Why Robinhood is key to the future of SPACs
What the SPAC is happening? It wasn’t long-ago when founders Uber-ed down Sandhill Rd clamoring for pitch meetings with VCs and their checkbooks. With the emergence of SPACs, private companies can now directly tap into the pocket books of their core consumers through this investment vehicle. In 2019, VCs poured $294B across 33K companies or a 6% drop in funding vs 2018.
In 2020, I predict a continued decline in venture dollar volume as companies with a strong Direct-to-Consumer (D2C) business models look to SPAC.
What is a SPAC?
Special Purpose Acquisition Companies (SPACs), often referred to as blank-check companies, register as shell companies with the SEC, issue shares at $10/ share in the public markets and lure companies seeking investment with public capital within 2-years of its listing. The modern day dating equivalent of setting up a Tinder profile, swiping through potential mates and trying to put a ring on it before they change their mind.
From the target company’s perspective, SPACs operate similar to a VC round, offer the benefits of a direct listing (employees cashing out) and bypass the investment banks and VCs. PWC estimates the average underwriter fee for an IPO is between 3–7%, roughly an entry-level salary for every million dollars underwritten.
“A SPAC was absolutely the right way to come to public markets because it allows us to grow and accelerate [our business]. The fact that we’ve been able to be streamlined, efficient and without a protracted, drawn-out process that is the traditional IPO has just been enormously helpful in keeping the team focused [on the business],” — Hilary Coles, co-founder and VP of product of Hims & Hers.
D2C, LTV and SPACs
The new frontier of LTV can be harnessed in a SPAC listing. Successful direct-to-consumer (D2C) companies create a personalized relationship with the consumer by tailoring their products and services to fit their exact needs. Over time, D2C companies earn consumer trust and expand their product offering to maximize each consumer’s lifetime value (LTV). The next step to maximizing LTV is tapping into the consumer’s checkbooks for an investment opportunity. Enter the $0 per trade pioneer, Robinhood.
Robinhood’s product design and unstoppable growth affirms that retail investors weigh brand perception over a company’s profitability when making an investment decision. The app does not show OR link to a company’s financial statements and yet Robinhood has added 3M investors in 2020. This isn’t a criticism of the company, Robinhood is clearly doing well with over 13M users and a $8.3B valuation. This growing investor cohort has fueled the meteoric rise of companies top of mind and frequently used, most notably FANG (Facebook, Amazon, Netflix and Alphabet’s Google.)
Robinhood will now be the lubricant intermediating capital between public and private markets, underpinning the rise of SPACs.
- Hims: In a post-COVID world, I predict doctor visits will be more frequent and index towards shorter, virtual appointments. Hims stands to gain as a trusted source for men’s and soon to be women’s health.
- Draftkings ($DKNG): States have suffered lost taxes revenues in this economic slow-down. States can add a tax revenue stream to offset those losses by taxing this vice. Also, Michael Jordan is on board.
- Virgin Galactic ($SPCE): The space race has increasingly become a billionaire sword fight and there’s a galaxy of opportunities in space. Plus, the applications of the foundational technology Virgin Galactic is developing are not limited to space-tourism.
- Opendoor ($IPOB): We’ve quickly moved from work-from-home to work-from-anywhere. Instead of going through the traditional real estate charades, sellers can receive an appraisal and purchase offer from the comfort of their living rooms. Game-changer in a post-COVID world.
- ($IPOC): The target company of this SPAC has not been identified, but you may recognize its manager: Chamath Palitipya, an early Facebook employee, founder of Social Capital and father of the recent SPAC movement. Under his watch, Virgin Galactic and Opendoor have gone down the SPAC route.