- Today we're going to talk
about how to SPAC your startup,
how do you SPAC IPO your startup?
Just like Virgin Galactic or Draft Kings,
what does it take to do a SPAC?
What's the actual process?
We look at the five-step for a SPAC IPO
and get advice from some very experienced people.
- Just launched the fourth SPAC last week.
And in total I've done eight public companies I've been on.
- [Heini] Yes, we get the best possible advice
to avoid any pitfalls.
- What I would caution people on though is,
there are candidly a lot
of what I call a recovering investment bankers,
or maybe less politely, washed up investment bankers,
and a SPAC business, and you know-
- [Heini] Running a public company
is not the same as running any other startup,
so be careful.
- You go jail longer for white collar crime
than murder in this country (chuckles).
- [Heini] With that, let's get started.
- [Announcer] This is "Raw Startup".
- I've done three SPAC IPOs, announced three transactions,
just launched the fourth SPAC last week,
and in total, I've done eight public companies
I've been on the board of, or been the CEO of.
So the first SPAC IPO was February 21st, 2020.
And we were actually, we rang the NYC bell,
like literally the Friday before the COVID lockdown started,
I think.
And we announced the transaction July 27th with the number
one US online casino business,
a company called rush street interactive that deal closed
towards the end of the year.
Second SPAC IPO was in August last year.
And we announced the transaction in October with actually a
UK based apex owned company called genius sports group.
The third SPAC IPO was in November last year,
and we just announced the transaction two days ago,
actually. So it's a business called ion Q a,
which is the world's first publicly listed quantum computing
company. Believe it or not.
So it's truly a deep tech company that plays off of my
partner's Background and,
and mine is a physicist originally.
So all this three SPAC in one year, that's just crazy.
- Yeah. I've, I've been very busy, you know, I, I, I won't,
I won't catch you. The days are long.
And zoom has been actually a my friend.
I wouldn't be able to do this right.
If I were flying around the country for a week or two,
every time, one of these is announced because one,
I would be sick all the time, probably into a,
there's just not enough hours in the day.
- Something we've just become more efficient. Right.
We raised a big round and it was all done on zoom.
I didn't meet any of them at all. So it's crazy.
Anyway, so we're going to get into it now.
Number one, check the business fundamentals.
- Well, it's very much sector specific.
What I think most people don't fully appreciate is that a
SPAC IPO is really just one of the three ways of conducting
an IPO. It's a different mechanism.
So you have the direct listing option.
You have the traditional IPO, which is an S1 filing,
and you have the SPAC IPO, which is an S4 filing.
All of them are reviewed by the SCC. All of them,
once they close look the same,
you're trading under a ticker on the NYC of the NASDAQ.
All of them are subject eventually to Sarbanes Oxley rules
and NYC or NASDAQ rules on top of the SCC. So, you know,
you're going to be compared to your peer group,
if you have a peer group, okay,
you're going to be trying to court research analysts the
same way. And so, you know,
people like to ask me what it takes to be public.
And I always have to give the same answer, which is look,
what it takes if you're a quantum computing company
is very different than
if you are an online sports book, SAS data provider.
And it's very different from what it takes to be an online,
you know, casino business.
And I've done all three of those deals.
So knowing who you're gonna be compared about against the
important knowing how you're going to be interesting to
research analysts is really important.
And being clear that you're on a path to go from, you know,
kind of stealth and secrecy mode,
or at least sharing information you want when you're private
to being, you know,
very much in the limelight is the first thing you have to
make sure that you want to do and you're prepared to handle.
- Okay. So you're basically saying that a SPAC IPO,
when it comes to the barrier of entry
is very similar to any other IPO.
- It is. There were pros and cons of each approach.
SPACs are faster.
SPACs allow you to get more transparency and more credit for
your forecast because an S4,
which is technically a reverse merger with,
with my public shell,
you're allowed to make forward looking statements, right?
Cause it's merger, but that's one,
there's a prohibition on forward-looking statements.
And this is the reason why you've seen a lot of innovative
earlier stage companies pioneering with the SPAC.
So whether it's, you know, space companies,
a quantum computing company, a 3D printing company,
they've all done SPAC IPOs,
because you can really talk with the next five years,
whereas you can't do that in any other IPO mechanisms.
The third advantage really is that retail investors can
participate in the SPAC IPO,
whereas they can't in any other mechanism. Right?
So as soon as you announced a SPAC IPO,
anybody in the world can go
and buy my existing ticker symbol,
whereas in an S1 IPO or direct listing,
it's really just kind of friends
of Goldman Sachs or Morgan Stanley
that get allocated and the deal happens
and it's already popped, right?
