All companies begin their journeys in a similar way—privately held. Eventually, some tech companies find themselves pressed to demonstrate a clear path to profitability and provide specific evidence of growth to raise capital and gain brand recognition in a crowded market. In response, these companies make the transformative decision to go public.
The often lucrative move can come in the form of several paths. For many private companies, the choice is whether to go public via an Initial Public Offering (IPO) or merge with a Special Purpose Acquisition Company (SPAC). Each option comes with its own set of requirements and benefits.
Before making such a critical business decision, founders should take the time to assess their funding options and make a choice based on factors unique to their company and its goals. The path your company should choose depends on factors related to profitability and industry status.
What Is a Special Purpose Acquisition Company (SPAC)?
A SPAC is a company designed to acquire one or more privately held companies. These shell companies go public without having any existing business operations or assets. They raise money from large institutional investors, which they then use to invest in private companies. Sometimes called a “blank check company,” a SPAC earns money by taking a percentage of the profits made by the companies it acquires once the target company combines with the SPAC and goes public.
For private companies seeking to reach the public market faster, a SPAC is likely the best path.
What Is an Initial Public Offering (IPO)?
In contrast to a SPAC, an IPO is the process by which a private company offers shares to the public for the first time. It has long been the traditional means by which a company goes public.
The process begins with company founders and executives working with financial investment underwriters to evaluate risk and determine the value of their company. Founders and underwriters then hold a series of presentations for investors to generate interest in the company before going public.
For companies looking for a traditional, thorough approach to going public that mitigates risk, an IPO is likely the better choice.
The Difference Between SPACs and IPOs
In the most basic sense, SPACs and IPOs are opposing ways for a company to go public. A traditional IPO requires a company to gain recognition and build a specific amount of value before its public debut whereas a SPAC allows a young company to depend on a big-name sponsor to raise significant capital and turn to the public market almost immediately to gain more.
Why Consider a SPAC?
SPACs don’t require the scale, profits, and predictability necessary for a traditional IPO, giving a fledgling company that can’t meet those requirements an opportunity to enter the public domain. The merger process also has the added benefit of speed, with results in as little as three to six months as opposed to the typical 12 to 18 months required for execution on an IPO. Alongside the quick timeline, a SPAC merger is likely to have lower costs of marketing and more control over price negotiations. To sweeten the pot, SPAC sponsors can even raise additional capital to help your company meet its goals.
Fierce competition and constant evolution make the tech industry rich with opportunity, but also create pressure to act fast. When it comes to going public, these market conditions become clear. This can make the speedy timeline of SPAC mergers all the more attractive to companies hoping to gain an edge in the market before technology advances. Modern technology also has the distinct benefit of attracting the public, promoting many SPACs to specialize in technology. This growth attracts higher-quality investors to promising SPAC companies, which can ultimately add a layer of security to the process.
Still, SPACs didn’t gain the nickname “blank check companies” by chance. In some cases, SPAC companies lack awareness of the startup they’re acquiring or the basic investment goals. If the investor has cash, but no experience in your industry, you’re taking the risk of substantially diluting your shares with a partner who has little to offer beyond increased cash flow, which is probably not worth the risk.
Why Consider an IPO?
Even as SPACs grow in popularity and become more accessible, many business founders are drawn to the security of a traditional IPO. Companies following the typical IPO schedule have done their due diligence and are working within an expected timeframe. Meanwhile, the timeline for public company readiness with a SPAC merger is more likely to be compressed, with the target company taking on the brunt of preparation requirements.
While the SPAC process doesn’t have the same rigorous requirements as an IPO, the more relaxed circumstances can leave businesses vulnerable to making costly mistakes. In a traditional IPO, a professional underwriter ensures all regulatory requirements are met, but a SPAC is already public and doesn’t have an underwriter. Without the professional risk assessments and advice supplied by investment underwriters, companies inadvertently increase their chances of incorrectly valuing their business or even running into lawsuits.
Choosing the Right Path for Your B2B Tech Company
To determine the right path for your business, it’s essential to know that your company has consistent growth patterns to support the decision to go public. While the IPO process is meticulously dictated through regulations, the SPAC merger provides more freedom. When making your choice, you’ll need to know that you and your investors have the education and business knowledge to carry out documentation and other processes without error. At the end of the day, you know your business better than anyone else—own the choice you make and go public, whether that be via an IPO or a SPAC.
