Misc

In pandemic era, entrepreneurs turn to SPACs, crowdfunding and direct listings

08/07/2020

If necessity is the mother of invention, then new business owners are getting very inventive in the ways in which they access cash. Relying on some long-tested and some new avenues to raise money, entrepreneurs are finding more ways to get public market cash faster than they would have in the past.

Whether it’s from Reg A crowdfunding dollars, Special Purpose Acquisition Companies (SPACs) or direct listings, these somewhat arcane and specialized financing vehicles are making a comeback alongside a rise in new funding mechanisms to get to market quickly and avoid the dilution that comes from private market rounds (especially since those rounds are likely to come at a reduced valuation given market conditions).

Some of these tools have existed for a while and are newly popular in an era where retail investors are driving much of the daily fluctuations of the public markets. Wall Street institutions are largely maintaining their conservative postures with regard to new offerings, so secondary market retail volume growth is outpacing institutional. Retail investors want into these new issues and are pouring into the markets, contributing to huge pops to new public offerings for companies like Lemonade this Thursday and creating an environment where SPACs and crowdfunding campaigns can flourish.

The rise of zero-commission brokerages and the popularization of fractional trading led by the startup Robinhood and adopted by every one of the major online brokers including Charles Schwab, TD Ameritrade, E-Trade and Interactive Brokers has created a stock market boom that defies the underlying market conditions in the U.S. and globally. For instance, daily trades on Robinhood are up 300% year-over-year as of March 2020.

According to data from the BATS exchange, the total trade count in the U.S. was up 71% and May trading was up more than 43% over 2019. Meanwhile, E-Trade daily average revenue trades posted a 244% increase in May over last year’s numbers.

Don’t call it a comeback

The appetite for new issues is growing and if many of the largest venture-backed companies are holding off on going public, smaller names are using SPACs to access public capital and reach these new investors.

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