Editor’s take: SPAC mergers on the horizon

That Khosla Ventures filed to form four blank-cheque companies heralds a new dynamic in the investment space with challenges and opportunities

By Murielle Gonzalez

SPAC merger concept

Khosla Ventures, the venture capital firm that has invested in food-as-medicine Ukko, plant-based ice cream Nick’s, and protein sweetener Joywell, has filed S-1 documents with the US Securities and Exchange Commission (SEC) to create four blank-cheque companies or SPACs. The move heralds a new dynamic in the market and funding opportunities for growth companies with an eye on the public market – but all that glitters is not gold.

SPACs, short for special purpose acquisition companies, have emerged at a fast pace – more than 160 blank-cheque companies have raised more than $48 billion in gross proceeds this year alone. The trend is evident when looking at the numbers in 2020 – 248 SPACs raised $83 billion.

NutritionInvestor has reported the launch of SPACs targeting companies in the food and drink space, including the November Nasdaq debut of Natural Order, and the Euronext-listed 2MX Organic, the SPAC co-founded by French telecoms billionaire Xavier Niel.

The SPAC trend has been driven by shrewd individual investors who have joined forces to form these investment vehicles – until now. Venture capital firms have joined the trend, and Khosla Ventures is among the first in the space to file S-1 documents with the SEC.

California-based firm Khosla Ventures was founded in 2004 and has raised a total of $2.9 billion across 10 funds, according to Crunchbase data. The latest is Khosla Ventures VII, which the company launched in October last year with a target of $1.1 billion.

The Silicon Valley-based firm invests across several verticals, including enterprise software, health, cleantech and AI.

Khosla Ventures: Venture capital SPAC

According to the SEC filing, Khosla seeks to form four SPACs under the name Khosla Ventures Acquisition Co, and subsequent brand names II, III, and IV.

The firm is looking to raise $300 million for the first SPAC, with $100 million increments for each sister firm., except for Khosla Ventures Acquisition Co IV, which targets $200 million.

All four S-1 documents read: “We intend to focus our search for a target business addressing a large market opportunity with a highly differentiated, proprietary technology.”

Khosla’s founder Vinod Khosla and Derek West are among the names in the fillings. West is the chief legal officer at Uber. Mario Schlosser, founder of Khosla Ventures’ portfolio company Oscar Health, is also named in the paperwork.

Goldman Sachs, Citygroup, and Piper Sander are registered as financial and legal advisors for the fund.

SPAC merger: Challenges and opportunities

Whether Khosla will seek SPAC mergers with food and drink companies is unclear, yet the statement in the paperwork suggests agrifoodtech companies fit the bill.

In light of what was discussed at the NutritionInvestor webinar ‘Investment trends in food, drink and nutrition’, the SPAC mergers on the horizon bring about opportunities and challenges – for investors and founders alike.

For example, Farzad Mukhi, Duff & Phelps’ investment director, recognised the SPAC trend is closely linked to the appetite of retail investors that are looking for growth. He explained that historically, individual investors in the food space have placed investments in large conglomerates like Conagra and Kraft Heinz, which are stable businesses and pay dividends but aren’t growing. He argued that sort of demand for new investment opportunities has helped spur the SPACs trend.

“I think that a lot of those SPACs are being sponsored by private equity funds, who have had a hard time doing traditional buyout transactions in the food space over the past few months just because of where valuations are,” said Mukhi, noting some of the complexities around getting a transaction done in this pandemic add elements to factor in.

Players in the market agree that SPACs transactions are ideal for financial sponsors because they can ultimately represent a low-risk opportunity to invest in these companies. However, the availability of SPAC mergers brings about challenges for founders, as the ‘real deal’ happens after the transaction.

SPACs are a quicker way to become a public company versus a traditional IPO route – the IPO is done by the SPAC when it’s formed. In this context, the acquired company only has to deal with the terms and conditions of the acquisition.

But once a private business becomes a public company, the chief executive has to deal with new reporting dynamics. And in the retail market, the strength of a company is often assessed based on quarter-to-quarter performance.

SPACs have come to be seen as another way for companies to get late-stage growth capital, but as Mukhi said in the webinar, companies in the public space are under the microscope, which doesn’t really make a lot of sense if you’re a young company that has a pathway to growth.

The rise of venture capital SPACs not only confirms the trend but a new dynamic in the market. Let’s hope the SPAC mergers on the horizon are good news for investors and founders alike. Whether these vehicles are fit to provide a significant return on investments – or a platform for companies to succeed – is yet to be seen.