European Unicorns & SPACs: Why They're Hesitant

SPAC Activity Continues in the U.S. Market

The U.S. market for Special Purpose Acquisition Companies (SPACs) demonstrated continued activity this week. Satellogic is set to become a publicly traded company on the Nasdaq exchange through a merger with a blank check firm.

This Earth-imagery company is typical of many SPAC targets, requiring substantial capital and projecting revenues further into the future.

News also emerged on Tuesday that Nextdoor will also pursue a public listing on the Nasdaq, utilizing the SPAC route.

Differing Approaches to SPAC Transactions

Nextdoor’s financial forecasts, as highlighted by TechCrunch, were more conservative and therefore appeared more credible compared to projections from numerous other companies debuting via SPACs.

These two companies exemplify the spectrum of SPAC-driven public offerings. Some startups leverage SPACs with more speculative business models, anticipating future revenue streams, while others are more established with a proven track record of revenue growth.

The Acorns deal aligns with the established trend, whereas Lidar SPACs represent the more speculative end of the spectrum.

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SPAC Dry Powder Remains Significant

Despite discussions suggesting a potential slowdown, the SPAC boom isn’t over, considering the number of companies still seeking these deals. Mary D’Onofrio, a partner at Bessemer, indicated to The Exchange that while the “rate of SPAC IPOs” and mergers has decreased, a substantial $128 billion in “SPAC dry powder” remains available for acquisitions.

Matt Murphy, from Menlo Ventures, clarified the deceleration in SPAC activity, explaining to The Exchange that increased scrutiny has made these deals less straightforward than they initially appeared.

Expanding Beyond the U.S.: SPAC Interest in Europe

This week’s developments in the U.S. demonstrate that blank-check companies are still successfully identifying a diverse range of companies for public offerings. However, the question arises: are similar SPAC opportunities emerging in other regions?

Given the prevalence of unicorns outside the U.S. startup landscape, is Europe experiencing comparable interest in SPACs?

The Exchange investigated this possibility, considering the significant funding rounds and traditional IPOs originating from the European region. Is the SPAC trend gaining traction in Europe?

Acquiring European Businesses

A substantial number of Special Purpose Acquisition Companies (SPACs) are presently listed on U.S. stock exchanges, actively seeking acquisition opportunities. Historical data demonstrates prior instances of U.S.-based blank-check firms acquiring companies located in Europe. Skadden, a global legal practice, has documented 16 transactions involving European firms and U.S. SPACs between 2015 and February of the current year.

Jonathan Anguelov, co-founder of Aircall, indicated to the French publication Les Échos in March that their company, like many other French and European scaleups, had been contacted repeatedly regarding potential deals (as reported by TechCrunch). However, receiving such inquiries does not automatically signify that European unicorns are actively considering these proposals.

Wefox represents an example of this. The company communicated to The Exchange that it is currently focused on utilizing the funds from its recent, record-breaking Series C investment. Consequently, exploring SPAC opportunities is not a priority at this time.

Wefox recently secured $650 million in funding, resulting in a valuation of $3 billion. Despite their current disinterest, the insurtech firm acknowledged the growing number of European startups experiencing rapid growth, similar to Wefox, which could become potential targets for SPAC acquisitions.

The company also noted that while the European market exhibits strong investor enthusiasm for taking companies public, there isn't a particular emphasis on utilizing SPACs as a route to market.

Given the readily available capital offered by eager SPACs, the question arises as to why more European companies aren't accepting these offers. A contributing factor could be guidance from venture capital firms advising against such a course of action.

The Allure and Risks of Quick Returns

Venture capital firms often choose to sell their shares in portfolio companies following an initial public offering (IPO). Alternatively, they may choose to retain ownership. However, all investors in privately held companies share a common goal: maximizing the exit value of the startups they support. The reluctance of investors to champion Special Purpose Acquisition Company (SPAC) exits warrants investigation. What factors contribute to this hesitation?

Pär-Jörgen Pärson, a partner at Northzone, outlined several key reasons in correspondence with The Exchange.

Pärson highlighted the significant operational differences between a publicly traded company and a private enterprise. Effective communication strategies must evolve, as “the public market lacks investors with specialized knowledge of your specific sector.” His firm advises startups to “begin preparing for public company communications 12 to 18 months before a planned listing.”

SPAC mergers typically do not allow for this extended preparation period.

However, this is not the sole consideration. Pärson also expressed concerns regarding “the broader economic climate and market fluctuations,” which have been communicated to both “entrepreneurs and limited partners when evaluating the current risks associated with SPACs.” The firm believes SPACs are particularly susceptible to market shifts. Pursuing a SPAC transaction carries risks related to changing public market sentiment, and these risks are “likely higher” than those encountered with traditional IPOs or direct listings.

