The rise in SPACs is leading to improved terms for targeted companies and an overall lower cost of capital, as company underpricing in traditional IPOs worsens
If you are looking past or through Covid — and why not, all of Wall Street is — the topic du jour in Silicon Valley is Special Purpose Acquisition Companies, or SPACs.
Context & Ripple Effects
This piece, from Bill Gurley's Above the Crowd, made the early case for what the rest of the corpus then documented: PitchBook counted more than 66 SPACs raised in 2020, up from 30 in 2019, with pandemic-era uncertainty pushing founders toward an IPO alternative. Gurley's core claim is that this supply of alternative capital disciplines a traditional IPO process whose underpricing — money left on the table by target companies — has been getting worse.
The follow-on coverage filled in the mechanism: because a SPAC deal is structured as a merger rather than an offering, startups escape the quiet period and can promote their stock far more aggressively. And by January 2021, research showed hundreds of SPACs competing to acquire tech companies, which is exactly the buyer-side rivalry Gurley argued would shift terms toward targets.
First-order effects
- Target companies gain negotiating leverage against underwriters and sponsors alike: with hundreds of SPACs hunting for deals, sellers can auction themselves across both channels instead of accepting an investment bank's IPO price.
- Startups weighing a listing now have a structurally cheaper path — better terms plus a lower cost of capital per the article's thesis — directly at the expense of IPO underwriting economics.
Second-order effects
- Investment banks face pressure to defend their IPO franchise: if worsening underpricing keeps handing targets to SPAC mergers, the traditional book-building process loses its captive pipeline of late-stage tech companies.
- Competition among sponsors inflates deal values for startups — the WSJ-reported dynamic — meaning venture-stage pricing and exit expectations rise alongside SPAC formation.
Third-order effects
- The pattern did not hold as a permanent repricing: Dealogic recorded July 2022 as the first month in five years with no new SPAC issuance, after a March 2021 peak above $36B — suggesting the going-public market oscillates between channels rather than permanently migrating to one.
- If the underpricing critique outlives the SPAC boom, the durable structural question is whether direct listings, reformed IPO mechanics, or whatever channel follows compete on price transparency — with regulators eventually scrutinizing whichever route dominates.
The trend: Going-public decisions are becoming a contest between channels — IPO versus SPAC versus successor structures — where each boom exposes pricing friction in the incumbent route before the cycle reverses.