Hippo CEO Assaf Wand is preparing Hippo to go public and prefers SPACs to traditional IPOs.
Miri Ekshtein PhotographyAs an increasingly popular way to take a company public, SPACs, or Special Purpose Acquisition Companies, are weighing heavily on startup CEOs’ minds. They’re faster to set up than traditional IPOs, and hundreds of investors are trying to convince entrepreneurs to use them. So far in 2020, financiers have sunk $63 billion into SPACs, more than the total sum invested in them from 2009 through 2019, according to Spacinsider.
In its plans to go public, fast-growing fintech startup Hippo is considering a SPAC. Hippo CEO Assaf Wand says he prefers them to traditional IPOs, largely because they wrestle some control away from Wall Street. “I’m not the biggest fan of Wall Street in many ways,” he says. “It hasn’t served companies well.”
He met with eight different SPACs over the summer. “It was about education,” he says. “It wasn’t about me vetting them.” He says he’ll also consider direct listings but hasn’t researched them as deeply yet. “I’m considering everything,” he adds. “Every prudent CEO should look at all three options.”
Hippo is a five-year-old Silicon Valley startup that offers homeowners insurance. It uses satellite imagery, public data and smart-home devices like water-leak detectors to speed up the application process and minimize claims. In July, it raised $150 million in funding at a $1.5 billion valuation, up from $1 billion a year earlier. As of the summer, it was bringing in $270 million in annual premiums, up 140% from the year prior. Wand says there’s a good chance he’ll take his company public in 2021.
SPACs form when investors or “sponsors” raise money—usually hundreds of millions of dollars—with the intent of acquiring a private company and taking it public. They take their “blank check” entity public before deciding what business they’ll buy.
They take as little as eight weeks to execute compared with the roughly six months for traditional IPOs. One reason they’re popular with investors is because the funders can walk away with a large ownership stake—often 20%—in the newly public company. Several industry insiders, including Acorns cofounder Jeff Cruttenden and venture capitalist Ryan Gilbert, say that every fintech unicorn is being approached by SPACs. In September, real estate fintech company Opendoor announced it would go public through a SPAC created by Chamath Palihapitiya.
Both SPACs and traditional IPOs require companies to pitch their business to large institutional investors like T. Rowe Price, telling them to invest at the highest valuation possible. Wand likes SPACs because they give CEOs more flexibility in selling their story. For example, in a SPAC, CEOs can share projections for future growth, instead of being limited to discussing past financial performance.
“I think certain businesses are better talked about in the future than the past,” says Ryan Gilbert, a Hippo investor and co-sponsor of a $750 million SPAC with Bancorp founder and former CEO Betsy Cohen. “That’s what venture capital is all about.”
In traditional IPOs, investment banks organize the stock sale process. They select the large investors who will be pitched on a company, and they arrange meetings with CEOs. “The meetings are 30 to 45 minutes over Zoom, and then Fidelity decides if they’ll invest,” Wand says. “In a SPAC, investors can set up seven different meetings. In many cases, you can educate your investors more. I want to have educated, resilient investors.” Founders like long-term investors because they’re less likely to sell their stock—and potentially send its price downward—if the business has a bad quarter.
Silicon Valley venture capitalist Bill Gurley beats the drum for SPACs. He argues that banks design traditional IPOs so that companies are undervalued initially but see a big “pop” on the first day of trading. That can result in hundreds of millions being left on the table, he says, because the company could have gotten a higher price for its shares. Andreessen Horowitz partners Alex Rampell and Scott Kupor disagree. They say prices in a traditional IPO are set by supply and demand. “There’s a popular narrative that evil investment bankers are intentionally underpricing traditional IPOs to steal from companies … this narrative is almost completely false,” they write.
Another reason Hippo CEO Wand likes SPACs: “Because it’s a merger, you can negotiate everything.” You can negotiate the sponsors’ stake to be 5% instead of 20%. “You can say they’ll only get their 5% if the stock goes above a certain price,” he adds. In an IPO, the process is more established and formulaic.
Many companies that pursue SPACs also use PIPEs, or private investments in public equity, to simultaneously raise more money. Let’s say a SPAC raised $250 million. Before the SPAC merges with a target company, a group of large investors like Fidelity could invest another $250 million through a PIPE. Wand likes PIPEs because they’re a guaranteed commitment (SPAC sponsors can bail out of the deal at the last minute), and they’re seen as a vote of confidence in the company, since new investors are coming in with full knowledge of what firm will be acquired.
Some argue that the prestige of running a traditional IPO is one reason to choose it over a SPAC. “The prestige is cool,” Wand says. “But I think that three weeks after you are public, nobody cares about how you went public.”
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