The role investors play over a company’s lifetime -- and where SPACs fit in

With the rise of SPACs -- and as a SPAC founder myself -- I am regularly explaining this in vogue path to the public markets to founders, media and mystified family and friends. Is a SPAC just a shell company that fast-tracks the process to going public, or is there more to it? 

To answer this question, it’s helpful to zoom out and examine in context the value all types of investors bring at different stages of a company’s lifecycle. Because at its heart, a SPAC is just another type of investment that helps a company transition to its next chapter, and every investment brings not just funds but a toolkit of resources that helps make applying those funds successful. 

So, let’s zoom out. Think of a company’s lifetime as five primary stages with different needs: 

• Stage 1: Seed. The founder or founding team has a great idea and needs money to get it off the ground. At this stage, the company needs angel investors and incubators who have a higher risk tolerance and want to provide fundamental nurturing advice.
• Stage 2: Startup. The team has traction and the company is in motion, and now it needs more fuel to accelerate. At this stage, the company needs money from deeper, more institutional pockets like venture capital firms. 
• Stage 3: Growth. It’s time to move into the fast lane and pass some competitors, and the company needs boosters in both finances and strategy from late-stage venture firms and growth equity to set themselves apart. 
• Stage 4: Going public: This is where the jet fuel comes in. At this stage, the company is navigating how to transition from private to public. This is the SPAC sweet spot, as well as where institutional partners (like investment banks) come into play in the traditional IPO process.  
• Stage 5: Being public: At this stage, the company has taken flight as a public company and needs counsel from the its buyside shareholders (hedge funds and mutual funds) as well as sellside research analysts. 

Stage 1: Seed

During the first year or two of the company’s life, it has only a few employees (0-10) and is really just learning how to walk. It needs startup accelerators like Techstars, Y Combinator, seed stage venture firms like Shrug, Crosscut or NFX focused on very early opportunities, as well as angel investors -- whether they are so-called “super angels” like me (I currently have angel investments in over 75 companies through my seed fund “75 & Sunny Ventures”) or even just dabblers with money interested in the space. This crowd of investors are the nurturers willing to endure small stumbles to get the company off the ground. Ideally, they help the company find product market fit, recruit a team, and launch the product. 

Stage 2: Startup

In this next phase around years 1-3, the company has 10-100 employees and, having mastered walking, now wants to run. This requires deeper pockets from venture capital firms like Benchmark, Maveron or Upfront who have a different focus and skill set than the seed investors. In addition to funding bigger rounds ($5M-$20M), this group of investors advises companies on how to grow faster and start to scale. 

Stage 3: Growth

Around years 5-8, the company really starts to grow and needs even bigger partners who specialize in growth acceleration. Growth equity firms like Tiger Global and TCV specialize in helping companies determine how to scale sales teams, expand internationally and maintain corporate culture through hyper growth. Again, a different and specialized skill set to the investors preceding them. 

Stage 4: Going public

The complexities which companies face at this point in their evolution -- for the few who make it this far -- are significant, and this is the reason I got into the SPAC space. A company enters this big transition from private to public beginning about six months prior to actually going public and extending to about two years after IPO. In addition to being in the driver’s seat as CEO of Zillow through this stage, I was also on the Board of Directors of Zulily and more recently of Palantir through this private-to-public transition period. Done with the right Board and advisors, it is a thrilling and rewarding journey. Done poorly, it’s a disaster. I’ve written at length on the different doors to going public and navigating this stage, because this is where a good SPAC really shines. 

At this stage, a company readies itself to go public by getting the right leadership in place and tweaking its capital structure to be optimal at IPO, navigates entering the public eye and maintaining company culture amidst that new spotlight, scrutiny and stock price and, critically, curates a shareholder base to serve as its financial bedrock upon which it can scale the company post-IPO. It is a huge deal and an arduous process, and investment partners along the traditional IPO path leave much of these needs unmet. Not so with SPACs, who, in addition to providing a capital markets solution, also provide counsel leading up to and through the IPO. 

Stage 5: Being public

Once public, investment management funds like Fidelity and T. Rowe Price help companies navigate shareholder and public market perception and, importantly, how to communicate objectives and progress effectively to instill confidence and stability to their shared stakeholders. In the case of Zillow, I benefitted immeasurably from the wise counsel and input of some of our largest public shareholders, including Caledonia, an Australian fund which has long been Zillow’s largest shareholder. 

The most important dynamic for growing companies to consider is the value exchange at each of these stages between the company and its investors. The dynamic at each stage is very much the same: Companies source investment based on the type of value they need, at the time they need it, in exchange for a share of the business; investors at all stages are paid by their limited partners who exchange a portion of their profits for money-making opportunities created from the investors’ strategy and expertise. 

It all boils down to what the investor brings to the table for both sides, and this includes SPACs. Those that provide more than just a vessel to go public but also expertise in deal-making and investor management and experience in the field taking companies public themselves are a better exchange of value for companies. As with every stage of investors, not all SPACs are created equal.