20VC SPACs. What Are They Why Now How Do They Change The Venture Landscape Are They Better Than IPOs & Direct Listings How Should Founders Think About Them Kevin Hartz & Troy Steckenrider @ A

In the 20 Minutes VC podcast, Harry Stebbings interviews Kevin Hartz and Troy Steckenrider, founders of Astar, a SPAC that raised $200 million to take tech startups public. Kevin Hartz, with a notable investment background including Airbnb and Uber, and Troy Steckenrider, with experience at Opendoor and McKinsey, discuss the potential of SPACs to democratize public market access for innovative companies. They emphasize the need for aligning SPAC sponsor incentives with company performance, rather than profiting regardless of outcomes. Astar's mission is to partner with enduring businesses, offering an alternative to traditional IPOs and providing founders with more options for going public. They aim to reform SPAC economics, reduce costs for partner companies, and focus on long-term value creation.

• Special Acquisition Companies (SPACs) are a major topic of discussion in the investment world.
• SPACs are seen as an alternative to traditional IPOs for taking companies public.
• Astar is a newly listed SPAC that raised $200 million to take a tech startup public.

"Day, SPACs or special acquisition companies, and."

This quote introduces the topic of SPACs, highlighting that they are the focus of the current discussion.

• Kevin Hartz is a co-founder and partner at Astar, with a successful history as an early-stage investor and as co-founder and chairman at Eventbrite.
• Troy Steckenrider, Kevin's partner at Astar, has experience in homeownership innovation, capital markets, private equity, and consulting.

"Joined by the founders of one of the most recent SPACs, Astar."

This quote sets the stage for the conversation with the founders of Astar and their qualifications.

• Astar's name references a search algorithm and indicates the company's focus on innovation and finding enduring businesses.
• The company aims to reform SPAC economics to benefit all parties involved, not just the sponsors or investors.
• Astar plans to create a series of vehicles, starting with their first SPAC called "one," to bring innovation companies to market.

"Astar, and that's an a asterisk is really referenced to a search algorithm developed in 1968 at Stanford University."

This quote explains the origin of Astar's name and its symbolic meaning related to their mission of finding optimal business partnerships.

• A SPAC is a pool of capital raised through an IPO to invest in a private company and help it go public.
• The capital is held in a bank account for up to two years while a partner company is identified and taken public.
• SPACs present a straightforward path to public markets for companies and offer public investors access to private company investments.

"So with respect to what a SPAC is, it really is just a pool of capital that is used to invest in a private company and help them get public."

This quote succinctly defines what a SPAC is and its role in the public and private investment spheres.

• SPAC investors have the option to participate in the deal at the time of investment, similar to a fully drawn VC firm.
• The capital commitment is funded upfront, and investors can opt in or out after knowing the details of the deal.

"The VC firm would then go out and do one deal. But what's interesting here is with a SPAC investment, the SPAC investors have the opportunity to decide at the time of the investment whether or not they want to participate."

This quote compares SPACs to venture capital investments and emphasizes the choice investors have in SPAC deals.

• The responsibility lies with SPAC founders to find outstanding businesses that will attract investor interest.
• While investors have the option to withdraw, strong businesses with clear advantages typically secure investment.
• Historical trends show a high approval rate for SPAC deals, with most capital rolling over into the final investment.

"I'd like Troy to add a bit to this, but first I would just say it's really on our shoulders to find a great company."

Kevin Hartz emphasizes the importance of selecting a compelling company for SPAC success, which is a core responsibility of the SPAC founders.

• SPACs provide an alternative to growth rounds and traditional IPOs, offering a different path for companies to go public.
• Enduring companies view SPACs as a financing event rather than an exit, with a focus on long-term growth post-IPO.

"Well, our belief strongly is that there is no exit to a company. The most enduring companies are just going through a financing event, and we'll continue to build on."

Kevin Hartz articulates the philosophy that SPACs are a step in a company's journey, not an end goal, aligning with a long-term vision for growth.

• More optionality is better for founders and operators.
• Direct listings, traditional IPOs, SPACs, and growth rounds are available options for companies.
• Companies are reversing the trend of staying private for extended periods.
• There's a shift from average four-year IPO timelines to twelve years, which has downsides.
• Private market can cause atrophy of performance muscles due to lack of strong governance.
• Founders are now seeking to enter public markets earlier to compete.

"More optionality means that there's a direct listing. There is a primary traditional IPO, and now there is a SPAC. In addition, companies still can take growth rounds."

This quote outlines the various pathways available for companies to access capital and public markets, emphasizing the importance of having multiple options.

• Historical context: companies used to go public after six or seven quarters of increasing revenue.
• Microsoft and Amazon went public with valuations around $500 million, which is now considered small.
• Current trend: founders want to compete in public markets with revenues around $50-60 million, growing in triple digits.
• SPACs can accommodate various sizes of capital raises with the addition of a PIPE (Private Investment in Public Equity).

"We're looking actually upstream and we're finding a great deal of reception from founders that want to get out there and compete at 50 million in growing triple digits, or 60 million in revenue growing triple digits."

This quote reflects the current trend of companies seeking to go public at earlier stages of growth, with strong revenue growth being a key factor.

