What The “SPAC” Is Going On?

Written by
Ross Andrewsarrow icon

What The “SPAC” Is Going On?

Written by
Ross Andrews

SPAC has been the hot word in last few months. There have been several stories about new SPACs raising capital and several high profile startups goin public through a reverse merger with SPACs, most notably being DraftKings. So what is a SPAC? And why have they become such a hot commodity lately?

SPAC stands for, Special Purpose Acquisition Company. They are essentially a blank-check company that makes it public debuts and raised capital from investors. SPACs don’t initially generate any revenue and don’t have any business operations to sell products or services to customers. Their capital raise is for the sole purpose of giving the SPAC buying power to go out and acquire another company in which the SPAC then owns and potentially operates. SPACs are usually organized and run by accomplished business operators since investors are essentially giving them money and entrusting them to use it to acquire a business that will go on to generate profits and returns for the original investors in the SPAC.

There has been a noticeable increase of the formation and use of SPACs recently, especially in the SaaS/software space. Investors in early stage startups are hoping that through subsequent rounds of funding to get the company to profitability and/or a liquidity event such as an IPO or acquisition. The trend lately however has been late-stage privately help businesses going public while still being deeply unprofitable. There has been a lot of public attention and scrutiny of these companies recently and that has exposed them high highly unpredictable and fluctuating initial debuts on the public market.

SPACs are potentially being favored to help give investors greater control over a newly minted public company that is still unprofitable. With some of these SPACS having several billions of dollar in purchasing power they could control stronger majorities of these companies and flush them with cash so they have the time and stability to help them achieve profitability while still getting the financial benefit of being a public company.  

Sign Up For Our Weekly Newsletter