Investors find European unicorns reluctant to join SPAC boom

The U.S. SPAC market kept rolling along this week with news that Satellogic will go public on the Nasdaq stock exchange thanks to a merger with a blank check company. The Earth-imagery-focused company is standard SPAC fare, with strong capital needs and distant revenues. It was not alone in pursuing the transaction type Tuesday, with news breaking that Nextdoor will also go public on the Nasdaq via a SPAC.

Nextdoor’s projections, as TechCrunch noted, were more modest and thus more believable than what we’ve seen from many other SPAC-led debuts.

These companies represent the two poles of blank-check-powered public offerings: Some startups taking the SPAC route are more speculative, banking on revenues to come, while others feature more established companies with a history of material revenue growth. It’s easy to find more examples of both varieties. Acorns’ deal fits the established trend. Lidar SPACs? Less so.

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Given the breadth of companies pursuing blank-check deals, the SPAC boom isn’t over even if there has been chatter that the party is breaking up. Bessemer partner Mary D’Onofrio told The Exchange, for example, that while the “pace of SPAC IPOs” and combinations have slowed, “there is still $128 billion of SPAC dry powder in the market seeking acquisitions and incentivized to transact.”

Matt Murphy, a partner at Menlo Ventures, helped explain the SPAC pace deceleration that D’Onofrio discussed, telling The Exchange that the pace of SPAC deals “has slowed as they’ve gotten more scrutiny and don’t seem quite as ‘easy’ as they once were.”

But this week’s U.S. SPAC news tells us that blank-check companies are still finding a diverse set of companies to take public. But what about other regions? Unicorns are hardly unique to the U.S. startup ecosystem. Are we seeing similar SPAC interest in Europe?

The Exchange tried to find out, given that we’ve seen huge rounds from the region and a few IPOs over various types. Is the SPAC game afoot in Europe?

Hunting European targets

There’s a huge number of SPACs trading in the United States currently hunting for a deal. And there is historical precedent for U.S.-listed blank-check companies taking on European targets. Global law firm Skadden counts 16 U.S. SPAC-led transactions with European companies from 2015 through February of this year, for example.

“For the past few weeks, we’ve been approached on a recurring basis, much like all known French and European scaleups,” Aircall’s co-founder Jonathan Anguelov told French financial newspaper Les Échos last March (translation: TechCrunch). However, being approached doesn’t necessarily mean that European unicorns are entertaining the offers.

Wefox is one such company. In an email to The Exchange, the company said that it is busy “absorbing [its] world-record Series C investment,” so it is “not thinking about any SPACs right now.” Wefox closed a $650 million round that valued it at $3 billion last month.

The insurtech company’s SPAC hesitancy doesn’t mean that European blank-check deals will prove scarce forever. The company added in an email that in Europe “there are a lot of startups now scaling up like Wefox,” implying that there are many targets for blank-check companies to consider. But the company also said that while the “market [in Europe] is very buoyant and there is significant investor interest to take companies public,” there is “no specific focus on SPACs.”

If liquidity is so easy to come by thanks to hungry SPACs, why aren’t more European companies taking the outstretched hand? One reason may be venture capital advice pushing in the other direction.

The mirage of easy money

Some venture capitalists sell shares in their investments after they go public. Some hold. But all private-market investors have an interest in the exit value of the startups that they back. If investors aren’t advocating for SPAC exits, there must be a reason. What is it?

Northzone’s Pär-Jörgen Pärson provided several reasons to The Exchange in an email.

Pärson explained that operating as a public company is vastly different than running as a private firm. It takes a different form of communication, because “in the public market, you won’t find investors specialized in your market.” He added that his firm tells startups “to start practicing communications as a public company 12-18 months prior to the actual listing.”

SPAC-led debuts do not provide that amount of time.

But that’s just part of the picture. Pärson also explained that his firm has concerns about “the macro environment and market volatility,” which it has shared with its “entrepreneurs and LPs when it comes to assessing the risks around SPACs today.” The investing group’s view is that SPACs are very market sensitive. That means that there are more risks to the public market shifting its stance while pursuing a SPAC transaction. And those risks are “probably greater” than what IPOs and direct listings might endure.

