's so interesting. And so now the average is almost 12 years. And as you said, there are these 10 and 15 year companies that just should be out in the light of the public markets.
You know, I said before that the best antiseptic is sunlight. And a lot of these private companies have just developed bad practices through taking round after round of private capital. It loosens the muscles. You're not as responsive. I felt that firsthand and we took so much private capital at Eventbrite that...
Some of our toughest times were really just being a great capital allocator. So there's already the movement happening where companies want to be out in the public markets. And history says that that's the right stasis or the right direction to move towards. It was Microsoft and Amazon that went public. Do you know what their market cap was at their IPO? It was like $400 million. That's correct. $400, $500 million for each company.
And now they have, what, a trillion and a half in value. Well, that obviously didn't hurt those founders or hurt those businesses. They gained so much by being out in the light of the public markets. Today, as to your point of...
disclosures and so on, we went through this period of Sarbanes-Oxley that has now hindered the process and the disclosure of more information and being more helpful to investors. You have a quick roadshow where you have to get to know an investor. An investor has to get to know your company in a short period of time in the traditional IPO process.
You also then that portfolio manager making the investment has to decide on something very quickly with limited amounts of information in the S-1 document.
Julia was distracted for quarters in my wife as CEO of Eventbrite and going through the IPO. It was many quarters of work. And the management team is always best spent not fundraising, but best spent building a great company. So that's another the speed aspect. The disclosure aspect is there's an S4 and that's that merger effect.
And that actually is a point that companies can disclose an immense amount of information, far more than you can with this one. This is when doing a SPAC, a de-SPAC process. This is correct. So the SPAC has raised, say, $200 million as our ASTAR vehicle one has.
And as we find that perfect partner company in D-SPAC, what would happen is that an S-4 would be filed, and that's the merger agreement, which is really just capitalizing that company with $200 million. And it's really around that company itself to then be able to tell
a deep and thoughtful narrative about the business, about their business, to be able to proform out projections, to be able to do all these things, spend the time with investors, to be able to let the investors in an in-depth data room rather than these kind of brief encounters. And so we find it as a far more thoughtful method to get out in the public markets.
So this is going to blend your comment with where I want to take it with Troy is, what do you anticipate a diligence process looking like from here? And then how do you consummate that transaction?
It's a great question. And I would say the diligence process looks very similar to any late stage investor, whether that's private equity or whether that's a growth stage investor, which is a full data room with company metrics and financials. That's access to management and discussions with them. You know, I would assume that we as an investor are going to do kind of standard things like channel checks and customer interviews and supplier interviews and
understand the market for their products and kind of all that traditional investing research. But at its core, I think the big advantage we have is that ability to get that additional information that a private market investor would be used to, to make that decision on whether to invest or not and at what terms. And that's simply just not available to a public market investor given those disclosure issues. And this is things like cohort analysis or future looking financial projections that notably are never in S1s.
Exactly. And we think that that benefit actually has become even more relevant, both given COVID as well as given kind of the technology nature of these high growth companies. On the COVID side, you can imagine that historical financials are less relevant, given the major blip of COVID. And so an investor looking at, you know, the previous two or three years of financials may get less insight from them, I know, in the traditional S1 situation.
Similarly, if you think about a very high growth company, again, looking at two or three years of financials really may not tell that company's story just given their immense growth. And so that's why we think it's actually relatively challenging in a traditional S1 to get those insights. And what we've heard from investors, especially these pipe investors
partners is that they really like the ability to really dig in because before they make a large investment, they want to take that time to do that real due diligence. And so do we. Whereas Kevin pointed out trying to get to that decision in an 8 to 15 day roadshow with just public information and no guidance is really, really difficult. And so that's why we're actually seeing a lot of these
Public market investors really kind of drive the desire to move towards this pipe process because they can get that level of diligence that makes them comfortable. Okay, so take us through the pipe process then. A target has been a... Sorry, I don't want to say target. I know Kevin's shooting daggers out of his eyes. Partner company. A partner company. It's like we're talking to Sequoia here. So a partner company has been identified. You want to merge with them to take them public. What's the mechanics there?
