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VC Analyst Note: What's special about a VC SPAC?

3Q 2017

VC Analyst Note: What's special about a VC SPAC?

September 14, 2017

VC Analyst Note: What's special about a VC SPAC?
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Social Capital Hedosophia Holdings Corporation (SCHH) listed its shares on the NYSE, raising $600 million for its special purpose acquisition company. Such vehicles aren't necessarily new, but SCHH is planning to use its capital to buy stakes in VC-backed tech unicorns, either minority investments or full ownership. This unconventional approach could pave a new path to liquidity for companies moving forward.

Our latest VC Analyst Note breaks down special purpose acquisition companies and the risks associated, as well as takes a look inside Social Capital Hedosophia, its managers, strategy and potential benefits for VC in the long run.

Key takeaways:

  • Special Purpose Acquisition Companies (SPACs) have been utilized for many years and typically have little media coverage, but Social Capital and Hedosophia’s new SPAC (“Social Capital Hedosophia Holdings” or “SCHH”) is garnering attention due to its size ($600 million) and stated intention of acquiring a technology company valued over $1 billion. 
  • Being acquired by SCHH would provide the targeted company with an avenue to go public without many of the hurdles posed by the traditional IPO process. This is the latest in a series of recent innovations and alternatives to traditional exit options as hold times for VC-backed companies have risen. 
  • While being acquired by a SPAC can reduce the costs related to an IPO for the company, it doesn't solve any of the reporting, transparency or other problems of operating as a publicly traded firm. The SPAC management also retains a 20% finder’s fee. 
  • Several risks are inherent in SPAC structure, most notably investors’ redemption rights if they do not approve of the proposed acquisition—essentially giving investors a money-back guarantee