Other concerns exist. EY’s Franck Sebag noted that for a European company, being acquired by a U.S. SPAC is “complicated.” It’s not as demanding as an IPO, he explained, but the level of work required is nontrivial.

And there may be less impetus for SPAC usage over traditional IPO methods. M&A lawyer David Miranda said that SPACs are “in part a response to flaws in the price discovery mechanism in U.S. IPOs, which is less of a concern in Europe.” That might further undercut appetite for the transactions among European companies interested in listing locally.

Where SPACs have found purchase

Still, SPAC deals are happening across Europe, data indicates. Europe- and U.K.-based tech companies are exiting onto U.S. markets via SPACs, from Arrival and Cazoo to EVBox and Wallbox. On top of that, there’s a growing number of European SPACs — as in, vehicles listed on European stock exchanges.

While there have been listings in “Frankfurt, Stockholm, Milan and even Helsinki in recent weeks,” according to Les Échos, the decision of investment banker brothers Michael and Yoel Zaoui to list their health and tech SPAC on Euronext Amsterdam is one more sign in favor of the Dutch market. “The main beneficiary of a post-Brexit shift of euro-denominated equity trading from London, [Amsterdam] emerges as the SPAC capital of Europe,” the FT wrote.

This may be the case for now, but other countries are determined to play a part. In April, the French financial markets authority (AMF) noted the friendliness of French law toward SPACs. “[We] observed a significant increase in the number of SPACs preparing their listings on the Paris stock exchange since the beginning of 2021,” it noted. “The French legal framework and regulatory requirements enable the listing of SPACs to be welcome in Paris, all the while providing appropriate investor protection.”

Meanwhile, other countries are looking into their legal framework for SPACs. This is true of Belgium, where financial markets regulator FSMA launched a public consultation last May, and, perhaps more famously, of the U.K. with its Hill Review. Officially known as the U.K. Listings Review, the list of recommendations compiled by Lord Hill includes measures to make the London Stock Exchange more attractive to SPACs, arguably aiming to regain an edge over Amsterdam in the post-Brexit context.

Nevertheless, the rate of SPAC creation is modest compared to what’s been going on in the United States, but it still represents material growth and a new avenue for European tech startups hungry for exit opportunities.

Where SPACs may fit into Europe’s future

Sebag has his own idea on where European SPACs could add value: “sectorial build-up.”  In the same way as 2015 French SPAC Mediawan “helped consolidate the audiovisual sector,” he told TechCrunch, “a specialized SPAC could consolidate the market by grouping several targets as an answer to the low number of tech companies getting listed.” CEO Yoram Wijngaarde pointed out a vertical that seems to be a good candidate: “The SPAC route makes particular sense for deep tech startups that need to access deep late-stage capital to fund pre-profit R&D cycles,” he said. Deep tech is a hot topic on European tech’s roadmap, with the Scale-Up Europe report recently claiming that Europe isn’t doing enough to foster more deep tech startups and investors, so more capital on that front would likely be welcomed by many players.

But their focus aside, European SPACs may have something to add by addressing some of the ethical concerns their U.S. counterparts have raised. For instance, two SPACs that made their debut last month on Euronext Paris used a milestone-based structure, Les Échos reported. Perhaps to anticipate the data-backed claim that “the house always wins with SPACs,” this “staircase structure” is designed to align the incentives of the SPAC’s sponsors with those of later investors.

In addition, it seems less likely that retail investors will get hit with disappointing returns: French SPACs are de facto targeted at qualified investors, since they are listed “on the professional segment [of Euronext Paris], with high entry costs,” the AMF report noted. Will this be how European SPACs lead the way?

The final pace of European SPAC activity during the present boom will clarify itself over the next few quarters; with most SPACs already counting down on their window to do a deal, the opportunities for combination will begin to sunset, and we’ll see which Europe-based unicorns pull the faster money trigger and which follow a more traditional path to liquidity.