Yeah. So typically you would have done a fair amount of due diligence. You'd have kind of a preliminary letter of intent, probably not signed, but kind of a rough idea as to what the term of that deal might look like. And then you'd kind of go out and try to bring in additional pipe investors and get them interested in it. They probably will do their own underwriting, their own diligence.
meet with management teams, get those forecasts and then go from there. You know, depending on the investor and the opportunity, you know, I think you can bring in pipe investors earlier or later. You know, you certainly could imagine a world where some investors may even want to be involved at the term sheet stage and kind of really almost a co-partner. And you could also imagine a
a later stage investor who just wants to plug in and get an allocation, you know, very similar to the way they might do an anchor order for an IPO. And so you might just look to build the book at the very end. But I think in general, like I said, investors really like this opportunity to do that diligence. And so really do want to get involved in that diligence process before making a commitment to invest in a pipe. Great. And so folks know that when we're talking about relative sizes here, if there's like a $200 million SPAC, so that's money that's already been raised for the SPAC that's sitting in the trust, you
You could imagine going and buying, I don't know how, actually, can you guys talk about the size of the companies or a range of the size of the companies that you're interested in merging with?
The general rule of thumb is that you're looking at companies four to six times the value of the SPAC itself. So in the case of one, that puts us at the $800 to $1.2 billion or right in that billion-dollar sweet spot for just the pure SPAC. And what we've done at one is we've gone against the trend of what's happening right now. In the last 18 months, we've seen this phenomenon of the mega SPAC, of
500 of 800 of a billion and now this four billion dollar mega SPAC we've gone the other way and our
Our intention is to stay and get these companies to market sooner, more around that billion dollar level. Now we can flex up with the pipe, which is really interesting and especially interesting to a partner company that's at a larger valuation. And the reason is, is that our promote does not cover that pipe. So that pipe is a very inexpensive way to raise money. So wait, wait, wait, I got to stop you. You got to define the words you just used because promote...
Like, even for folks who are venture investors who are used to the word carry, promote is going to be new. So what are we talking about here? That's right. The promote is the equivalent of the carry. So imagine if a venture fund invested in a company and had a certain carry out of that, but it wasn't all from that venture fund. It'd say it came directly
Well, that's not the best analogy, Troy. Well, the mechanism is the warrants, right? Those extra warrants you're getting. It's actually, let's let Troy jump in here and really explain this the right way. The sponsor promote is really comprised of two items. One is that the sponsor buys warrants, and these warrants are equivalent to the public market warrants with the same strike price and term and all like
all those similar terms. But the real value is traditionally in what's called the sponsor or founder shares. And what that is, is that 20% of the SPAC value on a post-money basis is given to the sponsor for arranging the deal. So on a $200 million SPAC, that's $50 million. On a $400 million SPAC, that's $100 million. And again, the reason that that number is slightly unusual is because it's on a post-money basis.
rather than the $80 million you might expect for a $400 million back. So did you hear that? We had our org meeting with Goldman Sachs on June 18th,
And we filed on June 30th and we brought our SPAC into the public market yesterday, which was August 18th. So 60 days from start to finish, we now have this entity in the public market and consummating a deal, the promote would be equal to $50 million.
And we just think that's a little crazy. Not bad for two months work. Not bad. Well, the hard work is, of course, ahead finding that sponsor company. But a lot of SPACs are not thinking that way. They'll just find any company. Because the other crazy thing about SPACs is, unlike the carry,
If the value of the company goes down, you still get the promote. So think about if your fund, your venture fund. It's not on the profits. It's just on completing the deal. Yeah. And so if you have a $10, these things go out at $10. If it fell to $5, the promote, you'd still walk away with $25 million. Right.
I just don't get it. And so we have to change that because that's just harmful to the company. It's just harmful to the investors and shareholders in this, especially the Robinhood generation that's now really investing in this. And it just attracts people with bad intentions. Do you have provisions in place then to tie the promote to the combined entity performance over time? Right.
