For founders looking to take their company public, special purpose acquisition companies (SPACs) offer a less risky, shorter alternative to traditional IPOs, if a few best practices are observed. In a SPAC, companies are formed in order to raise capital in an initial public offering and then uses the cash to acquire a private company, thereby taking it public, usually within a two-year time frame. The process recently has become popular, especially because SPACs allow founders to avoid the extensive disclosures mandated by the traditional IPO process. Often, SPAC investors don't even know the startup they will be acquiring--earning SPACs the nickname of "blank-check companies." In 2021, there were 30 percent more SPAC issuances than traditional IPOs, according to The Financial Times.
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 on average.
As reported by CNBC, a rather volatile market led some SPAC deals to unravel, causing companies to settle for less-than-optimal targets or change the deal all together. For this reason, the U.S. Securities and Exchange Commission 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.