Why Blank-Check Companies Are Now Targeting SaaS

The first time you likely heard the term “SPAC” was in 2017, when entrepreneur Chamath Palihapitiya raised $600 million for a blank-check company formed for the purpose of merging or acquiring other companies. Social Capital Hedosophia Holdings was ultimately used to take a 49% stake in the British spaceflight company, Virgin Galactic.

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SPACs, or special-purpose acquisition companies, are shell companies that do not have the day-to-day operations of a typical organization. Instead, they are created solely to raise capital through an IPO, which they use to acquire or merge with another business or businesses.

When a SPAC is formed and completes its IPO, the capital raised is placed in a trust account that earns interest. The funds can only be used for an acquisition, but people can use the interest for any working capital needs. This isn’t a novel concept, since SPACs have technically been around for decades but recently the trend of blank-check companies targeting SaaS companies has caught the attention of many.

There has been a noticeable increase in the formation and use of SPACs recently, especially in SaaS. Investors in early-stage startups are hoping that subsequent rounds of funding get the company to profitability and/or a liquidity event such as an IPO or acquisition. However, there has also been a lot of public attention and scrutiny of these companies, exposing them to highly unpredictable and fluctuating initial debuts on the public market.

In February, Rocket Internet Growth Opportunities Corp., a blank-check company whose management team includes members of Rocket Internet’s leadership, announced plans to go public on the New York Stock Exchange (NYSE) in a $250 million deal, according to a Form S-1 filing.

The SPAC seeks to “support the disruption of outdated business models, with a particular focus on marketplaces, eCommerce, enterprise [Software-as-a-Service] SaaS, FinTechs, HealthTechs and artificial intelligence,” according to the regulatory filing.

The news comes as Rocket Internet was progressing with plans to go private after watching the value of shares steadily decline.

And in December last year, Dune Acquisition, a blank check company led by executives from Delta2 Capital targeting a SaaS business, raised $150 million by offering 15 million units at $10.

So why are SaaS companies the latest target for SPACs? Simply put, SaaS is a growing sector and seemingly avoided the bitter blow of the pandemic many other industries couldn’t withstand. SaaS purchasing saw a 26% increase from February to April of 2020, the onset of the pandemic, compared to the year before. Data security SaaS spending spiked 132%, and web conferencing grew 22% from 2019. With such a rapidly growing industry, it is no surprise that this latest investing trend is trying to snag its own piece of the action.