Our goal is to work with the partner company to come up with that format. And for against our best interest, we've just told you publicly that we are going to align interests. When you launch your first SPAC, you come out with standard terms, that there's a lot of room to really renegotiate it in any way. What we want to do is earn our keep. We want to actually earn
on how we do it in the Silicon Valley is that you become a long-term shareholder. Like I've had the good fortune of being a seed investor in Pinterest and Airbnb and others, and that value came building over years, not flipping. And then the same way, you know, my cardinal sin has always been selling too early. We want to find a great company and sit there as a long-term shareholder along all these other great investors.
really benefit with the company. And so if I could TLDR what you're saying, yeah, we went out with standard terms because that's what you do when you're new. And we're going to be flexible to work with the right business to make sure we align interests over time. And we're okay with kicking the can down the road on in what way are we going to adjust what deal terms to make that work? That's correct. We did get the warrants down to a quarter, which
is again an unprecedented amount for first timers. But we were many times oversubscribed. That narrative is really resonating with this new breed of SPAC investors as well as with these companies.
Right. And when you say got that down to a quarter, the deal that I was referring to is the deal you will make with the company. And when you're saying got down to a quarter, that's the deal you're making with the investors in the SPAC. So you're saying, look, we found people who believe in our vision and are willing to only take one in four warrant coverage instead of one in three or two. So you're basically saying...
even the deal that we've already made so far, we've got the right people on board for sort of an aligned future. So we're confident that we're going to be able to move the right levers when we have to negotiate with a company too. That's correct. And it is in the best interest of the investor to, you know, we will be as a promote locking yourselves up. And that's really indicating to the market that, you
We really care about the future upside. We're not trying to flip a company. And that's been the greatest ills of the SPAC today. And the reference to the warrant, you know, again, is one component of the dilution to the partner company. The partner company wants the lowest cost of capital. There's a cost of capital going the traditional IPO route. There's a cost of capital to going out in the direct listings. And until our cost of capital aligns
with these other two mechanisms. And right now it's more. But until it aligns and then you have these benefits of the S4 disclosure, being able to disclose, being able to move more information to investors, being able to align on and move quicker to the markets because we have our money raised now, let's say the election comes or let's say the craziness of this disconnect between the economy and the stock market reconnects.
There's never a bad time to bring a great company to the market. And while the IPO window will close, this option of the SPAC will be there of our vehicle one.
And of course, there's the other argument on top of all of this, too, which is, look, if you have a brand like Uber, the IPO process might be right for you because everyone's going to be, you know, let's ignore their performance since IPO, but let's rewind to how crazy excited people were to be a part of this IPO of a company that they've heard of that's grown like crazy, that's been the darling, that's a household brand. Yeah.
you're able to go and take companies public where you're willing to do the diligence, but other people may not have heard of them and that's okay. Like they don't have to rely on that sort of, you know, either fame in the consumer or investor communities because they really only have you and maybe the pipe investors to sort of convince during the diligence process. That's correct. And, and,
The brand name is not there. If it's not there, it's because they're much earlier in their lives. We want to find the Ubers and Airbnbs before they become those household names and help them build with that in the public markets, just as Amazon and Microsoft did at $500 million valuations when they came out into the public markets.
Okay, so a big mechanical question for Troy. So now we're all the way to the end where a partner company has been identified, negotiated an LOI, maybe you've brought in a pipe or not. At some point, I think the SPAC shareholders get to vote on whether the transaction goes through. Is that right? That's correct. So how does that work?
So as part of announcing the transaction, you file what's called a super 8K. It lays out the terms of the deal. This is where you get to actually include management forecasts, provide all the rationale, communicate with investors why we're excited about this deal, kind of provide the terms. But what's unique about the SPAC is that the SPAC investors get to choose whether they want to participate in that deal and effectively roll over their shares into the new entity, or if they want to redeem...
and get back their original $10 per share. That's kind of a unique opportunity that these investors have that really doesn't exist in any other type of investment format. It almost be as if an LP and a VC firm got to decide whether or not they wanted to do a specific deal after that deal was announced.
It's a very rare structure. And again, I think this is why we've seen SPACs become more and more mainstream is because that is a tremendous protection to the SPAC investors. They have that ability to get their money back. And so that really can give confidence to investors that if they don't like the deal for whatever reason, that they can redeem.
That said, redemptions historically have been very, very low. And especially for most deals done recently, if the deal is done well and people are excited about it, the stock will trade up and the SPAC will trade up and so you'll see very little redemptions. Hmm.
And so does that vote happen as a group or like if let's say I'm in for five million bucks of the 200 million that you guys IPO with and other 195 million all likes the deal. I for whatever reason, I'm like, you guys, I don't I don't like this company. Can I just choose not to participate, get my money back, but you guys still go do the deal? And where's that break point of like how many of those shareholders have to agree?
