Aug 31, 2020 · 37m · 20vc
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*
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In this episode of The 20 Minute VC, host Harry Stebbings interviews A* co-founders Kevin Hartz and Troy Steckenrider about the mechanics, evolution, and future of Special Purpose Acquisition Companies (SPACs). They discuss how SPACs offer an alternative to traditional IPOs, the necessity of aligning sponsor fee structures with founder interests, and A*'s strategic vision for technology growth capital.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 28.6% of the talking time here. How this is scored →
Harry as informed peer 4.5 Guest teaching 5.2 Guest disagreement 1.8 Harry pushing back 3.3
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 28:49 Rejecting the high-volume SPAC assembly line
Kevin pokes fun at Chamath Palihapitiya and firmly rejects the high-frequency SPAC model, arguing that rushing out 20 SPACs compromises quality.
Hardest push from Harry ▶ 25:00 Pushback on inflated startup valuationsHarry directly challenges Kevin on market pricing, arguing that billion-dollar unicorns today lack the revenue fundamentals of companies from two years ago.
Biggest teaching moment ▶ 6:02 Explaining SPAC mechanics via VC fund analogiesTroy provides a comprehensive breakdown of SPAC mechanics, framing it as a fully drawn VC fund where LPs retain redemption options.
Harry holds his own ▶ 14:18 Calling out SPAC structure inconsistencyHarry demonstrates keen preparation by confronting the guests on why their own SPAC used vanilla fee terms despite publishing an op-ed criticizing industry fees.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Nomenclature and Historical Evolution of SPACs | 2 | 6 | 1 | 1 | Harry asks a broad introductory question about how the guests entered investing and created A*. Kevin takes over with a lengthy historical overview comparing VC evolution from the 1960s to Y Combinator and modern SPACs. | |
| Defining the SPAC Mechanics and Capital Structure | 6 | 5 | 2 | 5 | Harry challenges the SPAC model by asking whether investor redemption voting hurts contrarian bets. Troy and Kevin educate on market statistics, noting 99 percent of SPAC deals get approved. | |
| SPACs vs. Growth Rounds and Traditional IPOs | 4 | 6 | 1 | 2 | Harry asks where SPACs fit into the capital funnel relative to growth rounds and IPOs. Kevin provides historical context on how private holding times blew out from 4 years to 12 years post-2000. | |
| VC Ecosystem Collaboration and Investor Access | 5 | 6 | 2 | 3 | Harry asks directly about SPAC fee structures compared to investment banks. Kevin bluntly calls current industry fees egregious and calls for market reform. | |
| Aligning Incentives and Educating Founders | 5 | 5 | 2 | 5 | Harry presses the guests on why they used a standard fee structure for their first SPAC despite calling for fee reform in TechCrunch. Troy explains they will align terms during target negotiation. | |
| Future Market Landscape and Bubble Risks | 5 | 5 | 2 | 4 | Harry questions whether SPACs will truly democratize or stay in the hands of the top one percent. Kevin warns of potential dot-com style bubble risks if low-quality SPACs flood the market. | |
| Co-Investing SPACs and Demystifying PIPEs | 4 | 6 | 1 | 2 | Harry asks how PIPEs function in SPAC deals. Troy clarifies the financial terminology, explaining that PIPEs in SPAC transactions mirror IPO anchor orders rather than distressed debt deals. | |
| Capital Sizing and the Mega SPAC Trend | 6 | 5 | 3 | 6 | Harry challenges the guests on sky-high tech valuations, arguing modern billion-dollar startups lack sound fundamentals. Kevin counters that enduring tech companies always look overvalued early on. | |
| A*'s Differentiating Edge and Low Warrant Coverage | 5 | 5 | 3 | 4 | Harry asks about issuance frequency compared to high-volume sponsors. Kevin lightheartedly pokes fun at Chamath Palihapitiya while insisting A* prioritizes long-term quality over volume. | |
| Quickfire Round: Books, Memos, and Strategic Vision | 3 | 3 | 1 | 1 | Harry runs through standard quickfire questions regarding books, memos, and long-term vision. The guests reflect on unit economics and building an enduring franchise like Sequoia. |
Statements from this episode (27)
Stebbings: A* raised $200M for its first SPAC vehicle
“A-Star, a newly listed special acquisition company, which raised two hundred million dollars to acquire and take public a tech start-up,”
Hartz: SPACs will be an enduring listing vehicle, not a passing trend
“We see this SPAC phenomenon, not as a flash in the pan, not as a quick up and down. That'll be a passing fancy of the 20 twenties, but really an enduring vehicle to bring our innovation companies to market.”