So retail really likes that.
And it's one of the things that I pride myself on is kind of
democratizing the IPO for everybody.
- Number two, get the team and partners ready for the SPAC.
- And the reality is
you're going to be a public company once the deal closes
and the close can take, you know,
maybe three months from when you announce it,
top quality underwriters, you know,
Goldman Sachs, Morgan Stanley predominantly are increasingly
treating this the same as their normal underwriting process
from a underwriter diligence perspective.
And they're increasingly requiring a similar infrastructure
in the last year.
There's been a continual improvement in kind of
infrastructure and regulatory requirements driven by the
underwriters who want to be ahead of any,
any upcoming SCC rulings. Okay.
So my advice to everybody is you have a year to become
Sarbanes Oxley compliant. After you close this SPAC IPO,
which is a year longer than you have with any other IPO
mechanism, because it's a reverse merger.
You still want to think hard about hiring a CFO.
Who's going to be doing the road show even for the SPAC IPO,
because A it's good practice B some underwriters,
namely Morgan Stanley and Goldman Sachs will probably prefer
if not require it.
And I think it will help engender, you know, frankly,
some confidence with the long,
only top quality investors that you want to attract.
- Okay. So hire a CFO, appoint the auditors,
and then you go out and meet people, or what happens,
what happens next?
- You hire your CFO.
You work on your forecast is the next thing. So, you know,
making sure you have numbers that you have haircut enough
and reduced enough so that you can live with the guidance
long-term is really important, right?
So that guidance is going to be out there.
It's going to be in the presentation.
The presentation will be filed publicly with the SCC.
You need to make sure that it's not something that,
you know, a one quarter or even one year later, you're like,
whoops, I wish I'd done something more conservative.
- Yeah. So I think this is important.
You're, you're really building a pitch,
but it should not be the same pitch as you pitch a VC.
This is a more conservative pitch that has a clear cut into
the numbers are predictable
and you're probably going to make them.
- No, I mean, I have to make them right.
I mean, let me, let me sort of give you some examples.
The statistics on meeting and beating guidance in the first
four quarters, the first year of your IPO,
if you do that and your stock price is higher at the end of
the first year than the IPO price,
you're probably always going to be successful public
company. It's like 90% plus chance.
If you do the opposite
and you miss one quarter like 98% chance,
you're gonna have a hard time kind of forever because
people remember this and they remember your philosophical
stance. It is absolutely different than a VC pitch.
Okay. So let me give you a different, a different tier.
If you look at the statistics of venture capitalists and
what percentage of their portfolio companies
meet or beat plan,
it's like 1% or 10% of people meter board.
- 199, let's put it that way.
- Yeah, you're lucky, you know, for public companies,
it has to be the opposite. Like, you know, you are insane.
If you put numbers out there,
you're not going to hit because it will take you like four
years to recover from like one missed quarter in people's
popular imagination. This is it.
Look, this is the US you know,
I'm talking about like joke for that one, as you know,
you go to jail longer for white collar crime than murder
in this country.
- So be careful.
- Be careful. Exactly.
There is real. The real issue is if you,
if you do something that, you know,
falls foul of one of the rules, for sure.
- Number three, find a SPAC.
- I think the best SPAC partnerships really are done where
there's a lot of trust in the system.
And we're both the SPAC sponsors such as myself and the
company, you know, have known each other for some time,
understand they each have credibility in the space that
you're discussing an IPO and can bring a lot to the table,
right? You're gonna, you know,
you're gonna end up with SPAC and their sponsors being
board members, at least one, if not two board seats,
you're going to end up with their shareholders,
being your shareholders. I'm not your rights SPAC sponsor.
If you don't think I know more about this SPAC process than
you do, if you've never done it before and vice versa,
I shouldn't be picking a partner company.
If I don't think they're a fabulous set of assets in the
short, medium and long-term right.
So trust is important if you truly don't know anybody and
nobody has approached you.
Yeah. You can hire a bank to find SPACs, right?
You can effectively hire an agent and you can run a process
and you can speed data, bunch of SPACs
and you'll eventually find one.
What I would caution people on though, is,
there are candidly a lot of what I call, you know,
recovering investment bankers,
or maybe less politely washed up investment bankers and,
and this and this SPAC business. And you know,
there's a lot of people learning on the job. Okay?
My strong advice to people is you're probably only gonna IPO
your company once,
definitely only once on this piece of the business cycle.
And so, you know, you want to go with the best fit.
