Since last year, we’ve been tracking the growing list of capitalists who got into the SPAC game. You can read an interview we conducted with Amish Jani, the co-founder of FirstMark Capital, about his SPAC here. And if you need a refresher on all things SPAC, we have that for you as well.
This morning, I want to better understand the trend by parsing a few new venture capitalist SPACs. We’ll examine Lerer Hippeau Acquisition Corp. and Khosla Ventures Acquisition Co. I, II and III. The SPACs are, somewhat obviously, associated with New York-based Lerer Hippeau and Menlo Park’s Khosla Ventures. And all four dropped formal S-1 filings last week.
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Today’s topic may sound dry, but it really does matter. As we’ve reported, Lux Capital is in on the SPAC wager, along with Ribbit and, of course, SoftBank. Adding our latest names to the mix and you have to wonder if every VC worth a damn in the future will have their own raft of SPAC offerings.
In that way, as some late-stage venture capital funds invest earlier — and now later — full-service VC outfits will offer first check to final liquidity, will such a full-stack venture outfit be able to win more deals than a group offering a limited set of financing options? If so, the recent venture capital SPAC wave could become more of a rising tide in time, to torture a metaphor.
Regardless, let’s quickly parse what Khosla and Lerer Hippeau are telling public investors about why they will be great SPACers before working our way backward to what the resulting pitch must be to startups themselves.
Full-stack capital
The Lerer Hippeau SPAC is the most interesting of the two firms’ combined four offerings, so we’ll start there. That isn’t to diss Khosla, but the Lerer Hippeau blank check has some explicit wording I want to highlight.
From the Lerer Hippeau Acquisition Corp. S-1 filing, read the following (bolding: TechCrunch):
As our seed portfolio matured over the last decade, we added a growth strategy to our platform through our select funds. This capital enables us to continue providing financial support to our top performing early-stage companies as they scale, and to selectively make new investments in later-stage companies in the Lerer Hippeau network. With our portfolio now maturing to the stage at which many are considering the public markets, we view SPACs as a natural next step in the evolution of our platform.
After writing that it has had four portfolio companies “publicly announced business combination agreements with SPACs” and noting that it expects more of the same, Lerer Hippeau added that it considers its “expansion into the SPAC market as a highly complementary element of our strategy to support founders throughout their entrepreneurial journeys.”
That’s all rather clear, yeah? The LH crew are best known as early-stage investors. But they added a growth-stage fund later on as capturing value in startups that one helped scale just makes sense. And, now, with SPACs taking the helm when it comes to bringing startups through the gap and into the public markets, a young tech company could stick with Lerer Hippeau from seed to SPAC.
And Lerer Hippeau would enjoy upside from first check to the last, possibly making what we might consider the maximum off of its winners.
Perhaps this is the natural evolution of the venture capital world. We’ve seen some big funds invest earlier over the years — to the chagrin of price-minded, early-stage funds — and as Lerer Hippeau shows, early-stage funds going later. Will there be market room for funds that are both generalist and stage-focused?
I don’t know. Perhaps specialist, stage-focused firms like Work-Bench will still have their place, but for other VCs, not having seed-through-SPAC funding could become debilitation instead of norm; so much for VCs saying that they are not public market investors!
Which brings us to Khosla and its SPAC three-pack. Pulling from the first S-1 filing, here’s what the venture firm says that it is up to (bolding: TechCrunch):
Khosla Ventures seek out high-impact innovations — “Black Swans” — with significant upside beyond the realm of normal expectations and Khosla Ventures has a track record of finding them. Khosla Ventures seeks out unfair advantages: proprietary and protected technological advances, business model innovations, unique partnerships, and top-notch “engineered” teams. [ … ]
We believe that now is a particularly attractive time to pursue a business combination. Khosla Ventures has always focused on highly disruptive technology companies that are committed to changing large markets through technology. We believe the traditional IPO and direct listing processes are not designed for these types of companies to execute on their ambitious strategies. Similar to the companies Khosla Ventures has invested in previously and the business combination opportunities that we intend to pursue, we believe using a SPAC structure is a disruptive alternative to, and creates more efficiencies than, the traditional IPO approach.
This is a little different, isn’t it? Unless I misread the lengthy S-1 preamble, Khosla is less explicit about who it wants to combine with, even noting in its filing that while it will “primarily seek to combine with businesses owned by founders and minority investors” with its SPAC, it may also “consummate a transaction with businesses controlled by private equity investors or family-owned businesses.”
That’s a wide swath of the private market from which to choose from. Perhaps this is why Khosla has three SPACs?
Here’s my beef: For a long time VCs have told me that they don’t pay a lot of attention to the public markets, or that, as referenced above, that they aren’t savvy to public-market investing. This bit of modesty actually made sense. It’s why some VCs simply liquidate their positions after a portco goes public; what do they know about holding public stocks?
But, now, instead, we’re going to see VCs pick which of their portcos to list (Lerer Hippeau), or merely what private companies to vault onto the public markets (Khosla). That feels different!
A new era of venture, or just another temporary weirdness caused by zero-cost money and an overabundance of bored cash?