The SPAC Overcorrection

Chamath Palihapitiya has been a leading proponent of SPACs. Photo: Michael Nagle/Bloomberg via Getty Images

SPACs have suddenly gone splat. On the latest Pivot podcast, Kara Swisher and Scott Galloway discuss why the shell companies, which exist solely to bring other firms to market, have fallen out of favor — and why they will likely have an enduring place in the market regardless.

Kara Swisher: SPACs may be going out of fashion. The Wall Street Journal is reporting a reluctance from start-ups to use them for IPOs. The numbers are down 12 percent, I think, since May. Tons of people were running into this space, including you. What do you think of the situation?


Twice weekly, Scott Galloway and Kara Swisher host Pivot, a New York Magazine podcast about business, technology, and politics.

Scott Galloway: There seems to be a pattern across every major technology-innovation class or financial innovation, whether it’s junk bonds, the internet, or SPACs, and that is: The innovation comes along. It’s very exciting. A lot of the early movers, the early pioneers, make a lot of money. It attracts a massive amount of capital. The market gets out over its skis and then there’s a bit of a crash-slash-correction. But coming out of it, you find there are enduring companies. Junk bonds are a static part, an important part, of our financial markets. Amazon was birthed from the dot-com and the dot-bomb generation.

And I do think SPACs are going to be a static part of the financial ecosystem. It’s just that we have, I think, 270 SPACs searching for a company right now. It’s a great time to be a seller. I think the majority of SPACs that are publicly traded are more than 50 percent off their highs. And there’s just no getting around it. SPACs, in addition to being a financing event where you get to go public sooner — they’ve had to reach further into the barrel and find companies that weren’t ready for prime time.

It’s not even the SPAC market that’s tightening; it’s the pipe market. Because to buy a company, you have to get bolt-on or staple-on debt financing in the form of a pipe. And they’re the adults in the room going, “Sorry, this doesn’t hold water.” And a lot of these companies — typically, when you go public, you go public knowing that your next two quarters’ numbers are kind of baked. You know they’re going to be good or exceed expectations. And with these companies, a lot of them, their projections are already missing.

So the bottom line is it’s a great time to be a seller. And when you think about this, Kara, the interesting thing about SPACs is that from the moment they SPAC, they have 24 months to do a deal or they have to give their money back. And the sponsors have to come up with about 10 million bucks, or 2 to 4 percent of the gross proceeds. And then they lose it all. So, you’re about to see — I mean, I’m on about four company boards, and I get an inbound from someone looking to SPAC probably every 48 hours, and their desperation is only going to grow. Because it’s not even 24 months. If a SPAC doesn’t de-SPAC within six months, it begins to smell. And so you’re going to have probably, I mean, I think the number is something like 70 to 100 billion dollars …

Swisher: So these are inbound looking to buy your companies?

Galloway: “Heard you’re going on the board of Open Web. We’re a SPAC.” I mean, that one I’m getting every 48 hours.

Swisher: And what do you say? What do you actually say to them, then?

Galloway: I give them the email address of the CEO and say that at this point, we’re just looking to build a great company. We’re not looking to SPAC. I pass them onto the CEO. But the level of desperation — and these are credible SPACs of very credible operating groups …

Swisher: So, give me a case of why you would and why you wouldn’t.

Galloway: Well, okay, I’ll tell you about a company I’m involved in that is SPAC-ing. I’m an investor in Better Mortgage, which is a company founded by this kind of tech genius named Vishal Garg, who has said, “All right, there’s 200 intermediate steps between applying for a mortgage and getting approved for one that involve humans and regulation and paper. And unfortunately, sometimes, systemic racism.” And he said, “If we can use technology and AI to collapse the supply chain, I can get a mortgage approved in 40 percent of the time and pass all of those savings back to the borrower.” And the level of business they’re doing and the productivity per employee is off the charts.

And then a SPAC came along and said, “We want to do this.” And the attractive thing about the SPAC, and the reason Better Mortgage agreed to it, was that SoftBank showed up and said, “We will do the pipe.” And so this means that the SPAC will get done. It means it’s credible. And also, it shortens your time to market, your time to become a public company, because they have already done a lot of the SEC work.

So, basically, it’s time to market. You get to take advantage of a good market. You get your sort of just-add-water IPO. The reason not to do it is that, if you’re building a company and feel like you’re not ready to go public, you feel like you’re really building an enduring company, and you don’t necessarily feel the need to get out right now.

What are your thoughts?

Swisher: I think the pipe is critically important. This is private investment in public equity commitment. So it shows that someone believes in it. That’s really pretty much the pipe, and it gives them money to do things with, and without it, it makes it much harder. I think one of the things it has shown is that the IPO process, like the mortgage process you just described, is slow and onerous and problematic. And so the question of how to get people cashed out, how to get these start-ups into a position where they’re liquid, is a really interesting one. So I think people were like, “SPAC, SPAC, SPAC.” And now it’s, “Oh, they’re terrible.” I think probably the truth is right in the middle.

Galloway: That’s right. Somewhere in the middle. That’s overcorrection on both. The pendulum is never in the middle.

Swisher: But when Paul Ryan had a SPAC — I don’t even know if he managed to land it somewhere — I was like, Huh, why is he there? I remember being like, Mm-hmm. Joanna Coles, I got. Okay. I got that. But Paul Ryan, I was like, Ah, I don’t think so.

Galloway: But what will be interesting, though, is in three to six months, when some of these SPACs start lapping their one-year anniversary, which means they now have a gun to their head. You are going to see panic at the disco.

Swisher: Possibly.

Galloway: I mean, it’s going to be very interesting to see how desperate these companies are. It’s going to be interesting.

Swisher: I wouldn’t just take any old SPAC. That’s all I’m saying. Not any old SPAC.

Pivot is produced by Rebecca Sananes.

This transcript has been edited for length and clarity.

The SPAC Overcorrection