Hartz: A* plans to launch subsequent SPAC vehicles after its first
“Now, as the name one refers to, we were likely, we hope and plan to have a two and a three and a four with the success of one.”
Steckenrider: SPACs Provide Private Companies an Easier Path to Public Markets
“And so from the company's perspective, this is a much easier and straightforward way to get to the public markets.”
Steckenrider: 99% of SPAC merger deals since 2010 passed investor votes
“I mean, I think it's something like 99% of deals have had a yes vote, of SPAC deals since like twenty-ten have had a yes vote.”
Steckenrider: SPAC Investor Redemption Risk Is Overstated
“The redemption thing is certainly a risk, but I think it's a little bit less risky than people actually make out when you actually kind of track the real world technicals in terms of the way it trades.”
Hartz: Going public is a financing event, not an exit
“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 will continue to build on.”
Hartz: Staying private too long atrophies a startup's operational performance
“The muscles of really performing well can be atrophied in the darkness of the private markets.”
Hartz: Microsoft and Amazon both IPO'd at $500M valuations
“If you look back at Microsoft in the 19 eighties or Amazon in the 19 nineties, one would maybe not recall that they went public at a five hundred million dollar valuation each”
Hartz: SPACs free founders from relying on private preemptive bidders
“They're saying that it's time to get out in the public market sooner and have a much broader audience and a much broader reception to picking and choosing investors. So you don't see these decisions made in the darkness of a one or two preemptive Bidders on a …”
Hartz: Current SPAC fee structures are egregious and require market-wide reform
“At the current time, SPAC fees are egregious. I'll just say that outright, and they need to be reformed.”
Troy Steckenrider: SPAC sponsor founder shares typically equal 20% post-money
“The first are sponsor shares, which are typically 20% of the post-money SPAC investment.”
Steckenrider: Traditional SPAC founder shares misalign incentives during down markets
“You get the founder shares regardless of whether the deal does well, and so there's a world where the company post-DSPAC could trade down. Investors have lost money, the company has lost money, And yet the SPAC management team would still walk away having done…”
Hartz: Fair SPAC deal terms are required to attract top-tier companies
“That if there is a fair deal for both sides, that if there's a fair deal that the partner companies really see out there, you're going to attract the best companies. You're not going to attract the B and C companies.”
Hartz: SPAC market structure is decades behind venture capital's evolution
“SPACs follow the same pattern, but they're really just a few decades behind.”
Steckenrider: A* will adjust SPAC sponsor terms during partner company negotiations
“For our SPAC, we plan to kind of address this when we're negotiating with a specific partner company to make sure that whatever deal we end up with, we are fully aligned.”
Hartz: Speculative SPAC deals will collapse like the dot-com bubble
“What we do see, and what we do predict, unfortunately, is something akin to perhaps the dot-com bubble in 99 and 2000, where you saw a lot of bright, shiny objects, and big flash in the pan market seeming successes, and then you'll see a lot of these coming do…”
Hartz: Pre-deal SPAC evaluation depends entirely on the management team
“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.”
Steckenrider: Multiple SPACs have never historically combined for one transaction
“Historically there really hasn't been a transaction that's involved multiple SPACs working with the same target.”
Steckenrider: PIPE investors in SPACs function like IPO anchor investors
“In the SPAC world, pipes are a little bit different, and I would say the analog in the SPAC world looks far more similar to an anchor investor in an IPO, where the pipe investor in a SPAC typically has done a lot of underwriting of the company, has gotten to m…”
Hartz: A* has $200M and 24 months to complete a de-SPAC
“In our case, we have a twenty-four-month time frame to get all the way to what's called the de-SPACing process, and that's simply that putting our two hundred million that we have in A star, our first vehicle one onto the balance sheets and effectively merging…”
Hartz: SPACs target merger partners four to six times their capital size
“In general, and what the rule of thumb is that a vehicle based on the size of the capital really looks to partner with a company that's four to six times market cap. So that would be 800 to 1.2 billion, or really just going after that billion dollar sweet spot…”
Hartz: The most enduring tech companies are always effectively overvalued
“The best companies, the most enduring companies are always effectively overvalued.”
Hartz: Quarter warrant coverage is unheard of for first-time SPACs
“A quarter warrants is something that's unheard of for a first-time SPAC.”
Hartz: A* Will Prioritize SPAC Quality Over Launch Volume
“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. So we'll move at the pace only that we can find the best companies to partner with.”