That's a great question. So there's two things I would highlight in response to that. The first is absolutely you can redeem your 5 million in that example. But the reality is, is that if the market is excited about the deal, the SPAC will likely be trading above $10 per share, in which case you wouldn't look to redeem your shares, you would just sell them because you'll make more money that way. And so your 5 million is taken out, but someone else has now basically put in their 5 million. And so the SPAC has the same amount of proceeds.
The second way that people solve this structurally is oftentimes one of your pipe investors will effectively agree to backfill any redemptions. And so in your world, you know, let's say we had a hundred million dollar pipe partner and you redeemed your 5 million. They might agree to invest an additional 5 million to kind of top us back up, you know, so that we would still have the same amount of total capital being provided to the company. Got it. Okay. That makes total sense.
So the cost of my free option, so if I'm lucky enough to get solicited by you guys to participate in your initial $200 million capital raise, the cost of my free option to participate or not participate in this later company, this later deal that you're going to do is basically what? Like, why wouldn't I do this? Yeah.
So the cost is really the opportunity cost of your fund. So again, the money is put into a trust account. It's invested in roughly six-month treasuries, which obviously have a relatively low yield right now. But again, if your alternative is traditional cash, it's actually not a bad deal because you are getting that free upside, both with respect to the shares at the conversion as well as respect to the warrant. So it is providing kind of an interesting opportunity
certainly not a cash interest alternative, but does provide kind of an interesting cash management tool that does give you that kind of optionality, especially in this low rate environment. And because the SPAC price will trade around based on what the market thinks of deals they think you're looking at, or that once you announce things you are looking at, you could also make returns just trading on the SPAC, right? Yeah.
Absolutely. You find a partner company, you do a transaction. What does the cap table of the company look like at the end of this? And the board.
And the board, yeah. Because you guys don't become co-CEOs of the company. You're not Kevin and Julia this time, right? That's exactly right. So think of it just as any other financing. If there was a $200 million investment in a post money of a billion two, it's just like an IPO, just like any other fundraising round. And
When we talk about long-term partnership, that is as shareholders, our focus is around great founders that are going to stay in the seat for decades. We're not there to replace or rip and replace. We have a board of directors. It's a phenomenal board of directors. They're mostly here to help us find those great partners. But as the spec dissolves, once the financing is complete,
The company is still in charge and it's up to their discretion of how to build their board and who runs their business. Now, there could always be this serendipitous case where a board member on our board might be a great independent board member for their board as they're going through the public markets. And we have a really incredible range. We have Pierre Lamond, who was the co-founder of National Semiconductor.
Yeah, OG. Yes, total OG. And he was mentored by Gordon Moore, joined Don Valentine in 1981 at Sequoia Capital, remained there for a number of decades. And then we have Lockie Groom. I don't know if you've met Lockie. Now runs a fund, a venture fund in the Valley, but he had started two companies as a teen and he had...
been one of the first employees at Stripe and grew up through the ranks there. And now at the ripe age of 26 with this fund, we claim the widest age disparity in the public markets and perhaps of all time. It's approaching 65 years between Pierre and Lockie. We have Michelle Gill. Pierre's in his 90s, right? Pierre's just turning 90. I don't know if he'd allow it. He might have to have that bleeped out. But he's as sharp as ever. He was a mentor to me during...
XOM, Zoom, the money remittance business and very helpful, incredible mentor to me. So we also on our board of directors have Michelle Gill, who's the EVP over at FinTech Leader, SoFi. We have Gautam Gupta, who was for many years at Uber
an acting CFO at Uber before joining Opendoor as an executive. And then we have Tarina Speer, who's this incredible founder who started a company called Figs. And she started with very little capital. It's now doing a quarter of a billion dollars in revenue, growing triple digits with 50 million in EBITDA. So great operators, great executives. And they're out there working with us to find those great companies of tomorrow.
So that brings up a good question of, so there's a bunch of SPACs coming out. There's going to be this sort of, there's a market for any company that's decided they're going to consider a SPAC as their path. So how do they decide? I mean, surely there's economic terms, which is, look, our $200 million is going to either take...
