subSPAC Weekend Edition (5/2/21)

Welcome to The subSPAC Weekend Edition! Each week we give you some knowledge darts from some of the smartest investors, traders, and punters on the planet.

Our guest writer this week is Spencer Rascoff, Founder of Zillow and Head of Supernova Partners.

Despite the macroeconomic uncertainty caused by the Covid pandemic, 2021 is going to be a banner year for minting new public companies. The variety of entry points has never been more plentiful, thanks to a barrage of SPACs providing express routes through SPAC mergers (and boards being increasingly supportive of these new routes) alongside traditional IPO and direct listing paths to the public market. 

On the other side, the pool of prospects is deep, thanks to ample pent-up demand from private companies that have put off making the leap into the public markets. And, of course, the market itself is eager to invest, as low interest rates create low returns in fixed income bonds and therefore push more capital into equities to chase returns. Finally, the democratization of stock trading from new retail platforms like Robinhood caters to individual investors and adds fuel to an already red-hot market. 

Going public is in vogue again, something I’m thrilled to see not just as a SPAC sponsor, but as someone who’s experienced first-hand all that it takes to go and be public and the benefits that come with it. I’ve written extensively over the years about those benefits, crate-digging to my 2013 post when I was CEO of Zillow about how being public forces you to crystallize your strategy; again in 2015 about the best model (dual class) for being public and preserving innovative freedom; and again in 2018 celebrating the long-awaited entrance of (then unicorns) Dropbox and Spotify into the public pool. Being public is awesome for your employees and your shareholders — if you’re ready for it. 

But how do you know if you’re ready? 

As a SPAC sponsor at Supernova, this evaluation exercise has been front and center in literally hundreds of discussions with founders over the past few months. On their side, founders and their teams are considering whether they’re ready to make this huge leap and if we’re the right partner amidst the sea of SPACs (of which not all are created equal) knocking at their Zoom doors. On our side, we’re sizing them up based on our combined experience — mine in leading companies, and my co-sponsors in deal-making and successful public entrance — to assess whether they’ll succeed with our help through the process. 

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Evaluating public readiness

Whether you’re ready to be public comes down to so much more than financial readiness, and this is where many investors go wrong because it’s the only criteria on which many focus. Our SPAC’s evaluation follows a formula I’ve used for a long time: 

“Great people, properly motivated and led, build great products, which attract huge audiences, which generate revenue, which drives profits that create shareholder value over time.” 

The first three components of this formula are all about people. The next two are about getting the product right, and the remaining three are about the financials, which you can’t get to without nailing the components that precede it. 

Within this formula, here are the most common themes and questions bubbling up from our conversations with many founders considering going public: 

People: Is the company culture well-established and long-term oriented? Is it ready to weather the shock to the system of being publicly traded? The sudden shift to public scrutiny can rock a company if its cultural foundation isn’t solid, and a move that was meant to fuel innovation can hinder it if leadership or employees become driven by the quarterly whims of investors.

The company should have a long-term orientation codified into its way of operating, and even better if it can remain founder-controlled when it goes public. We look for missions, core values and indicators of employee sentiment. (Glassdoor reviews and employee engagement surveys are often helpful to understanding this part of the business.) 

Personally, as someone who has been through it, I would add another question: Are you ready as a founder? Leading a public company is a lot to sign up for. It is rewarding, but also grueling. The constant scrutiny and quantitative measurement of your company’s worth can be exhausting and not everyone is up for this challenge.

Product: Do you have significant product market fit? Is the product 1) widely accepted and liked by your users or customers and 2) economically viable for the company? Both of these pieces are critical when going public, and Facebook’s IPO provides a good example as to why: When Facebook went public, about half of their usage came from mobile yet they’d never run an ad on mobile, creating a very significant unchecked box in their business model readiness that contributed to what is widely regarded as a botched IPO.

In addition to product market fit, being public leads to a heightened focus on information security, greater scrutiny around compliance with regulations and a whole new level of quality control for bugs in your release cycles. You need to be really buttoned up in these areas, which is, frankly, often not the case for fast-growing companies with a startup mentality. When you’re public, these vulnerabilities not only make you an active target for short sellers, they have a much greater likelihood of creating negative news cycles that quickly turn sentiment and send you on time-consuming, distracting damage control with your customers, your board, investors and the media.

Financials: Does the company understand the levers of the business? For example, do you know what will happen to revenue if you hire 10 more salespeople, or what will happen to your customer acquisition costs if you spend $10 million on advertising?

Are your financials in order to the point where you are ready for an audit?

Are you big enough revenue-wise to make a splash that Wall Street pays attention to when you jump into the public pond? My standard for this is around $100 million of revenue or $1 billion of value. Being a public company with a market cap less than $1 billion is very difficult because these companies are often ignored by public market investors. 

These are just a few themes rising to the top of our conversations as we search for the right company to take public through our SPACs. But regardless of what side of the table you’re on, these criteria are a helpful starting point to evaluate whether you and your company are ready to make the leap. Being public is an incredible next step — if you’re ready. 


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