Additional challenges exist. Franck Sebag of EY pointed out that a U.S. SPAC acquisition of a European company presents “complexities.” While less rigorous than an IPO, he clarified that the undertaking still requires substantial effort.

Furthermore, the appeal of SPACs may be diminishing compared to conventional IPOs. David Miranda, a mergers and acquisitions attorney, explained that SPACs “arose partly as a solution to deficiencies in the price discovery process within U.S. IPOs, a concern that is less pronounced in Europe.” This factor could further reduce the attractiveness of SPACs for European companies seeking local listings.

The Expanding Role of SPACs in Europe

Despite recent market fluctuations, Special Purpose Acquisition Companies (SPACs) continue to facilitate transactions throughout Europe, as evidenced by available data. Several European and U.K.-based technology firms have achieved public listing on U.S. markets through SPAC mergers, including companies like Arrival, Cazoo, EVBox, and Wallbox.

Furthermore, the number of European-based SPACs – those listed on European stock exchanges – is steadily increasing. Recent listings have occurred in financial centers such as Frankfurt, Stockholm, Milan, and Helsinki, as reported by Les Échos.

The choice by investment banking figures Michael and Yoel Zaoui to list their health and technology-focused SPAC on Euronext Amsterdam underscores the growing prominence of the Dutch market. Financial Times analysis suggests Amsterdam is becoming the leading European hub for SPAC activity, benefiting from a shift in euro-denominated equity trading following Brexit.

However, other nations are actively seeking to establish themselves as key players in the SPAC landscape. The French financial markets authority (AMF) highlighted the favorable legal environment for SPACs within France in April. They reported a notable rise in SPACs preparing for listings on the Paris stock exchange starting in 2021.

The AMF emphasized that French regulations strike a balance between welcoming SPAC listings and ensuring adequate investor protection. Belgium’s financial regulator, FSMA, initiated a public consultation in May to review its SPAC-related legal framework.

The U.K. is also evaluating its approach, notably through the Hill Review – officially the U.K. Listings Review. Lord Hill’s recommendations include changes designed to enhance the London Stock Exchange’s appeal to SPACs, potentially allowing it to recapture market share from Amsterdam in the post-Brexit era.

While the volume of SPAC formations remains lower than in the United States, the growth is significant. This presents a valuable new pathway for European technology startups seeking exit strategies and access to capital.

Key Developments & Regional Focus

• Amsterdam: Emerging as a leading SPAC hub due to post-Brexit trading shifts.
• France: Benefiting from a supportive legal framework and increased SPAC listing interest.
• United Kingdom: Actively reviewing regulations to attract SPACs and regain competitiveness.
• Belgium: Currently undergoing public consultation to refine its SPAC regulatory approach.

The increasing activity demonstrates a growing appetite for SPACs as an alternative route to public markets for European tech companies. This trend is expected to continue as regulatory frameworks evolve and investor confidence stabilizes.

The Potential Role of SPACs in Europe’s Economic Landscape

Sebag proposes a specific avenue for European SPACs to generate value: “sectorial build-up.” He explained to TechCrunch that, mirroring the 2015 French SPAC Mediawan’s role in consolidating the audiovisual industry, a specialized SPAC could achieve market consolidation. This would involve acquiring multiple target companies as a solution to the limited number of tech firms pursuing initial public offerings.

Deep Tech as a Prime Candidate

Yoram Wijngaarde, CEO of Dealroom.co, highlighted a particularly suitable sector: “The SPAC route is especially advantageous for deep tech startups requiring substantial late-stage capital.” This funding is crucial for supporting pre-profit research and development cycles. Deep tech is a key priority for the European tech sector.

Recent reports, such as the Scale-Up Europe report, indicate a need for increased support for deep tech startups and investors within Europe. Consequently, additional capital allocation to this area would likely be favorably received by numerous stakeholders.

Addressing Ethical Concerns

European SPACs may also distinguish themselves by proactively addressing ethical issues that have surfaced with their U.S. counterparts. For example, two SPACs launched on Euronext Paris last month employed a milestone-based structure, as reported by Les Échos.

This “staircase structure” appears to be a response to concerns about inherent advantages for SPAC sponsors. It aims to align the interests of the SPAC’s backers with those of subsequent investors.

Investor Protection

Furthermore, retail investors in France are less likely to experience unfavorable returns. French SPACs are primarily directed towards qualified investors. They are listed on the professional segment of Euronext Paris, which entails significant entry costs, as noted in an AMF report.

Could this approach define the future trajectory of European SPACs?

The Future Outlook

The ultimate level of European SPAC activity during this current surge will become clear in the coming months. As many SPACs approach the deadline for completing a deal, the window for mergers will begin to close.

We will then observe which Europe-based unicorns act swiftly to secure funding and which opt for conventional routes to achieve liquidity.