Why VCs are Launching SPACs: Firstmark's Rationale

The trend is gaining momentum steadily. Each week brings announcements from more venture capital firms establishing SPACs – special purpose acquisition companies designed to raise capital through initial public offerings (IPOs) with the intention of acquiring and bringing other companies public.

Beyond the significant number of SPACs created by investor Chamath Palihapitiya, we’ve recently seen SPACs (or plans for them) from Ribbit Capital, Lux Capital, the travel-focused venture firm Thayer Ventures, Tusk Ventures founder Bradley Tusk, the SoftBank Vision Fund, and FirstMark Capital, among others. While many firms are currently evaluating this potentially significant new trend, others are actively pursuing it.

To gain a clearer understanding of this evolving landscape, we spoke on Friday with Amish Jani, co-founder of FirstMark Capital in New York and president of a new $360 million tech-focused blank-check company organized by Jani and his partner, Rick Heitzmann. We aimed to discover why a venture firm traditionally focused on early-stage, private companies would be interested in public market investing, how Jani and Heitzmann plan to navigate the regulatory requirements, and whether potential conflicts of interest might arise.

If you are considering launching a SPAC, investing in one, or simply wish to understand their relationship to venture firms, we believe this discussion will be insightful. The conversation has been condensed for brevity and clarity.

TC: What is driving the current interest in SPACs? Is it a quicker route to a thriving public market, particularly given the uncertainty surrounding potential market fluctuations?

AJ: Several factors are converging. Firstly, there’s evidence that SPACs can be remarkably successful. For example, [our portfolio company] DraftKings [completed a merger with a SPAC] and engaged in a [private investment in a public equity transaction]; it was a complex undertaking, and they utilized this method to become a public company, with the stock performing exceptionally well.

Concurrently, [private companies] have been able to secure substantial capital over the past five or six years, extending the timeline [for going public] considerably. This has resulted in tens of billions of dollars in value residing within the private markets, alongside an opportunity to access the public markets, build trust with public shareholders, and capitalize on the initial momentum of growth.

TC: DraftKings’ valuation has increased from $3 billion at its IPO to $17 billion currently. What characteristics define an ideal SPAC target compared to a traditional IPO? Does a direct-to-consumer business model enhance appeal to public market investors?

AJ: The key lies in the business’s inherent nature, growth trajectory, and long-term sustainability. While many early SPAC targets, as you noted, are consumer-focused, there’s equally strong potential for enterprise software companies to leverage SPACs for public offerings.

The qualities sought in SPAC [targets] closely mirror those desired in a traditional IPO: companies operating in sizable markets, led by exceptionally capable management teams, exhibiting attractive operating profiles and sustainable long-term margins, and possessing the ability to clearly articulate these attributes while maintaining the governance and infrastructure necessary for public operation. These capabilities are essential regardless of the chosen path to becoming public.

TC: Jason Robins, CEO of DraftKings, serves as an advisor to your SPAC. What prompted you to initiate sponsoring one yourselves?

AJ: Initially, we shared the skepticism of many others. However, as discussions progressed and we gained a deeper understanding of the level of customization and flexibility [a SPAC offers], it resonated with our approach. [Furthermore] our core philosophy centers on supporting entrepreneurs who embrace unconventional methods. They are disruptive, eager to explore different formats, and committed to innovation. We recognized that the SPAC structure, combined with the [merger process], represents a complex transaction involving capital raising alongside a merger, all occurring between an entrepreneur and a trusted partner who reach an agreement before public disclosure. This felt like a compelling avenue for fostering innovation.

For us, as lead partners and directors in the companies we invest in, we begin at the early stages – seed [funding] and Series A – and collaborate with these entrepreneurs for over a decade. If we can contribute to this process and innovate on behalf of our entrepreneurs and the broader tech community, we believe there’s a significant opportunity to streamline the path to public markets.

TC: Your SPAC has raised $360 million. Who constitutes its investor base? Are they the same institutional investors who participate in your venture fund? Or are these hedge funds seeking to deploy capital with the potential for quicker returns?

AJ: There’s a common misconception that most public market investors prioritize short-term gains. In reality, many investors are interested in participating in a company’s long-term journey and have been frustrated by their limited access to companies remaining private for extended periods. Therefore, our investors include some of our [limited partners], but the majority are long-only funds, alternative investment managers, and individuals genuinely enthusiastic about technology’s disruptive potential and eager to align with the next generation of iconic companies.

TC: What size transaction are you targeting with the capital you’ve raised?

AJ: The targets we’re considering will align with the typical dilution a strong company would experience during a public offering – approximately 15%, plus or minus. Applying that calculation, we’re looking at a company with an enterprise value around $3 billion. We’ll be engaging in discussions with numerous individuals we know well, but that generally represents our target range.

TC: Could you elaborate on your “promote,” outlining how the economics will function for your team?

AJ: Our [terms] are consistent with standard SPAC practices. We hold 20% of the original founders’ shares. This is a conventional structure commonly seen in venture funds, private equity firms, and hedge funds: a 20% stake is typical.

TC: It appears your SPAC may be the first of several.

AJ: We’re taking things one step at a time. Our immediate focus is on executing this successfully and concentrating on this task. We’ll then assess the response we receive as we engage with potential targets and observe how the market evolves before considering a second or third iteration.

TC: How actively involved would you be in the management of the merged company, and if the level of involvement is substantial, could that limit the number of companies interested in merging with your SPAC?

AJ: The management teams of the companies we target will continue to lead their businesses. Our active involvement will mirror our approach as a venture firm – we serve as a strong partner to the entrepreneur, providing a sounding board, helping them accelerate growth, offering access to resources, and leveraging the FirstMark platform. Following the [merger], we’ll evaluate the existing board composition, assess our contributions, and determine the optimal structure moving forward. That will be our guiding principle.

TC: Chamath Palihapitiya recently tweeted about a future scenario where numerous VCs with SPACs might simultaneously approach the same portfolio company to take it public. Does this seem plausible, and if so, how would you respond?

AJ: That’s a thought-provoking and intriguing idea, and it could even extend to the formation of SPAC syndicates. However, I believe competition is beneficial. It’s positive for entrepreneurship and the overall market.

The market is quite expansive. There are reportedly over 700 private “unicorn” companies. While SPACs are receiving considerable attention, the pool of individuals with deep technology expertise and backgrounds shrinks rapidly. Therefore, we’re optimistic about our ability to initiate these conversations.

You can listen to a more extensive version of this conversation, including discussions on liquidation issues and whether FirstMark will focus on its own portfolio companies or a broader range of targets, here.