• Venture capital firms are interested in learning about SPACs as a liquidity option.
• Founders and operators prefer public market exposure to pick and choose investors.
• Public markets offer a broader range of top-tier investors compared to limited private rounds.

"It's really at the founders and operators decision of which direction they want to go."

This quote emphasizes that the choice to pursue a SPAC or other forms of going public ultimately lies with the founders and operators of a company.

• Current SPAC fees are considered egregious and need reform.
• The "amazonification" of the SPAC market is required to make it a fairer source of capital.
• Aligning SPAC economics with traditional IPOs and direct listings is necessary for partnering with high-performing companies.
• Reformers in the SPAC market aim to set examples for fair deals to attract the best companies.

"SPAC fees are egregious. I'll just say that outright, and they need to be reformed."

This quote criticizes the high fees associated with SPACs and calls for industry reform to make the process more equitable.

• Sponsor shares typically represent 20% of the post-money SPAC investment.
• SPACs purchase warrants for additional upside alignment.
• Concerns about the misalignment of incentives when sponsors benefit regardless of company performance.
• Desire for industry change to align incentives more closely with company success.

"So the economics for the sponsor really take two forms. The first are sponsor shares, which are typically 20% of the post money SPAC investment."

This quote explains the financial structure of SPACs from the sponsor's perspective, highlighting the need for better alignment of incentives between sponsors and company performance.

• The goal is to set market leadership in SPACs to attract high-quality companies.
• Historical parallels are drawn with venture capital reform benefiting both investors and founders.
• The SPAC market is expected to reform, following a pattern similar to early venture capital.
• Concerns about a potential bubble and the impact on retail investors.

"We think about setting market leadership and others will follow by example that if there is a fair deal for both sides."

This quote expresses the intention to lead by example in creating fair SPAC deals, anticipating that others in the market will follow suit.

• SPAC evaluation is primarily based on the people involved due to the absence of assets and profit and loss considerations.
• Trust is a key factor, as SPACs hold significant amounts of money in a simple structure.

"It's really only based on people, because there's no assets, there's no p and l, or there's a small tiny l, but no p because it's just amount of money held in trust."

This quote advises that when evaluating a SPAC, the focus should be on the people involved rather than traditional financial metrics, given the nature of a SPAC's structure.

• Evaluation focuses on the people involved and their backgrounds.
• Importance is placed on understanding of tech and immersion in the innovation economy.
• Assessing whether individuals reward both the company and shareholders with their investments.
• Consideration of whether they are seen as founder-friendly.
• Interest in raising the overall success of the industry, not just individual success.

"It's entirely evaluated on people and looking at their background, are they really effective in understanding of tech? They've been immersed in the ecosystem of the innovation economy."

This quote emphasizes the importance of the individual's background and understanding of technology, as well as their involvement in the innovation economy, as key evaluation criteria for SPACs.

• Notable investors like Mark Stadd and Mickey from Ribbit are bringing SPACs to market.
• SPACs allow retail and long-only investors to get involved in companies that were previously less accessible.
• The presence of SPACs in the market is seen as an opportunity for institutional investors to place their money with confidence, similar to a venture fund.

"But I'm very heartened to see people like Mark Stadd and his team at Dragoneer bringing a vehicle to market... And for the first time, retail and many long only investors can get involved in that company."

The quote highlights the positive market impact of SPACs by allowing a broader range of investors, including retail and long-only investors, to participate in investment opportunities typically reserved for institutional investors.

• Historically, SPACs do not work together on the same target due to the nature of SPAC mergers.
• Additional capital can be brought into a SPAC transaction through a PIPE (Private Investment in Public Equity).
• PIPEs in the SPAC context are similar to anchor investors in an IPO, as they allow institutional investors to take a significant stake in a company going public.

"A pipe is a private investment in a public equity... It looks a lot more like a traditional anchor investor in an IPO and allows that pipe investor to really get a meaningful chunk and participate for the long term."

This quote explains what a PIPE is and how it functions in the SPAC ecosystem, drawing parallels to the role of anchor investors in traditional IPOs and emphasizing the long-term participation of PIPE investors.

• SPACs typically have a 24-month timeframe to complete the despacking process.
• This involves merging with a partnered company and putting the SPAC's capital onto the company's balance sheet.
• The timing is a balance between acting quickly and being patient to find the right company.

"In our case, we have a 24 month time frame to get all the way to what's called the despacking process... And it's really an interesting theoretical equation of how long you wait, how many companies you pass on before you find that next great leader in the market."

The quote discusses the timeframe for a SPAC transaction and the strategic patience required to identify the most suitable company for investment.

• The trend towards larger SPACs is noted, with some reaching billions in size.
• Astar chose a $200 million size for their first vehicle to focus on reversing the trend of companies staying private longer.
• The size of the SPAC is designed to partner with companies valued at four to six times the SPAC's capital.
• The ability to flex up with a PIPE allows the inclusion of top-tier institutional investors.

"We're interested in helping with these tailwinds of reversing the stay private trend with a smaller SPAC with something on the order of 200 million... That really helps us get to market with a company that's relatively earlier on in its IPO lifecycle."

