Last year, SPACs were coining money, with a record 613 raising almost as much funding as traditional IPOs in 2021 domestically. But the hot market, generated by sponsors seeking fast gains, got saturated quickly. Everyone from celebrities such as Jay Z, Martha Stewart, and former president Donald Trump to investors and business moguls got involved.

Now, barely a year later, hundreds of sponsors are struggling to lock down target companies for a merger to meet their fast-approaching deadlines. Of the 680 SPACs currently active, only 119 have live deals in place, leaving 561 without target companies as of September 12, according to SPAC Research, a resource for information on special purpose acquisition companies.

Among the more high-profile strugglers is Digital World Acquisition Corp., the blank-check acquisition firm that agreed to merge with Trump's social media company.  DWAC, which is being investigated by the U.S. Securities and Exchange Commission, failed to close the merger by its September 8 deadline and asked shareholders to approve an amendment to its charter to extend that date by a year. But DWAC couldn't secure enough shareholder support; instead, the company was able to delay the deadline until December 8 by getting a $2.8 million funding infusion. Without shareholder approval, the SPAC is likely to liquidate and return the money it raised in its September 2021 initial public offering.

"Way too many SPACs were formed, creating a big supply/demand imbalance, with too many SPACs looking for too few targets," says Brian Graham, co-founder and partner at Klaros Group, a boutique consulting and investment firm. "In addition, since the bubble of SPACs were all created at about the same time, they all face the same time deadlines to get a deal done."

As a result, SPACs have been desperate to find companies to buy, lest they be required to return money to investors and lose any initial stakes. Most of these SPACs are unlikely to find partners to take public before their 18-to-24 month timelines expire, notes Mathias Schilling, co-founder and partner of San Francisco-based VC firm Headline.

What made SPACs so popular so quickly? In a volatile market, SPACs can offer a  less risky form of going public than traditional IPOs. The deals tend to come with a privately negotiated acquisition price, meaning they aren't subject to exogenous shocks that could derail a stock opening in a traditional IPO. They also offer lower banking charges than traditional IPOs because the funding has already been raised; there's a shorter timeline; and investors get to cash out immediately.

So while SPAC may seem tantalizing, and the current market seemingly a prime opportunity to take advantage of desperate investors with large sums of cash, advisers are warning entrepreneurs to steer clear all together.

Most SPACs fail, badly.

In a SPAC deal, blank-check companies are formed by sponsors who raise capital to acquire a private company and take it public, usually within a two-year time frame. For sponsors, it can be a tantalizing money-making opportunity: 20 percent of the common equity in the SPAC for an investment of approximately 3 to 4 percent of the proceeds they plan for the IPO, usually to cover the warrants. If companies can see huge gains, sometimes several hundred percent beyond their $10 offering price, sponsors see a huge payday, notes Michael Sury, senior finance lecturer at University of Texas, Austin.

That was the case for gaming company Skillz, which went public via a SPAC in December 2020. Skillz's stock opened at $17.89 on its first day, then skyrocketed to an all-time high of $45.55 in February 2021. But a year later, after many initial investors sold their shares, the company's stock only trades for about $4. 

What happened to Skillz isn't the exception, it's now the norm, notes Ryan Cullen, CEO of Cullen Cioffi Capital Management, an independent investment advisory firm. Over the course of 2021 there was a rapid decline in SPAC returns. Of the almost 200 companies that went public via SPAC, 89 percent traded below their initial offering price, and the average return for investors last year was down 43 percent.

"Investor sentiment has turned against the SPAC largely because of their lackluster performance," says Cullen. "But also due to fraud."

Because SPACs offer shorter timelines, usually two years or less, the target companies go through only relatively short regulatory review and approval before going public. Compare this with traditional IPOs, which can be done in six months but often take years of preparation by the company.  When blank-check companies rush to complete deals, multiple issues occur in regard to due diligence, notes Zac McGinnis, managing director at Riveron, a Dallas-based  business advisory firm. The result is stock-drop lawsuits against SPACs filed by investors who say they were misled about a company's valuation.

For example, in 2020 music streaming company Akazoo faced scrutiny after going public through a SPAC for lying to investors about subscriber numbers, and where the company was operating. Ultimately, management was found by the SEC to have "defrauded investors." The company faced two securities lawsuits that were settled for $35 million and it was then de-listed from the stock exchange. 

"With all of these concerns on the table, many sponsors of SPACs have withdrawn their IPO filings rather than lose at-risk capital, which are the expenses that will not be recouped if the SPAC fails to merge," says Cullen.

For SPACs to work, founders have to find the right partners.

But if you're considering a blank-check deal, keep in mind that there's one factor that is the best determinant of success. According to Wolfe Research, SPACs led by "experienced operators," or CEOs with direct operating experience in the industry of the company being acquired, had greater returns on average than those that did not. The research found that just one year out, SPACs with experienced operators averaged a 73 percent rally, whereas those lacking an industry veteran suffered a 14 percent loss. For this reason, the SEC warned investors in March to re-consider putting money in SPACs, especially those run by celebrities.

"It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment," the SEC wrote on its website.

That's why if you're considering a SPAC, don't be swayed by big dollar amounts or celebrity names. Instead, think carefully about the experience that the blank-check company leaders are bringing to the table.

That's exactly what Stuart Landesberg, the co-founder and CEO of Grove Collaborative, recommends. The San Francisco-based sustainable consumer products company went public in June through the Richard Branson-backed Virgin Group Acquisition Corp. II, having raised  $435 million in capital and debuting at a $1.5 billion in value. Though choosing a well-known operator in Branson, Landesberg says he's confident in finding a long-term partner through the merger. 

"I think it's important for founders to look at SPACs beyond just a means to raise capital 
and pathway toward going public, but also as an opportunity for collaboration and partnership," says Landesberg. "When exploring a SPAC partner, consider their values and if they align with the founder company's mission."

The SPAC future is bleak.

Hypothetically, SPACs are not terrible, but they work best in frothy markets where investors are chasing yields at all costs, notes Kyle Asman, managing partner of Backswing Ventures, a private investment fund based in Orlando, Florida. But now, as the market has cooled, investors have had serious concerns about companies that aren't cash-flow positive and reliant on the capital markets to keep their businesses afloat. Today's market environment is less suited for such a deal.

"If there were a slew of high-growth, profitable companies, SPACs would probably be doing great, but that is currently not the case, and investors as well as quality companies are going to run from SPACs for the foreseeable future," says Asman.

As for the sponsors, many will be unable to complete their business combinations in the current market, so analysts say a number of them will elect to liquidate as their window to complete a deal closes. The number of SPACs currently looking for deals, combined with the challenging market conditions and the regulatory uncertainty, has created an environment that makes it much less likely for SPACs to succeed.

Investors expect to see a steep dropoff in SPACs in the coming years, with more companies opting for the more traditional IPO route. This will ultimately benefit average investors, not to mention founders, as traditional IPOs have much more oversight and more stringent disclosure requirements, which protect investors from misleading promises and founders from lawsuits.

"If you are a business owner looking to take your company public, it makes more sense to go through the traditional IPO process if you want to retain and increase shareholder value," says Cullen.