Bradley Tusk has recently become recognized for identifying emerging trends, stemming from his early work with Uber, his initial investment in the insurance technology company Lemonade, and his advocacy for utilizing smartphones for voting purposes.

Consistent with his position at the forefront of innovation, it wasn’t unexpected when Tusk, alongside a growing number of investors, established a $300 million special acquisition company (SPAC). According to regulatory documents, he and a partner intend to use this SPAC to acquire a business within the leisure, gaming, or hospitality sectors.

Given Tusk’s background as a successful political strategist – he managed Mike Bloomberg’s successful mayoral campaigns – and his apparent ability to anticipate future developments, a recent conversation focused on the longevity of SPACs, the potential impact of a Biden administration on startup investment, and the level of concern, if any, that major technology companies should have regarding the upcoming election. The complete discussion can be accessed here. Due to its length, this presentation focuses solely on the portion of the conversation pertaining to SPACs.

TC: Lemonade became a public company this summer, and its stock, initially priced at $29, is currently trading at $70. 

BT: As of my last check, the share price was actually down today. Infrequent monitoring can create a misleading impression of success, while daily observation, as I practice, reveals fluctuations like a 4% loss.

We were fortunate; Lemonade represented our second investment from our initial fund, and its IPO within four years of its founding is quite remarkable.

TC: Is it remarkable? I’m curious as to what this suggests about the frequent criticism that the traditional IPO process is flawed – is it simply a justification?

BT: [CEO] Daniel Schreiber clearly articulated that he and [co-founder] Shai Wininger had a deliberate strategy from the outset to become a public company as rapidly as possible. He believes an IPO should signify a new beginning – a demonstration of product-market fit and customer demand, paving the way for future growth and excitement. A company that has remained private for a decade, with a valuation in the tens of billions and slowing growth, presents a less compelling investment opportunity for the public.

The current question for those in our industry revolves around the upcoming IPO of Airbnb and whether it will generate the same level of enthusiasm, or if the market will be less responsive due to the company’s established presence.

TC: Is that the reason we are witnessing a surge in SPACs? The initial excitement may be diminishing, and there’s a desire to bring companies to the public market while the opportunity remains?

BT: I don’t believe that’s the primary driver. I see SPACs as a means of raising substantial capital quickly. It took me two years to secure $37 million for my first venture fund, whereas raising $300 million for my SPAC took only three months. It’s a remarkably efficient mechanism, and its current popularity among public market investors creates significant opportunities that people are actively pursuing. In fact, we are now seeing instances of planned SPACs being withdrawn due to intense competition.

Ultimately, fundamental business principles remain paramount. Taking a fundamentally weak company public through a SPAC may generate initial excitement, but without strong unit economics or substantial growth, long-term success is unlikely. Especially for those involved in the SPAC, the lockup period allows sufficient time for the market to recognize the company’s shortcomings. You cannot disguise inherent flaws.

TC: You mentioned raising the SPAC capital very quickly. How does the investor base differ from that of a typical venture fund?

BT: The investors in this SPAC – at least during my roadshow, which involved 28 meetings over a few days – were primarily hedge funds and investors who generally do not participate in venture capital. To my knowledge, there was no overlap between the limited partners in my venture fund and those who invested in our SPAC. These are public market investors accustomed to rapid decision-making. SPACs offer greater liquidity; we have two years to identify an acquisition target, but ultimately, it’s a publicly traded entity, allowing investors to enter and exit as they see fit.

TC: So, it’s largely hedge funds that are earning management fees for deploying capital in a relatively secure manner, and also receiving interest on the funds held in trust while the SPAC managers search for a target company?

BT: The appeal for these investors lies in their assessment of the SPAC manager’s ability to identify promising opportunities. They are essentially betting on the manager’s deal flow, public profile, and overall activity to uncover the right target. Venture investors are well-suited to this role, as we routinely evaluate numerous companies before making investment decisions.

TC: Is demonstrating public markets expertise necessary to convince these investors that you understand the requirements for taking a company public and fostering growth in the public markets?

BT: I suppose so. The fact that we successfully raised the funds suggests I met their criteria. However, I did spend nearly two years on Wall Street, where I led the lottery privatization group at Lehman Brothers. My partner [in the SPAC], Christian Goode, also possesses extensive experience with major gaming companies. Nevertheless, I believe that a venture investor with a strong deal flow and a proven track record, even without significant public market experience, would not necessarily be disqualified from leading a SPAC.