This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. Join Modern Retail+ to get access to the DTC briefing — as well as all articles, research and more.
There’s a new most-talked about acronym in the DTC world these days: SPAC, which stands for special purpose acquisition company.
SPACs give startups an alternative way to go public, without going through the traditional IPO. In a SPAC, a group of individuals raise money in order to acquire a company with the purpose of taking it public. At least one direct-to-consumer startup, Hims has already opted to go the SPAC route. The telehealth company announced at the beginning of October that it would go public through a merger with a SPAC, which would value Hims at $1.6 billion, and deliver up to $280 million in cash.
A SPAC is just one potential way for a startup to exit, and investors don’t think it will entirely replace an IPO. But another way for DTCs startups to exit could be welcome in an industry that has had relatively few startups go public to-date. Just a handful of what most industry observers think of as “direct-to-consumer startups” — businesses that were born online and predominantly sell through their own products through their own stores and websites — have gone public in recent years. Those include Casper, Peloton, Yeti Coolers and Purple.
“I without a doubt suspect we will see a DTC SPAC be announced in the next four to six weeks,” said Mike Duda, managing partner at hybrid accelerator agency and venture capital fund Bullish. “I think SPACS are more than a moment in time.”
There’s one big reason: there are a lot of investors looking to deploy capital right now, particularly while interest rates remain low, and a SPAC gives them one way to do so.
History of the SPAC
SPACs have been around since the 1980s: Draft Kings and Virgin Galactic are two of the most notable companies to have gone public via a SPAC in recent years. But, there’s been an uptick in SPACs this year. As of last week, 143 SPAC IPO transactions have taken place this year, compared to 13 in 2016, according to SPACInsider.
SPACs have become more popular as Silicon Valley, and by default among other venture capital-backed startups, as they have been looking for alternatives to going public. Benchmark general partner Bill Gurley, for example, started encouraging more companies to also look at going public via a direct listing, before also extolling the value of SPACS in a recent blog post.
One of the biggest issues startups have with the traditional IPO process is that is that it becomes too much of a dog and pony show. They first have to pitch the big banks like Goldman Sachs and JP Morgan on underwriting their IPO. Then they have to go on a road show to pitch potential investors before their public market debut.
“Working with an incredible institutional investor as a vehicle to enter the public market is a streamlined, efficient way to tell the story of Hims & Hers — and the big problems we’ve been working to solve — to as many people as possible,” Hims CEO Andrew Dudum said in an email, about why the company opted for the SPAC route. The SPAC Hims is going public through is led by investment management firm Oaktree Capital Management.
With a SPAC, a group of individuals seek to raise money from investors, with the expectation that they will identify a target company to take public via a merger or acquisition. Typically, they have two years to do so. In an SEC filing, the individuals behind the SPAC outline what types of companies they are targeting, how much money they are looking to raise, and who would would lead the blank-check company. In recent months, Casper CEO Philip Krim, former Varsity Brands CEO Matthew Rubel, and former Cosmopolitan editor-in-chief Joanna Coles have all formed SPACs.
Because SPACs seek to raise money from investors before identifying a company to acquire, investors are essentially betting on the individuals behind the SPAC, and trusting them to find a strong company to take public. Investors do have the option to opt out and redeem their shares to an SPAC’s transfer agent, around the time of a vote on a proposed acquisition. “I don’t know why too many people would actually fund a SPAC, other than if they really like the jockey on the horse,” said Duda.
But as venture capital-backed startups have been looking for alternatives to IPOs, some investors believe that’s also left a backlog of strong companies waiting to exit. And, they might be able to cash in on one of those startup’s exits if they back a SPAC.
Indeed, Duda said that he’s been approached twice to be involved in a SPAC, under the guise of “maybe some of your companies you’ve invested [in] that are later stage might want to go public through a SPAC.” He said Bullish has not gotten involved in any SPACs because “it’s just not our core thing…we’re focused on early stage consumer.”
But it signals another trend that might be on the horizon: consumer-focused VC startups might raise SPACs of their own, in order to take some of their later-stage portfolio companies public. FirstMark Capital is one such venture firm that recently raised a SPAC, as Axios reported.
One challenge within the DTC space in particular, is that some companies have disappointed on the public markets, after being valued during the fundraising process at revenue multiples that are more in line with software companies. Casper, for example went public at a $575 million valuation, after being valued at $1.1 billion.
The types of companies SPACs are looking to acquire varies depending in part upon how much money they raise. Duda said that he expects more smaller companies may go public via a SPAC than the ones that typically go public via an IPO; “think sub $100 million [revenue] companies,” which could be valued at around $200 to $300 million. However, whether a DTC company goes public via an IPO, direct listing, or SPAC, they all face the same problem: the pressure to continue to grow revenue, and become profitable quickly, becomes much more intense once a company is publicly-traded.
The lackluster reaction other DTC IPOs has left some companies hesitant to go public. With fewer DTC companies going public, that means there are fewer people who have gotten rich off of DTC IPOs who can reinvest that money back into the startup scene. “The lack of liquidity…means there are fewer founders that can give back to younger founders, or fewer successful founders that can serve on other founders boards,” said Web Smith, founder of e-commerce newsletter 2PM.
As to what types of DTC startups may go public via a SPAC, Smith predicted that it will be the well-funded, direct-to-consumers startups who were already rumored to go public soon. That includes Harry’s, Away, Glossier and Warby Parker to name a few. Another option, which he outlined in 2PM, is that “a SPAC would take public a small cohort of the enterprise-caliber brands,” to form a new holding company of DTC startups.
“[The SPAC] is not going to kill the IPO, it’s not going to kill the direct listing — it’s going to be an alternative,” said Duda.