Let’s talk about SPACs, ba-by. You know: the special purpose acquisition companies enticing startup founders to go public and nauseating critics of esoteric executive-speak.
In Seattle, they’ve officially crossed over into the cultural lexicon. Ciara backed one of them last year, joining a growing list of celebrities getting in on the hottest way to IPO. And in August, two consumer-oriented companies based in the Emerald City confirmed that they were entering Wall Street via the SPAC route.
On August 2, pet care app Rover began trading on the Nasdaq following its merger with a SPAC called Nebula Caravel Acquisition Corp. Founded in 2011 after a hackathon, Rover connects pet owners with sitters and boarders. It got a boost from all those Dr. Faucis and Coronas adopted during quarantine. “The ‘pandemic puppy’ surge is real and has only added to the long-growing trend of our pets being more central in our families and in our lives,” CEO Aaron Easterly said in a statement.
A week later, online cannabis guide and marketplace Leafly announced its intentions to go public in the coming months by merging with a different SPAC, Merida Merger Corp. I. Leafly’s site attracts more than 125 million annual visitors who want to learn about different strains and buy them from retailers. With legalization continuing to expand to major markets like New York and New Jersey, it’s an auspicious time to seek more investment, according to COO Sam Martin. “The greatest part about this deal for us is that we have been operating in a pretty capital-constrained environment over the last 18 months—we've been essentially a break-even company,” Martin says. “So this gets us back to that next growth stage.”
Okay, but hold on. What is a SPAC, again? And why are they all the rage right now?
A special purpose acquisition company, or a blank check company, raises money through an initial public offering (IPO) with the intent to merge with a promising private company. It doesn’t have products or offer services. It just has cash—lots of it.
Usually, private companies control their paths to IPOs. They often enlist investment banks to help them set target prices and complete extensive SEC disclosures before listing shares on a stock exchange. It’s a tedious process. Dr. Ekaterina Emm, a finance professor at Seattle University, likens the accompanying bank consultation fees to real estate agent commissions.
So the traditional process can be pricey and drawn-out. Merging with a SPAC that’s already gone through that slog, on the other hand, is cheap and quick—attractive qualities, especially in a market as volatile as our current one. Companies can skip later funding rounds and use SPACs to get in while the exchanges are hot. “They are really taking over the market,” says Emm.
For decades, SPACs have allowed smaller companies to reach stock exchanges. But that wasn’t always a good thing. When Emm and other scholars studied companies that merged with SPACs from 2003 to 2008, their findings were bleak: A year after mergers, the operational performance and stock returns of these YOLO firms were “significantly inferior” to industry peers and companies that had pursued more conventional IPOs.
Emm acknowledges that it’s a different economic moment, that SPACs are “becoming more legitimate.” At the time of her research, they made up a small fraction of equity raised. During the first quarter of 2021, they were responsible for as much as 70 percent of IPOs.
Still, she’d urge investors to do their homework if they’re considering investing in one. SPACs are increasingly facing litigation, perhaps a harbinger for a slowdown. “It isn’t sustainable,” Emm says of the boom.
Even if the SPAC scene goes off the rails, it’s already been a wild turn of events for Rover and Leafly. The two young companies were laying off employees en masse at the beginning of the pandemic. Now, both are hiring again.
Under the leadership of CEO Yoko Miyashita, who took over for Tim Leslie in August of 2020 after the job cuts, Leafly hopes to reach as many as 250 employees by the end of 2021, per the Puget Sound Business Journal, which is still a bit lower than the company’s pre-pandemic headcount. It’s capitalizing on different demographics’ growing interest in weed products—Martin notes that women over 60 are increasingly visiting Leafly’s pages—and, in turn, their disorientation. “Finding the right cannabis product is inherently a complicated journey,” Martin says, “especially in new markets where a lot of consumers don't have knowledge of the plants very well and knowledge of the product.”
Though there’s no doubt Seattle is filled with pet-obsessed professionals, Rover may have to compete on the recruiting trail with Florida-based Chewy. The pet product e-commerce site is hiring hundreds of workers for a Seattle office. As Geekwire’s Taylor Soper notes in that piece, Chewy’s stock soared during the pandemic after a traditional IPO.
We’ll see if Rover’s SPAC strategy, and Leafly's, for that matter, can offer similar returns.
A Seattle-Area Tech Exec Gets Sentenced to Prison for PPP Fraud
Last week, the U.S. Attorney’s Office of Western Washington announced that Mukund Mohan was sentenced to two years in prison for Paycheck Protection Program fraud. Using fake federal tax files and doctored incorporation papers, the former Amazon and Microsoft director managed to get a handful of Covid-19 relief loan applications approved, taking home $1.8 million. “For example, Mohan misrepresented to a lender that, in 2019, his company Mahenjo Inc. had dozens of employees and paid millions of dollars in employee wages and payroll taxes,” a news release describes. “…. In truth, Mohan purchased Mahenjo in May 2020 and, at the time he purchased the company, it had no employees and no business activity.” Yikes. The program really could have used that money, too.
Amazon and Microsoft Battle for an NSA Contract
Amazon Web Services recently won a $10 billion NSA contract, “WildandStormy,” and Microsoft is protesting, as first reported by Washington Technology. If this sounds familiar, it’s because nearly the exact same thing happened two years ago, with the roles reversed: Microsoft snagged a $10 billion cloud computing contract, JEDI, from the Defense Department, only to see Amazon raise hell (the contract was later canceled). The main takeaway here, of course, is that our government enjoys naming arcane endeavors a tad too much.
Redfin Lists Climate Change, a Tech-Backed Cricket Squad Forms, and Caskets Are On-Demand
Forget the Kraken. We have a cricket team! Geekwire spotlights the tech-backed Seattle Thunderbolts (schedule info here). Bezos’s space trip didn’t help Blue Origin claim that NASA lunar lander contract, so now he's suing. As if the real estate market wasn't harrowing enough, Redfin has added ClimateCheck data to its listings so that buyers can determine what climate change disaster will do to their properties (droughts and floods clearly aren't deterring folks from acquiring high-risk homes). And a Bellevue company allows you to pick out caskets online. Sorry, this took a dark turn.