10, 20 or 30% of your company. There's other sort of alignment terms around when you're going to get your incentive pay or not and how tied to the financial performance of the company that is. But is there other vectors to sell on? Do you sell on the vector of you get to have this person as your board member instead of someone else? Well, the operators of these companies
have options and they can go the traditional route of an IPO that's not going to raise. There's the growth of direct listing. You can take another private round, but they should be looking at the SPAC as an option. And
those different attributes of how the cost of capital can be lowered getting to the market quickly being able to disclose that having access to Our board of directors and the reason you have a board of directors on the SPAC is that it's NYSE requirements or Nasdaq requirements is to have a certain number of directors we just expanded because we wanted to show that again, we're for technology and founders and operators by technology operators and founders, but they have all these
accoutrements or these benefits, and they can make their own decision of which direction to go. We think we have a quote unquote superior product, just as any other company in the Valley needs to differentiate. We think we differentiate on all those points. I mean, it's probably not at all different from you're raising a growth round. You could take
money or you could take a CO2s money or T-Row or, you know, Excel's growth fund or the like, you're differentiating in the same ways, right? That's exactly right. And we've actually done our kind of tour of the Valley. Uh, of course it's been a zoom tour of the Valley of just talking to all the GPs at these different funds and, and talking to them and doing these kind of
informational seminars. One of our key performance indicators of... It's like a reverse roadshow. It is a reverse roadshow. Well, we're actually not just really out to promote ourselves, but really to talk about this as a new phenomenon and to make sure that all the funds understand these, because these are the discussions the CEOs are bringing this up in all their board meetings, is
What is the SPAC thing I'm being approached? But more importantly, this is a really interesting option. I see how this is taking shape. And so they have those questions. One of our key performance indicators for success is whether or not we as an industry can flip Bill Gurley. He's the big proponent of the direct listing. And we're working on him, a number of people working on him to bring him over to the SPAC side.
I love it. Love it. Well, you can definitely both agree on traditional IPOs, a suboptimal route. It's a route. It's fraught with challenges. Sarbanes actually has made it difficult. It's very finicky, the market openings and closings. But we still had a great experience at Eventbrite. I'm not going to say that it is this great.
super evil piece. We had a great experience with Zoom, the remittance business, going public in 2013, and a great experience with Eventbrite going public in September of 2018, the traditional way. But there's certainly a lot of the IPO pop that we saw, leaving money on the table that way. The
tied hands with a lot of the regulatory overreach. These are all reasons to take a close look now at the SPAC and why it will emerge in the future as a mainstream vehicle to get our innovation economy companies out into the public market sooner and really flex their muscles there.
So you're public now on the New York Stock Exchange as A1U. Can I buy it? Like, can I go and trade the stock? Yes, absolutely. You know, I don't think we can officially solicit investments, but it is a factual, it is a tradable security under A1. It will trade as a unit, which means the shares and the warrant will trade together for the first 52 days. And then you will be able to buy one or the other or both after that.
I see. And so in a traditional IPO, in all likelihood, I'm getting a better price if I get to buy the night before in the IPO, then then the next morning when it's already popped. Is there an advantage to being a part of that initial 200 million raised versus me coming in as a retail investor later trying to buy it off of one of your your lucky early investors? Like, is there an advantage to them for buying early?
I mean, they obviously buy in at $10 a share, but you don't see the kind of same pop that you might see in other IPOs. To some degree, there's an anchor because of the cash account. You also don't see it typically decline much below $10 because of that cash account. So it kind of works on both sides.
you can right now get very similar purchase and cost basis as what an IPO debt. It's really interesting because I think I could maybe point out, you know, to invest in, say, Mark Stodd's Dragoneer SPAC. Who wouldn't want to invest along Mark Stodd? How often do we have a chance, you know, no retail investor can be an LP in his fund. And this is a person that
You know, invested in Airbnb and Uber and Etsy and all these companies and has been insanely successful, was insanely oversubscribed. And now you have the opportunity to invest. And I just feel a strong set of confidence that given his portfolio and his performance, he'll have a great SPAC in mind. I feel like I need to get off the phone and get on to Robinhood. Yeah.
and buy some shares. So you're making a bet on a person who's an extraordinary, you know, in the case of Dragon Air, he's an extraordinary investor. That's where I ultimately wanted to take this is like, I've been thinking about buying some shares in various SPACs. Like, is anybody doing an index of SPACs? And if so, is that a good idea of pre-merger SPACs? Wow, that's a great idea. I hadn't really thought of it. Troy, what do you think of an index of SPACs?