The quote explains the rationale behind choosing a $200 million size for the SPAC, aiming to target companies earlier in their IPO lifecycle and contribute to a shift in the trend of companies remaining private.

• There is an acknowledgment that the best companies often appear overvalued historically.
• The speaker notes that enduring companies will maintain their value over time despite market fluctuations.
• There is an expectation of a convergence between private and public market valuations.

"The best companies, the most enduring companies, are always effectively overvalued... But really, at the end of the day, in the long term of that business, it will find its right valuation, despite the ups and downs."

This quote addresses concerns about high valuations and emphasizes the long-term perspective on company value, suggesting that truly enduring companies will eventually settle at a fair valuation.

• The team's respect for founders and experience on both sides of the investment table is highlighted.
• Historical involvement in successful companies like Pinterest and Airbnb informs their approach.
• A commitment to revolutionizing the industry and partnering with like-minded companies is emphasized.
• The SPAC aims to reduce the cost of capital by offering low warrant coverage.

"We're trying to find partners to work with us and really make these changes here... We also have set outright that we'll compress this cost of capital."

The quote underlines the team's strategy to differentiate themselves by respecting founders and reducing the cost of capital, aiming to create a more appealing proposition for potential partners.

• Chamath is recognized as a pioneer in the SPAC market.
• Chamath's view on the biggest challenge is not explicitly stated, but it is implied that cadence is a factor.
• Kevin Hartz (Speaker C) emphasizes quality over quantity in SPACs, aiming for enduring businesses rather than a high number of SPACs.

"Well, we really have to call out that Chamath is a pioneer in the market, and Chamath would be the first to point that out."

This quote highlights Chamath's acknowledged role as a forerunner in the SPAC industry and his self-awareness of this status.

"So we don't want to get out 20 spacs consecutively off the Runway unless we can assure that there'll be 20 enduring businesses."

Kevin Hartz articulates their strategy of prioritizing long-term business viability over launching a large volume of SPACs in quick succession.

• Troy Steckenrider (Speaker D) finds inspiration in a Churchill biography for its depiction of leadership and resilience.
• Kevin Hartz (Speaker C) prefers reading business plans and financials of great companies, finding them inspiring narratives.

"I've been reading a Churchill biography recently that's been great."

This quote indicates Troy's interest in historical leadership and perseverance as seen in Churchill's life.

"The must read is a great company's business plan and financials."

Kevin Hartz expresses his preference for reading material that offers insight into successful business operations and strategies.

• Kevin Hartz traditionally favors decks for their combination of visuals and text.
• He is also seeing value in well-written notion memos but is critical of poorly edited ones.

"Well, I've traditionally been more of a deck man, a deck person, I should say, because it really encapsulates the visual and the text."

Kevin Hartz explains his historical preference for decks due to their comprehensive presentation format.

"But I'm coming around to the memo way as I'm seeing the use of notion, and I'm not sure if you've seen this trend where there's some really well concise written notion memos."

Here, Kevin Hartz acknowledges a shift in his preference towards concise and well-written notion memos, suggesting a trend in the industry.

• Finding quality business partners for SPACs is a significant challenge.
• The process of setting up a SPAC is not seen as difficult, but ensuring the business's longevity is.

"I think it really is finding this great partner."

Troy Steckenrider identifies the critical challenge of locating suitable business partners for SPACs.

"It, without a doubt, is ensuring we find a durable business."

Kevin Hartz echoes the sentiment, emphasizing the importance of finding businesses that have the potential for long-term success.

• Kevin Hartz describes the timeline and process of their SPAC going public.
• He highlights the importance of choosing the right banking and legal teams, such as Goldman Sachs and Goodwin.
• Laura Depetra's contribution as a legal expert is acknowledged for her role in the SPAC's success.

"We had our first org meeting... We had filed in early July. Our s one flipped public in early August, and we launched and went public on August 18."

Kevin Hartz provides a detailed account of the rapid timeline from organizational meetings to the SPAC's public launch.

• Kevin Hartz stresses the importance of a genuine fit between investors and founders.
• He emphasizes the value of thoughtful partnership decisions over quick sales processes.
• Roloff Botha's involvement in his companies is cited as a positive example of a beneficial investor-founder relationship.

"What to change on the investing side is really finding a genuine fit between a founder and an investor."

This quote from Kevin Hartz suggests that the current investment landscape should focus more on compatibility between investors and founders rather than rapid deal-making.

• Kevin Hartz and Troy Steckenrider aim to build Astar into an enduring franchise in the innovation economy.
• They aspire for Astar to become a helpful platform for the tech community, aiding companies in going public.
• Astar seeks to pioneer and reform the SPAC vehicle and to be a lasting, impactful entity in the financial landscape.

"We want to really build an enduring franchise."

Kevin Hartz expresses his long-term aspiration for Astar to become a perennial figure in the investment community, akin to firms like Sequoia Capital and Andreessen Horowitz.

"We'd love Astar to become a platform that is used for lots of different things and to help lots of different companies."

Troy Steckenrider envisions Astar as a multifaceted platform that supports a wide range of companies within the tech ecosystem.