‘The Market Seems Crazy’: Start-Ups Wrestle With Flood of Offers

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As a deal frenzy mounts, propelled by financial vehicles known as SPACs, start-ups have become the prey.

SAN FRANCISCO — Ryan Schaffer, chief financial officer of Expensify, a start-up that makes business expense reporting software, has been relentlessly hounded since last year.

It started with Expensify’s board. In the fall, members asked Mr. Schaffer whether the company would be interested in merging with a “special purpose acquisition company,” or SPAC, a type of financial vehicle that private companies were increasingly using to go public. If so, they told him, they could provide introductions. Expensify was considering going public in 2021, so Mr. Schaffer said yes.

That opened the floodgates. Dozens of SPACs began emailing Mr. Schaffer through their advisers, investors, bankers and other middlemen. Eventually, the interest became so overwhelming that, he said, he stopped responding to new inquiries. Even his accountant had a SPAC hookup.

“The market seems crazy,” Mr. Schaffer said. “They want to go so fast.”

Many start-ups are being similarly deluged as SPACs have kicked off an extraordinary dealmaking frenzy. In recent months, these investment vehicles — also known as “blank-check companies” — have pulled out all sorts of tactics to make deals with target companies. Their strategies include offering stratospheric values, dangling incentive bonuses and recruiting celebrities like Sammy Hagar and Shaquille O’Neal to their advisory boards to lend some star power.

And if all else fails? They badger the start-ups.

The activity has ramped up as SPACs have proliferated and chase a limited pool of potential targets. The financial vehicles, which are publicly traded shell companies with no operations, are structured to hunt for deals. They raise money from investors, take the shell company public and promise that they will find a private company to merge with. If that is successful, the target company then takes over the shell and becomes publicly traded. The sponsor gets a stake, typically 20 percent, of the shell company.

For years, these vehicles had a shady reputation. That changed last year as the market surged — and there may now be too many SPACs. So far this year, 264 of them have raised $ 76.7 billion in public offerings, topping the $ 75.5 billion that was raised in all of 2020, according to Renaissance Capital, which tracks listings. The blank-check companies have outnumbered traditional initial public offerings — which are also booming — by nearly a four-to-one ratio.

Not having enough start-ups to merge with is a problem because SPACs face a ticking clock. If they do not complete a deal within two years, the special purpose vehicle dissolves and investors get their money back.

“There is intense pressure to find good targets,” said Julie Copeland, a partner at StoneTurn, which advises companies and investors on regulatory and compliance issues. “Not a lot of firms want to say, ‘Gee, we couldn’t find a target.’”

The supply-demand imbalance has pushed many of the blank-check companies to chase younger, untested start-ups. Last month, Joby Aviation and Archer Aviation, which are both electric air taxi companies that do not expect any revenue for years, said they planned to go public via SPACs that valued them at $ 6.6 billion and $ 3.8 billion, respectively.

The frenzy has already led to trouble. The stock of Nikola, an electric car start-up that went public via a SPAC in June, has plunged more than 80 percent after Hindenburg Research, an investment fund, accused the company in September of lying about its technology, overstating business deals and deceptively rolling a truck down a hill in a product video. Trevor Milton, Nikola’s founder and chairman, resigned, and the Securities and Exchange Commission and Justice Department have started investigating the company.

The S.E.C. has also opened inquiries into Clover Health, a health insurance start-up, and Lordstown Motors, an electric truck start-up, which both went public through blank-check companies in recent months.

On March 10, the S.E.C. warned that SPACs face distinct risks and potential conflicts of interest. The agency was particularly critical of those backed by celebrities, concluding that “celebrities, like anyone else, can be lured into participating in a risky investment.”

For now, the special purpose vehicles remain on the prowl for targets.

Jedidiah Yueh, chief executive of Delphix, a data infrastructure company in Redwood City, Calif., has experienced the interest firsthand. Mr. Yueh, who founded Delphix 13 years ago, said SPACs began reaching out last summer as his business picked up in the pandemic. The company, which helps customers process and automate data, recently became profitable and is a candidate to go public.

But Mr. Yueh said he hadn’t decided if Delphix would go public through a traditional offering or another route, such as a “direct listing” or SPAC. As he has sorted through the options, SPACs have flooded his inbox with messages almost every day. One even sent a mailer to Delphix’s unoccupied office last year while everyone worked from home in the pandemic.

Mr. Yueh said he had met with some SPACs out of curiosity. But he quickly got the sense that sponsors were telling him whatever they thought he wanted to hear. Once they learned that Delphix was profitable, “they just switch gears and talk about how easy they are to work with,” he said.

He said he had stopped responding to cold pitches and created a canned response to ward off others. The investors he met with weren’t the kind of long-term backers that Delphix wanted, he said. But in a nod to the trend of celebrity-backed SPACs, he added, “I would have taken a meeting with Shaq.”

To ease the way for more deals, some investors said they were trying to sell entrepreneurs on the benefits of SPACs. Peter Hébert, a managing partner at the venture capital firm Lux Capital, said that since the firm raised $ 345 million for a health care and tech-focused SPAC last fall, he had promoted the vehicles to at least 100 companies and investors.

Mr. Hébert said his message was that the vehicles were no longer just the territory of shady “Wolf of Wall Street” types but could benefit start-ups because they are a fast and inexpensive way to go public. While the S.E.C. prohibits companies from making financial projections in a traditional I.P.O., those going public via SPAC are under no such restrictions.

“I view our role as demystifying something that has a really bad reputation,” he said. Start-ups have been receptive, he said, though Lux has not yet announced a deal for its SPAC.

Andrew Dudum, chief executive of Hims & Hers, a telehealth company, said he was initially skeptical of SPACs but began taking meetings to learn about them last year — and was quickly overwhelmed by suitors.

“There’s an endless number of teams out there with capital,” he said. “Everyone and their grandma has a SPAC.”

Mr. Dudum eventually came around to using a SPAC because it was a speedy and less costly way to go public, he said, plus it would sidestep the dreaded stock “pop” on the first day of trading, which signifies a mispriced deal. In January, Hims & Hers listed its shares through a SPAC formed by Howard Marks, founder of Oaktree Capital Management.

At Expensify, Mr. Schaffer said the flood of interest had initially been flattering. The company, which is 12 years old and based in San Francisco, is profitable and recently crossed $ 100 million in “annual recurring revenue,” a threshold that some software companies use for going public. But the meetings soon began to feel like a beauty pageant, he said, as SPAC sponsors pitched him on their relevant experience and legitimacy.

In some calls, Mr. Schaffer said, it wasn’t immediately clear who was part of a SPAC and who was the middleman helping to make the deal. Afterward, the follow-ups always came fast, asking him to set up a management presentation and sign nondisclosure agreements.

“They’re basically always pushing really aggressively to move forward,” Mr. Schaffer said in an interview in January.

Some promised that Expensify would be valued at an eye-popping number, he said. Others floated a grease-the-wheels-style management bonus, which Mr. Schaffer said was a signal to end the call immediately because it felt sleazy. After David Barrett, Expensify’s chief executive, sat in on one call, he told Mr. Schaffer not to invite him to any more SPAC meetings unless things got serious.

Expensify can always turn to a SPAC deal given that it could be faster than a traditional I.P.O., Mr. Schaffer said. And there are hundreds to choose from.

“It’s like Door No. 3 sitting off to the side,” he said. “You can always take that.”

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