You can find, not people who are learning on the job
- Another piece of advice may be that,
if nine SPACs say no to you and a 10th says yes,
you might not be ready yet.
- No, absolutely correct.
Right. You may be pushing either a price too high,
or your business may not have the fundamentals.
You may not have the forecast,
so you may not have the infrastructure. So,
absolutely correct. If you're talking to us SPAC,
who's got like four months left.
Like they're going to say yes to anything.
And that's probably, yeah.
That's probably not going to go well on the road show,
investors will smell blood in the water.
It won't be a quality outcome to you.
- So, now you found the SPAC,
but before you move on to the next step,
you need some advisers, right?
- You know, even if you have a SPAC that you love,
you'll probably want, you know,
someone to do a report for your board that says, you know,
this is why we think the valuation is fair.
This is why we think this process makes sense for you.
You have other options. You can stay private.
You can wait and do another IPO. You know,
an S1 process 12, 18, 24 months later.
And this is a recommendation to the board. And ultimately,
you know, we think it's a fair deal.
You know, you, you also, of course,
you need to think about your lawyers.
So it's not just eMoney advisors.
You need to think about your attorneys. And once again,
I provide the same consistent advice, which is, you know,
you want attorneys that have done this before. Okay.
There are, there are league tables of, of SPAC
proficient attorneys, people that have done dozens of deals.
You don't want people,
and you don't want a partner at a law firm.
Who's even the law firm has done SPAC deals.
If the partner you have has never done one,
that's going to be a tough process. Again,
you're like learning on the job and it will be painful for
everybody. All right.
Last lastly, your, your accountants,
which you mentioned earlier, you know,
you want to count and sort of done a SPAC IPO also because
you know, the speed is different for sure
than a normal IPO process.
- So, you need a law firm, you need accountants,
you need MNA advisors and preferably all of them have
experienced in the SPAC space.
Number four, close to deal with the SPAC.
- So step one, you'll have, you know, a one to five page,
letter of intent that will have binding exclusivity and a
set of terms that you will want to proceed on the old,
both agree to, to kind of go
into the relationship in the next 60, 90 days together.
Once you sign that,
you're going to move on to the business combination
agreement. And that's, you know, not an eight page document,
but an 800 page document. Okay?
The nuance with the SPAC deal is as you get the business
combination agreement proceeding,
you're also in parallel going to begin talking to investors
who are already owners of the SPAC about whether or not
they like this deal,
because you want it to be a deal that they're going to vote
in favor of down the road.
And you might also want to raise some additional capital.
So there's something called a PIPE,
Private Investment into Public Equity,
and you can raise a PIPE while the business combination
agreement is being negotiated for additional capital.
So to give you some examples,
in my first SPAC transaction,
we had $230 million in the SPAC trust account.
We also raised $160 million of PIPE capital on top.
So the total is 390.
- Is there a reason for this specific procedure,
is it because you need more money or what's
or why did you do the PIPE too?
- Yeah, so partially it's because
sometimes you want some Secondary
and usually Secondary is better received if it comes from a
PIPE because remembering a PIPE,
the investors find out under NDA who the company is that
we're merging with. Whereas with the SPAC IPO,
those investors are investing in a blank check.
They don't know the deal. So if you're going to,
if you're going to cash CEO's and investors out,
it's usually a higher bar, right?
People want to know that like,
there's going to be value here. Long-term if you,
if you start cashing people out. Third fact,
we had 300 million in the, in the,
in the trust we raised a $350 million PIPE.
And that sends a really strong message in the stock market,
that there are SPACers like fidelity, who are,
who know the company who have done their diligence.
And they're really going to price
and underwrite the transaction.
And it really sends a strong signal to all this SPAC
investors to stay long-term and not redeem their money when
the shareholder vote happens.
- So this is like a poker game where you
first, you get your cards,
you only have your card it's in your hand, but,
and then you put some money on that, but then they show the,
the for three cards. And now you can say, okay,
I know what this company is.
I want to put more chips on the table.
- No, that's right.
I mean, some of the PIPE investors are often people who also
invested in the SPAC IPO. So they're kind of double Downing,
right? To use your, your, your, your analogy here.
So yeah, that's, that's spot.
- Number five. Tell the world and start trading.
- Yeah, so what's next is
you will simultaneously sign your business
combination agreement and you will sign all of the PIPE
subscription agreements,
because there's an agreement for every single person in the
PIPE. If you raise a PIPE, if you don't,
you can skip this step.
