Inside Silicon Valley’s SPAC psychology

The SPAC (special purpose acquisition company) hype is the latest financial engineering offering to quickly hit both mainstream media and the backrooms of Silicon Valley.

Wall Street is now “printing” 15 new SPAC IPOs each week while mainstream media prints 15 articles a week on the subject. Perhaps it’s time to explore the psychological motivations driving SPAC-mania.

I’m not going to cover the architecture or the mechanics of SPACs. The concept is the more familiar “reverse merger” where a public company acquires a more valuable private company to increase the public company’s valuation. With SPACs, the public company is literally a blank-check IPO company and the sole goal is for the acquired private company to become the operating public company.

SPAC IPO investors of the blank-check company also intend to include a PIPE (a third legal/financial structuring of a private investment in a public entity) to ensure that the resulting public company is fully funded for at least the next five years.

The psychology of how such hype develops and the pattern-matching that determines how it is likely to play out can be discovered through private conversations inside Sand Hill Road VC offices, in Silicon Valley boardrooms and on Wall Street. Here are the three investment themes I’m predominantly hearing:

  • New market creation and market-timing psychological forces.
  • Fear versus greed and risk rationalization psychology.
  • The FOMO flywheel effect.

Theme 1:  Wall Street and Silicon Valley created a new product for Main Street

Money, like water, finds the lowest ground and follows the path of least resistance.

Wall Street is currently awash in cash seeking a return. Effective 0% interest rates have stimulated new financial engineering ideas with relatively low risk, reviving a decades-old “financing vehicle”  known as the SPAC “blank check” IPO company. Wall Street has linked up with private markets to allow for a faster path to liquidity and higher value exits to create a tasty new investment product. Frost with a classic VC fund-like structure (2+2+20) to reduce risk for SPAC sponsors and initial investors, and the product sells like hotcakes!

Finally, put a for limited time only clock on the whole structure and the resulting rush to jump through a new IPO window before it closes creates a new investment race where there will be clear winners, laggards and losers.

As with most great new investment products, the idea is to sell this product to Main Street at a much higher valuation while creating a classic win-win-win mindset and a “buyer beware” undertone.


  • (2+2+20) consists of a typical 2% management underwriting fee + $2 million of management operating expenses to fund the SPAC sponsors’ private company search, plus a 20% negotiated discount of the private company’s shares the SPAC is acquiring in return for taking them public at a higher valuation.
  • SPAC IPO companies are required by the SEC to find an acquisition target typically within 24 months or the structure is delisted and all remaining cash is returned to the original investors.

Theme 2:  Fear versus greed and risk rationalization psychology