A VC whose portfolio companies have raised over $1 billion breaks down the unique advantages a SPAC exit provides — and shares how retail investors can profit from the white-hot market without giving in to FOMO

• A white-hot SPAC market and regulatory scrutiny might make some potential investors think twice.
• Hedge fund manager and VC Mike Murphy thinks SPACs will continue to be a great investment for years.
• He believes investors who do their homework and avoid FOMO can profit from investing in SPACs.
• See more stories on Insider’s business page.

The white-hot SPAC market got even hotter earlier this week on news that Softbank-backed Grab is merging with Altimeter Growth Corp. in a record-setting $39.6 billion deal.

Grab is just the latest in a long line of companies to merge with a SPAC, or special-purpose acquisition company, this year. According to data from SPAC Research, 306 SPACs have made their public debut in 2021, raising a combined $99 billion, and another 262 SPACs are getting ready to go public. 

In the first four months of 2021 the supply of new SPACs has already outpaced all of 2020 combined. This is no easy feat, considering that 2020 was the biggest year in SPAC history, with an incredible 248 SPACs reaching the market to the tune of a combined $83.4 billion. For comparison’s sake, in 2019 59 SPACs went public, raising a paltry $13.6 billion along the way. 

With SPACs debuting at record numbers and no signs of a slowdown in sight, the obvious question to ask is if the SPAC market has reached a boiling point. 

Mike Murphy, founder and CEO of Rose cliff Ventures, says no. Murphy understands SPACs quite well — late last year Rosecliff Acquisition I, a SPAC backed by Murphy’s Rosecliff Venture Management, filed with the SEC to raise up to $200 million in an initial public offering. 

Murphy sees SPACs as a good thing for private companies that otherwise would have simply continued to raise money through rounds of private funding and never go public. 

“They’ll just stay private and raise the big rounds, but the only people who will profit are the venture investors. It’s not going to trickle down to Main Street, because by the time they go public, it’s already a $30, $40, $50 billion company. Fast-forward now a couple of years, and you have all these great private businesses that have an opportunity to tap the public markets through a SPAC. I don’t think it’s a bad thing. I actually think it’s a great thing.”

A SPAC typically raises money from investors with the purpose of acquiring a private company and taking it public via a reverse merger within a set time frame. SPACs provide a way for private companies to go public while avoiding the intense regulatory scrutiny of the IPO process.

While this has helped foster the boom in SPACs, it has also caused concern among regulators at the SEC. Some shareholder advocates worry that while early investors and SPAC sponsors may profit, if a SPAC flops once it hits the market, regular investors are left holding the bag.

So should retail investors be investing in SPACs?

“The next Apple is out there somewhere,” says Murphy. “There are going to be some great companies that go public through the SPAC market. There’s going to be some losers that go public through the SPAC market. There are some people in these sponsoring SPACs that probably shouldn’t be.”

He continued: “But at the end of the day, my belief is when a company is now trading publicly, they’re going to be judged like Apple and Amazon. If they’re going to hit their quarter, and hit their growth rates, and hit their projections, the stock price is going to do well. If they don’t, it’s going to fail.”

Perhaps the best-known example of a SPAC trade turning sour on investors is Churchill Capital IV, a SPAC that announced a forthcoming merger with Lucid Motors on February 22. But rumors of the merger had sprung up weeks earlier, and shares of Churchill Capital IV rose several hundred percent in the runup to an official announcement. 

The sheer hype surrounding Lucid Motors was enough to sustain the incredible increase in share price, but when details of the deal were finally revealed investors felt let down, and the stock plummeted back to Earth. That is exactly the sort of scenario Murphy warns investors to avoid.

“People had FOMO, the fear of missing out on the next Tesla,” he said. “Retail investors jumped over themselves to get into Churchill IV and Lucid. It might be a great company, it might be the next Tesla, but it just wasn’t at that point in time worth $60 a share.”

“They announced the deal and the stock traded down, and today it’s trading in the mid-twenties,” he added. “It’s still a great deal from $10, where the SPAC was, but for retail investors, that’s where they get hurt.”

So what should SPAC investors do?

To avoid getting burned by SPACs, Murphy suggests that investors do their homework. Understand the company you’re investing in, how much it’s really worth, and what the time horizon of your investment is — otherwise, he says, it’s just gambling. 

Perhaps most importantly, investors need to understand that SPAC valuations are usually based on projected earnings that can often be two or three years down the road, if not longer.

“Right now they may not be making any money, they may be losing money,” he said. “You’re taking a risk because of the stage of the company. I think retail investors need to understand the structure of that, and know what they’re getting into before they move forward.”

Considering the incredible rate of SPACs hitting the market, can SPACs continue to hold the pace from the first quarter of this year? Once again, Murphy says no. “I think it normalizes a bit, but I think the 2020 pace is sustainable for the rest of this year, and then next year, and the year after that. I think there are just so many great companies out there. SPACs are here to stay.”

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