But fundamentally once you sign the BCA,
the SPAC has signed a material transaction,
and it has to immediately announce to the market that it has
signed a deal.
Okay. And so that is when fundamentally, you know,
the world finds out
that you've chosen this SPAC and this SPAC has chosen you.
And all of a sudden,
everybody in the world can buy the ticker symbol of this
SPAC. And so, you know, DNYI, for example,
that we announced two days ago, right now,
we haven't closed the transaction yet with the shareholder
vote. But if you buy DNYI,
it is effectively giving you a position in the underlying,
in my case, quantum computing company.
And for the next two to three months,
while the SCC is reviewing the documentation,
you file that's as close as you can get
to owning the end company.
- So in theory, you know,
these companies that are strictly cash are now trading above
cash because they know this company is coming in. Right.
And I guess sometimes you would see them trade under cash.
Right. That would be a pretty important indicator.
- Absolutely, absolutely. Right.
So this is the mark of a good SPAC team, right?
I've done three deals, my SPAC deals have all traded up,
not traded up like a snowflake IPO where a tripled that to
me is the sign of an under-priced risk.
It's traded up, you know, 10%, 15%.
The financial times always says that my deals are priced
fairly, which is true.
That's about a fair IPO discount, 10%, 50%, not, you know,
80%.
And so, you know, I think, yeah,
so that's an initial reaction.
And then you're into the phase of making sure the
transaction closes and getting through the shareholder vote.
And so you need to continue marketing,
just like any public company.
You have to market the company to new investors.
And you have to make sure
that you communicate with the market.
Anytime your company has a significant piece of news or a
new partnership announcement, customer win innovation,
product launch, et cetera.
- Now the ticker is there. The merger hasn't happened.
It takes three to four months before SCC approves
or happens.
- Yeah. So the next thing you do is you file this S4 merger
proxy, and that can happen as fast as, you know,
a day after you announced or even simultaneous, you know,
while a day, anyway, let's say,
or it can take some companies longer, right.
It depends how long it take S4 you to finish a very long
description of the business that has to be, you know,
SCC compliant.
All the audit has to be in their description of the audit
description of the forecast description of how the business
transaction came together.
Also has to go into the S merger proxy.
Then you file that with the SCC and they start reviewing the
document. And usually.
- Total time here is what,
how long have you have yours been like three,
four months or longer, shorter.
- Yeah, about three months,
two to four months is what you're running.
It won't be shorter than two months.
Hopefully it's not longer than four months.
Once you get to the SCC saying that you are finished,
they will declare your proxy effective is what they say.
And then you can convene the shareholder vote.
- So now the shareholders vote
and then it merges like within 24 hours. And that's it.
- Yeah. So the shareholder vote has a minimum notice period,
like any public shareholder vote.
And it is the shareholders of the SPAC that are voting on
this. And so this is the part where the quality of the deal,
how well it's trading,
how concentrated the shareholder base is,
how well you've communicated to your shareholders in this
SPAC, we'll all be vital for making sure you get the vote to
happen. Right?
So there will be usually 20 names
that will hold a lot of it, right?
So you'll be talking to 20 people, not 200 people roughly,
- And then that's it, right?
you have the vote and there is some time in between
they're usually days,
and then you're there and you change the ticker.
Or what happens?
- No, that's correct.
You know, you can close as quickly as 24 hours.
Usually the ticker changes overnight.
So the market closes at 4:00 PM. New York time.
If you're on NYC, it opens again at 9:30 in the morning.
So use the ticker changes overnight.
You know, messaging is really important there,
otherwise people get confused, right?
They wake up in the morning. They're like, wait,
but I own DMYT, you know, like, ah,
the ticker is now called RSI cause it's rush street
interactive in my first SPAC.
- So you wake up that morning
and check is the ticker working.
- Absolutely. Right. I mean, look, you know,
good SPAC sponsors like myself,
have a great relationship with the NYC.
We've done a lot of deals with them. And you know,
obviously once you get the ticker to change,
you want to schedule your bell ringing also. Yes.
So that's really an important part of driving exposure.
And obviously it's a beautiful ceremony, the NYC, you know,
I am biased. I've done both NASDAQ NY and NYC companies.
The NYC I think has,
has definitely a more historic and special process because
of course it's been operating, you know, since,
since George Washington was around here.
- And you get on stage there and actually do it. Right.
And I think NASDAQ has been trying to compensate
with this big banner outside. So basically that's it,
you're now a listed company and you definitely have to act
like a listed company.
- Yes, here are the five steps to a SPAC IPO.
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Thank you very much for watching.
Now go build something.
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