Before the SPAC boom, there were a number of proptech companies in the IPO pipeline. As more SPACs, which are also known as special purpose acquisition companies or blank check companies, have hit the market, this pipeline is emptying.
“That could have taken quite some time to clear itself out because there is just a huge backlog of companies that were doing an IPO, irrespective of whether they were proptech or not,” says Zak Schwarzman, a partner at MetaProp.
As these SPACs are successful, more will follow.
“A lot of people get rich, and the floodgates remain open, you’re inevitably going to see more and more of that,” Schwarzman says.
So far, things are going well. “These stocks are, not surprisingly, performing very, very well for the most part,” Schwarzman says. “So that trickles down into the rest of the ecosystem.”
Right now, the later-stage companies that are most appropriately compared against public market peers are the best SPAC candidates. Then earlier stage companies could go. “If the public sector debuts are going well, that generally will accelerate activity throughout the private market and growth will trickle down,” Schwarzman says.
SPACs allow companies to go public by bypassing the traditional IPO process. They are publicly-traded shell companies that are formed to pursue deals in the private sector by raising capital in an IPO and then searching out acquisition targets. The acquired companies then use the SPAC to sell shares to the public.
While Schwarzman thinks the increase in SPACs is a positive, he does see some risks in the boom. Outright fraud and abuse could be one thing that would jolt that storyline for SPACs.
Lower-quality companies doing SPACs could also take the bloom off the rose. The longer the SPAC boom goes on unabated, that is more likely to happen.
“The best candidates, the most public market-ready companies, should be the first to be targeted by SPACs,” Schwarzman says. “Then you should go down the quality curve. You could also think of it as the maturation curve.”
At some point, Schwarzman thinks some companies may rush in too early and become riskier and riskier. “That will likely happen the longer this goes on and contribute over time to some normalization,” he says.
In the past, the venture capital market was there for those types of companies before their warts were exposed to the public. “That’s what the venture capital market exists for,” Schwarzman says. “That’s what we do.”
Schwarzman says observers should also be watching to see if companies with “fundamental problems” slip through the cracks.
“It will now be easy for companies to go public,” he says. “They’ll go public earlier in their lives and maturation curves. The ‘right’ balance is somewhere in the middle.”