A SPAC offers startups a faster, less burdensome route to going public—but it comes with financial, operational, and reputational trade-offs that demand rigorous evaluation.
This article will help you assess whether aligning with a SPAC is a strategic move for your business. You’ll learn how SPACs work, what investors expect, and how timing, valuation, and compliance play into your decision-making.
What is a SPAC and how does it work?
A Special Purpose Acquisition Company (SPAC) is a shell company that raises capital via IPO to acquire a private business and take it public. The merger allows your startup to bypass the traditional IPO process.
SPACs begin life with no commercial operations. They’re funded by sponsors—usually institutional investors or former executives—and given a limited window, typically 18–24 months, to identify and merge with a target company. Once a target is announced, the deal must win shareholder approval before your company transitions to a publicly traded entity. The process offers speed and capital certainty, which has made SPACs attractive to high-growth startups looking to accelerate market entry without the drawn-out roadshow of a traditional IPO.
Why are startups considering SPACs over traditional IPOs?
Startups choose SPACs for faster timelines, negotiated valuations, and lower upfront scrutiny. In hot capital markets, SPACs offer access to public capital without the lengthy IPO road.
On average, SPAC mergers close in 3–6 months, compared to 12–18 months for a traditional IPO. The process is also more flexible: you negotiate your valuation directly with the SPAC sponsor rather than leave it to market demand. This appeals to founders prioritizing speed and predictability. Moreover, with PIPE (private investment in public equity) funding often baked into the deal, your capital needs can be secured early.
Yet the market is shifting. In 2021, over 600 SPACs launched, but by 2023, that number dropped below 100, according to Nasdaq and Refinitiv data. The cooling trend reflects growing regulatory scrutiny, increased redemptions, and performance concerns post-merger.
What types of startups are best suited for SPACs?
SPACs favor late-stage, high-growth startups with scalable models, strong revenue pipelines, and near-term profitability potential. These businesses are often in tech, fintech, clean energy, or biotech.
Your startup should ideally generate $100M+ in annual revenue or have a clear path to it. SPAC sponsors—and the PIPE investors that co-fund the deal—look for operational readiness. That means financial controls, forecasting capabilities, and a credible CFO who can handle public company requirements.
SPACs aren’t just about access to capital. They’re about investor trust in your ability to operate at scale in a public environment. If your systems aren’t built for scrutiny—audits, investor reporting, SOX compliance—you’re not ready, regardless of revenue.
How do SPAC valuations compare to IPOs and M&A?
SPAC valuations are typically negotiated upfront, not market-priced. This allows more control, but it also invites risk of overvaluation—especially in volatile markets.
In IPOs, the underwriters gauge investor sentiment and adjust pricing accordingly. In SPACs, the sponsor and target company align on valuation, which often inflates expectations. A 2022 McKinsey study found SPACs overvalued targets by 10–30% versus their post-merger public market value, creating credibility gaps with investors after the deal closes.
In contrast, selling your company via M&A ties valuation directly to strategic synergies and operational performance. That path often provides more grounded outcomes and quicker liquidity but less upside potential. If your goal is to stay on as CEO and lead a public company, SPACs offer that opportunity—M&A usually doesn’t.
Key evaluation metrics for SPAC-readiness
- 3–5 years of audited financials with clean reporting
- Scalable infrastructure to meet public company standards
- Compelling growth narrative tied to large TAM
- Willingness to undergo investor and analyst scrutiny
- Alignment with sponsor experience and sector
What are the main risks of going public through a SPAC?
SPACs come with legal complexity, short-term investor pressure, and post-merger volatility. Many startups struggle to meet aggressive forecasts promised during the deal.
Redemptions are a major risk. If SPAC investors opt to redeem shares prior to closing, you could be left with less cash than expected. In 2022, average redemption rates exceeded 80%, according to Dealogic.
Another challenge is performance. A 2023 Bloomberg Intelligence report revealed that 70% of SPAC-deSPAC’d companies traded below $10/share one year post-merger. The scrutiny is intense, especially if you miss revenue or EBITDA targets.
Reputational risk is also real. Poor execution can tarnish your brand and deter future investors. If your operational maturity isn’t there, you’re better off delaying or choosing a different exit.
How do SPAC sponsors influence the deal?
Sponsors control the capital, structure, and investor narrative. Their track record and alignment with your sector are critical.
A credible sponsor brings PIPE investors, Wall Street analysts, and board members to the table. You should assess their prior SPAC performance, industry background, and operating involvement post-close.
Be cautious of sponsors with poor transparency or aggressive terms. Sponsors usually take a 20% promote (equity stake) in the merged entity—ensure they’re adding enough value to justify that dilution. If their incentives don’t match your growth plan, your shareholders may suffer long-term.
How do you prepare for a SPAC merger?
You need to think like a public company long before the deal closes. That means preparing audited financials, building investor relations capabilities, and managing internal change.
Public readiness starts with governance. Do you have the right board structure, committees, and financial controls? Can your team close books in 5–7 days and deliver accurate quarterly guidance?
You’ll also need to craft a compelling narrative for investors. SPACs often involve media roadshows, analyst meetings, and PIPE presentations. Investors expect precision, not hype. Missed expectations post-merger are unforgiving—and your stock price will reflect it.
Key Fast Facts About SPAC Exits Every Startup Should Know
- SPAC deals close faster than IPOs (3–6 months average)
- Valuations are privately negotiated, not market-priced
- Redemptions can significantly reduce cash proceeds
- Post-merger performance is highly scrutinized
- Fit best for late-stage, growth-focused startups
In Conclusion
SPACs can offer a viable path to public markets, but only if your startup is structurally, operationally, and financially ready. Evaluate the sponsor, forecast durability, and market conditions before moving forward. If you align with the right partner and prepare for scrutiny, a SPAC can unlock scale—if not, it can expose your weaknesses.
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Glen Leibowitz is a CFO and financial executive with 20+ years in capital markets and fintech. Currently CFO at Bitcoin Depot, he previously held roles at PwC and Apollo Global Management and served as CFO of Acreage Holdings. He specializes in IPO readiness, SOX compliance, and finance transformations. A CPA, he holds a B.A. in Accounting from Queens College (NY).