For Startup Leaders, SPACs Have Lost Their Allure

So-called blank-check companies, which go public with no assets and then merge with private companies, exploded in popularity last year as a mechanism for startups to raise a lot of money with more speed and fewer regulatory hurdles than a traditional initial public offering.

More recently, startup CEOs have watched many of their peers endure stock slides and earnings calls with disappointed investors in the weeks after finishing a SPAC deal. For many, it has been a bitter reality check that public-market investors might not be as generous as SPAC creators have been with early-stage companies with unpredictable revenue and growing pains. 

“The reluctance is palpable,” said

Adam J. Epstein,

who advises startup CEOs and their boards. “It’s gone from being a bona fide alternative path to an IPO to ‘We don’t really want to be a punchline.’”

Will Hayes, CEO of Lucidworks Inc., a startup that makes AI search tools for businesses, spoke with two SPACs about merger deals a few months ago but turned them both down. He thinks his company will be ready for the public markets in three to five years, but not today.

“It feels like a shortcut,” he said. “I got increasingly more uncomfortable.”

Some one-time SPAC believers lost faith after many startups immediately struggled to meet their growth targets. Of those that completed a public listing through a SPAC merger in 2020, about 50% missed their revenue forecasts and 42% saw their revenue decline in their first year as a public company, according to a report from Silicon Valley Bank.

“If you don’t know to a very high degree of fidelity what you are going to do next quarter, you are going to get reamed for it” in the public markets, said Brad Hargreaves, CEO of Common Living Inc., which rents out apartments and co-living spaces. He said he was approached by 10 SPACs over the past six months but hasn’t pursued any conversations with them; he wants his company to get bigger and have more predictable revenue before going public.

Among 44 technology startups that completed a SPAC deal from the start of 2020 through this past April, share prices have on average fallen 12.6%, according to data provided by Minmo Gahng and

Jay Ritter,

public-stock researchers with the University of Florida. More than half of the tech stocks declined more than 20%. The research is based on the share closing price on May 17.

Stocks of traditional IPOs have also dipped, although not quite as steeply: The 77 tech companies that had an IPO during that period saw their stocks fall 10.7% from the close of their first day of trading, according to Mr. Gahng and Mr. Ritter.

Enthusiasm for SPACs waned after the U.S. Securities and Exchange Commission announced new accounting mandates last month and stepped up scrutiny of other SPAC practices. Another deterrent for startups is mounting litigation from stock traders against SPACs, alleging conflicts of board members, breaches of fiduciary responsibilities and misleading statements, among other things. Some fund managers said they have put a moratorium on new SPAC investments, and one San Diego-based family office, Sky and Ray, said since last year it has slashed its SPAC holdings to five from 104.

The cooling demand is set against formidable supply: There are more than 400 SPACs searching for startups to merge with, according to data provider SPAC Research. SPACs generally have two years to complete their deal, although startups tend to shy away from those that haven’t found a partner after about six months, investors and CEOs say.

CEOs said they are inundated with SPAC mail that they just delete or ignore. Some SPACs are emailing cut-and-paste boilerplate letters, according to interviews with CEOs and letters viewed by The Wall Street Journal. In one case, a SPAC sent a pitch to a CEO emblazoned with the logo of the wrong startup.

Jamie Hodari, CEO of co-working startup Industrious, said about 30 SPACs have approached him in the past year to make a deal. He took four meetings. Some, he said, are thoughtful in their overtures, but with many of them “it’s almost to the point where your company is irrelevant—they just want a deal.”

Mr. Hodari, who is a member of a SPAC board himself, said a SPAC deal is still a possibility in the future. He raised $250 million from a large real-estate firm in February and is biding his time.

At the height of the frenzy, many startups skipped traditional private financing rounds in favor of a SPAC deal, but CEOs now say they are more inclined to tap the abundant venture-capital or private-equity options.

Cybersecurity startup Area 1 Security Inc. raised $25 million from venture capitalists a year ago and plans to fundraise again early next year, said CEO Patrick Sweeney. He turned down three SPAC meetings because he doesn’t want the distraction of being public while trying to grow his company and doesn’t see the need for a SPAC with plentiful other sources of capital.

SPAC deals are still getting done. In the past two weeks scooter company Bird Rides Inc., mortgage lender Better Holdco Inc., automation manufacturing business Bright Machines Inc. and self-driving trucking startup PlusAI Corp. have announced SPAC agreements. The shares of each SPAC in those deals were trading below their listing price of $10 at market close on Friday, a level considered widely by investors to be the minimum because it represents the amount of cash the SPAC holds.

Startups that are still pursuing SPACs say they now have the upper hand in negotiations as they weigh multiple offers.

Cetin Mericli, CEO and co-founder of autonomous trucking startup Locomation Inc., said he is reviewing offers from multiple SPACs. His largest competitor,

TuSimple Holdings Inc.,

went public through a traditional IPO last month, and Mr. Mericli said he wants a war chest to compete. He also wants to offer public-company stock to prospective employees, which will help with recruiting.

Mr. Mericli said meanwhile, as he mulls his options, he is raising more venture capital.

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Write to Heather Somerville at [email protected]