Zillow’s 2011 IPO should have been a day for popping champagne and plenty of high-fives.
Instead, employees and investors experienced a “facepalm moment” when the stock price shot up 200 percent within minutes of trading, according to former CEO Spencer Rascoff.
Special-purpose acquisition companies — also called blank-check companies — have no assets; instead, they’re formed in order to merge with startups and take them public. They’re sometimes criticized for being a short-cut to the public market, but SPAC advocates say they’re a quicker and more certain option than a traditional IPO.
5/ SPACs remedy many of the problems with IPOs and offer new benefits like the ability for a company to provide financial projections at the time of the SPAC IPO. The SPAC model also offers a quicker, more certain path to going public.
— Spencer Rascoff (@spencerrascoff) October 26, 2020
The certainty largely has to do with price. For a traditional IPO, executives endure grueling roadshows to drum up investor support, and investment bankers price the stock based on interest. If a stock is priced too high, it won’t sell; if it’s priced too low, it can experience a first-day “pop” that makes for a good headline but indicates the company could have raised more in the offering.
With a SPAC, the share price is negotiated ahead of the IPO.
“The typical tech IPO trades up by 43% one day later,” Rascoff said. In Zillow’s case, the stock jumped to $60 from $20 per share on its first day of trading, leaving employees and investors “penalized by the broken IPO system.”
The former Zillow chief has skin in SPAC game: His Supernova Partners Acquisition raised $350 million in an IPO last week.
SPAC activity has spiked this year, thanks to interest from investors like Bill Ackman, Alec Gores and Chamath Palihapitiya, along with private equity firms Apollo Global Management and TPG Capital.
So far, 161 SPACs have gone public in 2020, raising $59.4 billion, according to SPAC Insider. That’s up from 59 SPACs that raised $13.6 billion in all of 2019.
Last week, landlord Tishman Speyer formed a $300 million SPAC in order to merge with a proptech company.