How technology companies can prepare for SPAC investment

By Russell Diller | 16 September 2021

SPACs, one of 2021’s favoured investment vehicles for technology companies, can have substantial benefits for both companies and investors if preparations are approached correctly.

SPACs (Special Purpose Acquisition Companies) are increasingly popular in the technology space. While initially a US phenomenon, SPAC momentum is spreading across the world.

Faster access to public markets and more predictable capital injection are among the upsides driving interest. However, companies considering SPACs must pay close attention throughout the preparation process. Many of the novel aspects of becoming a public company require careful planning and structuring.

Getting it wrong will likely lead to a rude awakening for technology companies. Without the proper care and consideration, they, and their management teams, may face costly delays, lost value, and a challenging regulatory landscape to navigate after the SPAC acquisition.

SPACs Dominate 2021

SPACs’ rise builds on current investment market trends and their unique advantages. Some of the most important factors are:

Availability of dry powder: Investors looking to deploy capital are open to different investment vehicles.
Speed to market: Through a SPAC, companies can go public faster.
Lower floatation risks: SPACs minimise market and price risks.
Alternative pathway to going public: Companies without a clear IPO path have a different option

Data from SPAC Insider underscores SPAC’s explosive growth over the last couple of years:

Year	No. of SPAC IPOs	Total raised (US$ billion)	Average IPO size (US$ million)
2011	15	1.1	72
2012	9	0.5	55
2013	10	1.5	146
2014	12	1.7	146
2015	20	3.9	195
2016	13	3.5	269
2017	34	10	296
2018	46	10.8	234
2019	59	13.6	231
2020	248	83.4	336
2021*	386*	116.6*	302*

^{SPAC IPO performance 2011 - 2021 Data:}^{SPAC Insider. *: figures for 2021 cover January to ultimo July.}

As highlighted in the latest edition of BDO Horizons, in 2020, SPACs represented more than half of all IPOs in the US as the capital markets were seen as being more friendly to this type of company.

Under the Hood of SPACs

A SPAC involves one or more individuals (the legal definition of individuals) raising capital and creating a publicly traded SPAC company. The individuals (sponsors) tend to be either industry or investment experts, or both. Raised capital is used to fund an acquisition of a target company within an 18–24-month period. The target company is unknown at the time of the SPACs initial formation.

^{SPAC IPO performance 2011 - 2021 Data:}^{SPAC Insider. *: figures for 2021 cover January to ultimo July.}

The SPAC stocks trade in the open market, meaning that secondary investors can also invest. Following the acquisition of a target company, a reverse merger is performed to take the acquired company fully public. Investors are, in other words, betting on the sponsors’ ability to find a viable acquisition target company that is interested in going public.

Raising funds through a SPAC often enables company leadership to maintain greater autonomy and access to a more predictable amount of capital than traditional IPOs.

The approach is generally faster than a traditional IPO, meaning that success is dependent on completing complex preparations in a short period (often four to six months).

SPACs Spreading Throughout the Technology Space

Technology companies are a preferred target for SPACs. The graph below shows how technology led all sectors by a wide margin as the most popular sector for US SPACs in 2020.

^{Data: Statista, Graph: BDO Global}

Increased digitisation across industries contributes heavily to rapid market growth across the technology space. Securing growth capital to grasp the potential for growing revenue and profits is top-of-mind for many technology companies.

SPACs in the technology space started as a mainly US phenomenon but are now spreading to Europe, with Asia soon to follow.

The Amsterdam Stock Exchange saw the first European-based SPAC with the US$295 million listing of ESG Core Investments. Germany has also seen SPAC activity such as the US$325 million listing of Lakestar. The UK could be next, as changes to the UK listing regime are in the pipeline that would pave the way for listing SPACs on the London Stock Exchange.

SPACs are mainly national or regional investment vehicles. Therefore, the changing regulatory setups make SPACs a viable alternative to other investment avenues (IPO, VC or PE) for many technology companies.

The SPAC Investment Upsides

On the investor side, interest in taking technology companies public through SPACs is also high. Again, the potential for rapid growth is a primary factor.

Secondary investors also have the option of redeeming their investment in the SPAC vehicle if they, for example, do not agree with the sponsors on the choice of the target company.

Simultaneously, early company investors view SPACs as a viable exit strategy. The same applies to some founders looking to reap the rewards for their long hours and hard work by taking the company public and realising their share value.

Finally, SPACs can be an alternative way for investors to seek out companies with strong brands and business prospects that may otherwise not have a straight-forward way to going public.

Technology Companies’ Core SPAC Considerations

For technology companies, one of the most significant challenges when preparing for a possible SPAC transaction is the time pressure and strain on existing resources. Company management teams have a very limited amount of time to prepare to become a public company compared to pursuing a traditional IPO.

Heightened corporate governance, internal control, financial reporting, and regulatory compliance demands will all come into effect when a company prepares to go public.

Specific preparation and reporting considerations include:

Company readiness: Preparing for all aspects of being a public company, including changed requirements for accounting, financial reporting, human resources, etc. Prior to being acquired by a SPAC, a target company must have 2 or 3 years of historical financial statements audited in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB).
Tax structure: A company may need to address and optimise existing tax structures and activities prior to a SPAC merger and subsequently going public.
Reporting requirements: After a SPAC merger and subsequent public trading, a company must adhere to expanded reporting requirements, including the effectiveness of management’s internal control environment.
Increased short-term goals: As a public company, a company must release quarterly financial performance data, and demands for achieving consistent short-term results tend to be higher.

How to Prepare for a SPAC

With the above in mind, the importance of audits and due diligence for IPO readiness and the SPAC investment vehicle becomes crucial. Due to limited investment times, speed is pivotal but must be balanced with a thorough analysis. Experienced and expert insights from financial advisors and legal experts will be critical to reaching the best possible results.

Some of the areas where experienced collaborators will be invaluable include:

The equity story: an experienced financial adviser can help management present and package their company in the most favourable light and assist with the negotiation process with the sponsor of the SPAC.
Due Diligence: Collecting, analysing, and verifying financial and non-financial information can help a company identify and mitigate problems, errors, inconsistencies, and threats ahead of a SPAC process. Simultaneously, it can help the company showcase its stability, growth opportunities, core strengths, and prospects.
Stress-tested financial projections: Structuring and documenting financial projections and growth scenarios for how a SPAC can lead to further expansion will be weighty investment arguments during and after a SPAC process. Projections should be anchored to detailed data about historical results. Projections should be built on clear and well-documented assumptions and extend at least three years into the future.
Business Valuation: Tangible and intangible assets, IP, and a host of other areas contribute toward the overall value of a company. Documenting these, along with considerations about future stock options, partnership interests, options, and warrants, are essential.