What are the costs of going public, and how do SPACs stack up? Part 1: Money (the obvious cost)

There are countless articles and analyses comparing what venture capitalist Bill Gurley dubbed the three doors to going public: traditional IPOs, direct listings and SPACs. One of the most hotly debated aspects is, of course, fees. At the end of the day, despite all the debate of the process, is it worth it for the company going public to take alternate routes to the traditional IPO?  

Clearly as co-chair of Supernova Partners Acquisition Company (quite literally the “SPAC of SPACs”), my partners and I echo the same convictions as others in this space: SPACs accelerate your path to getting public, reduce market risk, advantage the company through better price discovery, and ease the fee burden by capping their fees, regardless of how much money is raised. These are not new points of view. However, if you’re talking about cost overall, they are incomplete. 

Costs involve much more than fees, and each path to getting public shoulders these costs differently. You have the obvious cost considerations involving money: fees, pricing and the ability to raise capital. You have the less obvious costs involving time: preparing the necessary financials, readying your company to go public, and the intensive investor roadshow. Finally, you have the even less obvious costs involving opportunity: maximizing investor confidence and attracting the right shareholder base. What’s more, you can only really understand the latter two categories, time and opportunity, if you’ve gone public before. Most companies don’t have this perspective. 

When you compare the three doors to going public through the lens of these costs, for most companies, a well-executed SPAC merger provides the clear advantage. I say most companies, because a SPAC isn’t right for all companies. And I say well-executed because, like all financial markets, results are distributed, and not all SPACs are created equal. 

In this article, we’ll cover the obvious costs: money. Here’s how a good SPAC stacks up to the other two options, traditional IPO and direct listing:

Traditional IPOs are often not the least costly approach for most founders and Boards; this path uses an underwriter -- an investment bank -- to facilitate the process of going public, and they charge an underwriting fee of around 7%. This fee is based on the premise that they can use their institutional knowledge to select the right price and their position to deliver the shareholders within their client base and make the IPO successful. However, none of this shakes out until the last minute because the bank essentially controls the process and is representing the interests of both the company it’s taking public and the investors it’s courting to buy in. The common argument against IPOs is that this process often works against the company going public, resulting in underpricing the stock and leaving money on the table (or said another way, transferring significant value to IPO investors at the expense of current investors). 

The costs of direct listings are much easier to account for and a fairer deal to the company going public than a traditional IPO. There is no fee per se, because there is no capital raised. However, there are significant “advisory fees” paid to investment banks. For example, according to SEC filings, Palantir paid advisory fees (primarily to its investment banking advisors) of approximately $56M for its direct listing. (Note: I am on the Board of Directors of Palantir.) In a direct listing, the price is set simply by matching market demand -- a very clean, unbiased method. However, with a direct listing there is no guaranteed access to a quality shareholder base as with the traditional IPO, and you can’t issue new shares in a direct listing because it’s against SEC regulations (for now). This means that direct listings are best suited for companies that are already well-known brands with a strong base of believers in their potential and no need for additional capital. Spotify, Asana and Palantir all were recent notable direct listings.

A SPAC, when well-executed for the right company, is the best deal, though at first glance it doesn’t appear to be. The fees seem much higher when you compare a typical ~20% “promote” of a SPAC with a 7% bank fee of a traditional IPO. The fee is an amount of the funds raised by the SPAC that will result in a percentage ownership of the company the SPAC merges with and then becomes. The promote shares are under a lock-up (for up to a year) and truly makes the SPAC sponsor a partner of management in the company. The SPAC sponsor can easily off-set the promote shares through helping the company achieve a better valuation versus a traditional IPO, where the “price pop” is often the biggest cost borne by existing investors.

The post-IPO price pop is a well-documented, costly aspect of going public -- a “facepalm” moment for many founders who can easily leave hundreds of millions on the table due to the opaque pricing of the traditional process where the founder has very little leverage. In a SPAC, the founder negotiates a price that is based on much more complete data, including forward projections, and direct, open negotiation with investors, which is only available through the SPAC route. And though there will always be a little bit of unpredictability, these two factors can easily cut that dreaded price pop significantly. The company and SPAC, of course, want the share price to trade well and increase during trading — but not by 40%+!

As referenced above, the SPAC is in a position to empower the founder in price-setting. SPACs can bring investors “over the wall” to discuss potential targets (of course, after they sign a non-disclosure agreement given it’s material nonpublic information), thereby giving both the investor and the target negotiating power. Both have a seat at the table, which means a valuable target will protect its ownership and a committed investor will get a fair price, which helps create a quality shareholder base (more on that in a minute). This, rather than the obvious headline fee, is where the SPAC becomes a much better deal for the company going public. 

The other piece not mentioned in the above fees table is the option for private investment in public equity, or a PIPE, to raise more capital. With a bank, the 7% fee applies to everything, so if in the above scenario the $2B company wanted to raise $600M, the bank fee in a traditional IPO would jump to a whopping $42 million (and that’s just the cash fee to the Bank, not including the price pop). With a SPAC, the fee is typically capped at the “promote”, meaning that additional raise would fully benefit the company except for perhaps a very small fee to a bank for assisting in the PIPE process (e.g., ~1% fee versus ~7% in a traditional IPO). 

Financial costs of going public

A closer look at fees

One final point about SPAC fees: I’ve tried to be objective in my analysis above and explained that SPAC fees are actually lower than IPO fees once you consider the IPO pop which the broken IPO system delivers to the buy side. But you can also go further and say that the SPAC fees (i.e., the promote paid to the SPAC sponsor group) isn’t shouldered by the merger company at all; it is paid by the SPAC investors themselves. Just as when a venture capital firm invests in a private company, its fees are paid by the limited partner capital providers to the venture fund not by the company itself, the fees paid to the SPAC are paid by its public market investors not by the merger company. By this measure, SPAC fees are even lower (or non existent, you might say) than a traditional IPO.

That wraps ups financial costs. Check out the next two in this series covering time and opportunity.