There have been rumors that a couple of people have been working on ETFs for this, but to the best of my knowledge, there really hasn't been anyone who's launched a SPAC-focused investment vehicle. I think there's a fund out of Canada that it's one of the major strategies inside that fund. But in general, no, there's not been a great fund that's come out and made this easy, kind of that lets you buy that basket of SPACs, at least not that we're aware of. We also need a tech crunch for SPACs as the industry emerges. So we've been talking to journalists. ProRata isn't enough for you?
It's getting there. Yeah, there's a few. You should splinter off a SPAC-only podcast. And then you should have an acquired SPAC. So there's the two of you. You could put together a SPAC in 60 days and you interview all these great companies. Why not? You two sincerely understand businesses and the innovation economy at the core. So this is our goal is to be the Johnny Spackle seeds of this industry.
And don't get us started on SPAC puns. I was hoping that name would come out. Well, David, anything else that you think we should cover on this SPAC primer? Well, the kind of last question I want to ask is kind of bring it back all full circle and in some way, not directly, but correspond with the Eventbrite story. It's been my view for a long time that
You know, there are many reasons why companies stayed private longer over the last 10 years. But certainly one of the large reasons of that is the...
capital needs on the capital provider side, like people, whether it was venture funds, raising growth funds, or whether it was hedge funds coming into the market, or whether it was sovereign wealth funds directly and soft bank wanted to get capital to work into companies. The way to do that was via private investments in, in,
fast-growing technology companies. And so all of a sudden, you can raise $200 million in a round in the private markets, and thus people do. Is a net outcome of all of this, that will still be the same? It'll just now happen in the public markets as it should? If a company merges with a SPAC to go public, it doesn't prevent them from raising more money either via future pipes or some other vehicle in the future, right? Yeah.
That's our opinion and belief that there's so many diverse capital sources in the public market that you in fact had so many late stage funds come in and try to access these companies or crowd out the public market investors in a sense. And in the case of the soft banks cause real challenges to these companies in doing it, losing sight of governance, losing sight of good capital allocation. And that's what the public markets are there for. And that's why you have
Apple at $2 trillion. That's why you have Microsoft and Amazon and Google. The values they are is because they were able to compete in the light of the public markets and run contrary to this old belief now that – or this conventional belief that companies should stay private for as long as ever. Now, it's not unequivocal. There are some companies that would just not be who they are.
And if they'd gone public earlier, but it's certainly the case with most of what I'm seeing.
All the better, right? Yeah. Price discovery alone and just seeing a range of investors and seeing a range of options. Again, like Eventbrite, I don't think would have, well,
Well, I know Julia would have found a way, but with the COVID black swan event and how our revenue in March went to zero and even negative with the refunds, not having those public markets, if we were in the private markets, it would have been incredibly difficult. But we had so many different – we had debt options. We had private converts, other types of pipes.
so many hundreds of options of investors that you wouldn't have in the homogenous, very narrow kind of conventionally thinking. Growth investors don't invest in non-growth. If you were in the private markets and this was happening, you would have been staked at a valuation and it would have been very hard to get capital into the business and
at a now appropriate valuation given what had happened. Without all the anti-dilution clauses and everything kicking in and destroying. That happens automatically. That's exactly right. It's a great point. Now, we saw value loss in the market, but we were able to shore up our balance sheet. It was dilutive, but we're here to fight another day, and Eventbrite will be there. When COVID hit,
eventually lifts. We don't know how soon or later that is. I'm not going to try to be an armchair epidemiologist, but we are fully capitalized and much more efficient to do so because of the public markets.
Awesome. Well, Troy and Kevin, we're going to let you go. Thank you so much for jumping on with us today. Is there anywhere that you'd like to point out publicly or just email that listeners can find you on the internet? Yeah, no, our website is a-star.co. And that's probably the easiest way to find us. I'm going to give out my email. It's kevin at a-star.co.co.
And Troy is the same. He's Troy at the dash star. And can I give out your cell number, Troy? If I can give out your home address, Kevin. Now we're really going to let you guys go. Thank you so much, both. Thank you. Thank you. It was really fun. Great. Thank you.