Metromile's Public Debut via SPAC

Yesterday marked the beginning of Metromile's journey as a publicly traded company. The company’s transition from the private sector was expedited through a merger with a special purpose acquisition company, commonly known as a SPAC.

The Rise of SPACs

SPAC transactions have seen a significant surge in popularity recently. They effectively connect highly valued private companies with available investment capital.

SPACs initially raise funds through an initial public offering (IPO) and then identify a private company to merge with.

Following the merger, the SPAC ceases to exist as a separate entity, becoming part of the combined organization. This process frequently involves an additional capital infusion, known as a Private Investment in Public Equity (PIPE).

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Advantages of SPAC-Led IPOs

Compared to traditional initial public offerings (IPOs), SPAC-led debuts can be completed more quickly. This accelerated timeline appeals to companies seeking a rapid entry into the public market.

Furthermore, SPACs offer greater clarity regarding potential capital raised than traditional IPOs, alleviating concerns for target companies about attracting sufficient investment upon going public.

Metromile is not anticipated to be the last company to launch publicly through a SPAC this year. Several other companies, including neoinsurance provider Hippo, are also considering this route. (Hippo did not provide a statement regarding this matter.)

Insights from Metromile's CEO

With an increasing number of SPAC transactions anticipated, Metromile’s public debut presented a valuable learning opportunity.

We spoke with CEO Dan Preston to discuss the significance of this milestone for his company and to gain his perspective on the SPAC process itself.

His insights provided a deeper understanding of the advantages and considerations involved in utilizing a SPAC for a public offering.

Metromile’s Entry onto the Public Market via SPAC

Preston was questioned by TechCrunch regarding the current landscape of Special Purpose Acquisition Companies (SPACs) and the factors that led to his firm’s decision to pursue this route. He explained that their initial engagement involved exploratory discussions, which rapidly gained momentum.

However, it’s important to note that not every company will experience a comparable level of market interest. Preston emphasized that SPACs are particularly well-suited for organizations that desire or require a more comprehensive narrative when becoming publicly traded. Specifically, this applies to newer ventures where a standard S-1 filing might not adequately convey their full potential.

Metromile, by implication, was a company for which the SPAC structure proved to be a fitting choice.

What specific benefits did Metromile gain by utilizing a SPAC for its public debut, as opposed to a traditional Initial Public Offering (IPO)? According to Preston, a conventional IPO would have likely occurred 12 to 18 months later. This extended timeframe could have necessitated securing additional private funding. Therefore, the rationale was to achieve “full funding” immediately, rather than delaying the process.

The availability of sufficient capital is a key advantage. For Metromile, Preston clarified, “fully funded” signifies possessing the necessary resources to reach the break-even point, thereby gaining greater control over its future trajectory. The prospect of raising substantial capital a year or more ahead of a traditional IPO was a compelling factor.

Securing such significant funding requires companies to provide extensive detail, Preston noted, potentially more so than with a traditional IPO. This includes in-depth analysis of market conditions, marketing strategies, projected financial performance, and historical data.

While traditional IPO filings may be more extensive in length, SPAC-led offerings often allow for a more detailed presentation and the inclusion of visual aids. It is uncommon to find a company projecting revenue forecasts several years into the future within an S-1 filing. Conversely, SPAC-led debuts frequently emphasize future projections, as these typically involve younger companies seeking to attract investors with more than just past results.

Preston stated that Metromile benefited from a highly competitive SPAC process and was pleasantly surprised by its rapid progression. Following initial conversations, the company received offers from multiple SPACs within a week or two, according to the CEO.

TechCrunch inquired about the level of understanding regarding insurance products among the investors Metromile engaged with. Preston indicated that it varied, with some investors possessing a stronger technological background than insurance expertise. Consequently, any insurtech startup considering a SPAC should be prepared to address questions from tech-focused investors who may lack in-depth knowledge of the insurance industry.

What key points did Preston need to explain to potential investors? He highlighted three crucial aspects:

• The strategic rationale for prioritizing unit economics over immediate growth in overall financial metrics (establishing a solid model before scaling).
• The development of a sustainable competitive advantage within the insurance sector (through claims technology, pricing strategies, and user experience).
• The methodology for aligning Generally Accepted Accounting Principles (GAAP) financials with insurance contribution margin (considering the effects of reinsurance, etc.).

These are all valid considerations, mirroring insights gained through coverage of other emerging neoinsurance companies over the past year.

Now that the company is publicly traded and has access to increased capital, what are its future plans? According to its CEO, Metromile is focused on expanding its operations nationwide, and the liquidity of its stock will facilitate potential acquisitions. (Currently, Preston stated there are no active plans to acquire other businesses).

Regarding potential drawbacks, Preston shared his company’s perspective on the SPAC process with TechCrunch, noting that it likely required less time and caused less disruption compared to a traditional IPO. However, he acknowledged that the substantial work begins after going public, a challenge faced by all newly public companies regardless of the chosen method. Therefore, he did not elaborate extensively on potential downsides.

Currently, Metromile is being traded, experiencing a slight decrease of around 2.8% today after initial gains. This represents a neutral debut. The focus now shifts to the company’s ability to execute its plans with the newly acquired funds.