For start-up leaders, PSPCs have lost their appeal



Start-up CEOs are turning their backs on PSPCs.

Skeptical CEOs say they are turning down offers from special purpose acquisition companies, suppressing their solicitude emails and pressing the brakes on merger deals amid falling stocks and disappointed investors.

So-called blank companies, which go public with no assets, then merge with private firms, exploded in popularity last year as a mechanism for startups to raise big bucks with greater speed and fewer regulatory hurdles. than a traditional initial public offering. .

More recently, startup CEOs have seen many of their peers experience stock cuts and profit calls from disappointed investors in the weeks after a PSPC deal was struck.

For many, the fact that public market investors may not be as generous as the founders of PSPC were with start-ups with unpredictable revenues and growing challenges has been a bitter realization for many.

“The reluctance is palpable,” said Adam J. Epstein, who advises startup CEOs and their boards. “He went from a bona fide alternative route to an IPO to ‘We don’t really want to be a punchline.’ ”

Will Hayes, CEO of Lucidworks Inc., a startup that makes AI research tools for businesses, spoke to two PSPCs about the merger deals a few months ago, but rejected them both. .

He thinks his business will be ready for public procurement in three to five years, but not today. “It looks like a shortcut. I’m getting more and more uncomfortable.”

Some PSPC believers lost their faith after many startups immediately struggled to meet their growth goals.

According to a report from Silicon Valley Bank, about 50% of those who completed a public listing through a PSPC merger in 2020 missed their revenue forecast, and 42% saw their revenue decline in their first year. year as a public company.

“If you don’t know with great fidelity what you’re going to do next quarter, you’re going to get fucked in the public markets,” said Brad Hargreaves, CEO of Common Living Inc., which rents apartments and spaces. of co-living.

He said he had been approached by 10 PSPCs in the past six months, but had not continued any conversations with them; he wants his business to grow and obtain more predictable income before going public.

Among the 44 tech startups that struck a PSPC deal between early 2020 and last April, stock prices fell an average of 12.6%, according to data provided by researchers Minmo Gahng and Jay Ritter. on the University of Florida scholarship. More than half of tech stocks are down more than 20%.

The research is based on the stock’s closing price on May 17th.

Shares of traditional IPOs also fell, but not so sharply: The 77 tech companies that IPOs during that time saw their shares drop 10.7% from the time they closed their first. trading day, according to Mr. Gahng and Mr. Ritter. .

Enthusiasm for PSPC has waned after the U.S. Securities and Exchange Commission announced new accounting mandates last month and stepped up its review of PSPC’s other practices.

Another disincentive for startups is the growing litigation by stock traders against PSPCs, alleging conflicts between board members, breaches of fiduciary responsibilities, and misleading statements, among others.

Some fund managers have said they have put a moratorium on new investments in PSPC, and a San Diego-based family office, Sky and Ray, has said since last year that it has reduced its holdings in PSPC to five from 104.

The demand for cooling is facing a formidable supply: more than 400 SPACs are looking for startups to merge with, according to data provider SPAC Research.

PSPCs typically have two years to complete their deal, although startups tend to shy away from those that haven’t found a partner after about six months, according to investors and CEOs.

CEOs said they were inundated with PSPC mail that they deleted or simply ignored.

Some PSPCs send copy-and-paste emails, according to interviews with CEOs and letters consulted The Wall Street Journal. In one case, a PSPC sent a pitch to a CEO sporting the logo of the wrong startup.

Jamie Hodari, CEO of co-working start-up Industrious, said about 30 PSPCs have approached him over the past year to strike a deal. He took four meetings.

Some, he said, are thoughtful in their overtures, but for many of them “it’s almost to the point where your business is irrelevant – they just want a deal.”

Mr Hodari, who is himself a member of the PSPC board of directors, said that a PSPC deal was still a possibility in the future.

He raised $ 250 million from a major real estate company in February and is biding his time.

At the height of the frenzy, many startups skipped traditional private financing rounds in favor of a PSPC deal, but CEOs now say they are more inclined to exploit the abundant options of venture capital or capital. investment.

Cybersecurity startup Area 1 Security Inc. raised $ 25 million from venture capitalists a year ago and plans to raise funds again early next year, CEO Patrick Sweeney said.

He declined three PSPC meetings because he doesn’t want to distract himself from being public while trying to grow his business and doesn’t see the need for PSPC with many other sources of capital.

The PSPC agreements are still in progress. Over the past two weeks, scooter company Bird Rides Inc., mortgage lender Better Holdco Inc., automation manufacturing company Bright Machines Inc., and self-driving trucking startup PlusAI Corp. announced PSPC agreements.

The shares of each PSPC in these trades were trading below their listing price of $ 10 at market close on Friday, a level widely considered by investors to be the minimum because it represents the amount of cash PSPC holds. .

Startups that are still suing PSPCs say they now have the upper hand in negotiations as they weigh multiple offers.

Cetin Mericli, CEO and co-founder of self-driving trucking start-up Locomation Inc., said he was reviewing offers from several PSPCs.

Its biggest competitor, TuSimple Holdings Inc., went public in a traditional IPO last month, and Mr Mericli has said he wants a war chest to compete.

He also wants to offer shares of public companies to potential employees, which will facilitate recruitment.

Mr Mericli said that as he considered his options he was raising more venture capital.


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