The Promise of SPACs for Emerging Markets
Why founders in Southeast Asia, the Middle East, and elsewhere are leveraging SPACs to take their companies public
Co-authored with Allen Taylor (Endeavor Catalyst)
Last month, Grab announced it would go public via SPAC. This is an incredible milestone in the world of SPACs (“Special Purpose Acquisition Companies), a sector that has exploded in the last two years. Grab’s SPAC deal — valuing the company at nearly $40B — is the largest in history globally, more than double the previous record.
While that in of itself is noteworthy, it isn’t the punch line.
Grab is not a traditional Silicon Valley company. Instead, it is the leading super app in South East Asia, with a primarily emerging market user base. And when it comes to SPACs and emerging markets, Grab is not alone.
Other Southeast Asian tech giants — like Go-Jek, Tokopedia and online travel leader Traveloka — are reportedly in advanced talks to go public via SPAC. Elsewhere, Anghami, the leading music streaming service in the Middle East and North Africa (MENA), is set to become the first technology company from MENA to be listed on the Nasdaq when it lists next month via SPAC (details here). And others are starting to take notice of what the SPAC explosion means for Latin America.
While the newscycle will have us believe SPACs are a Silicon Valley phenomenon, they are globalizing. And for emerging markets, that’s a good thing. SPACs offer access to smart capital at scale, global visibility and connectivity, and a founder-centric capital source for those visionary entrepreneurs who are building the iconic companies of the future.
Access to capital
Emerging startup ecosystems have much less capital. Despite progress in recent years, emerging markets still represent only 8% of global private capital and 11% of global stock market capitalization, while representing 61% of the global population and 38% of global GDP.
While this shortage of capital is starting to change on the private side as the likes of Sequoia, Softbank, Tiger Global, Andreessen Horowitz and others become increasingly active in emerging markets, the path to becoming a publicly-listed company is still largely untrodden.
Enter SPACs. For the very best founders in these emerging startup ecosystems, partnering with the right kind of SPAC — specifically, SPACs led by experienced operators, investors and venture capitalists — can provide access to founder-friendly, globally-connected capital at scale in a way that has not previously been possible. This is what Grab is doing by partnering with Altimeter Capital, who demonstrated their long-term commitment to the business by both locking up their SPAC “promote” shares for three years and leading the accompanying PIPE (“Private Investment in Public Equity”).
SPACs offer a valuable bridge to global capital that comes with visibility and connectivity. They also offer transparency and trust. In markets with limited analyst coverage of technology companies and fear of exogenous risks like macroeconomic shocks or corruption (both valid in certain circumstances) SPACs offer an additional benefit: trust. SPACs come with a known entity as the sponsor who offers formal governance.
Connecting ideas and expertise
LinkedIn co-founder and experienced investor Reid Hoffman — who together with Zynga’s Mark Pincus has launched three SPACs in the last year — calls this “venture capital at scale.” In Hoffman’s words, by partnering with founders, sitting on boards, and “providing guidance from experienced operators”, his own SPACs and others like it “will behave more like a venture capitalist than a traditional public market investor.”
The fact that some of these reimagined, operator-led SPACs are open to opportunities in emerging markets — for example, at least a dozen Southeast Asia-focused SPACs, including a pair backed by Peter Thiel, are actively searching for targets — is good news for emerging market founders. A recent McKinsey study found that SPACs built or advised by experienced operators outperformed their peers by an impressive 40% after one year of operating as a public market company.
This makes a lot of sense. By providing much more than just capital, SPAC leaders can give guidance and support to founders, much like venture capitalists do at earlier stages. Eddy Maroun, co-founder and CEO of Anghami, the Middle East’s leading music streaming business and the region’s first high-profile start-up to announce its plans to go public via SPAC, highlighted this difference in a recent conversation, sharing how the sponsor brought in knowledge and expertise required for this major transition, on top of the funding. In Maroun’s words: “For Anghami, this expertise was an important part of our choice.”
The iconic companies of the future
SPACs are well-suited to partner with the iconic companies of the future. And they’re not the ones you might immediately think about.
In the US, the ability to speak openly about the future and share forward-looking revenue projections — something that is forbidden in a traditional IPO process — has made SPACs a popular tool with companies that have incredibly strong future growth prospects: think electric vehicles, space technology, and yes, even flying cars. The iconic companies of the future.
Yet for emerging economies, these “iconic companies of the future” are much more likely to be leading technology firms creating industries like financial services, healthcare, transportation, and education for hundreds of millions of people. In the case of Grab — a “super-app” that is essentially equal parts Uber, DoorDash and Ant Financial — it is several of these in one. The SPACs for emerging markets will transform the lives of underserved individuals for the better.
SPAC to the future
SPACs are a powerful tool. But they are not a panacea.
In 2021 so far, SPAC volume already outpaces all of 2020. Some are calling it a bubble. They very well might be right. Inevitably, the music will stop (already we’re seeing some regulatory headwinds) and the pendulum will swing back.
But movements act like a pendulum. Over time things will settle somewhere in the middle, and create a viable new alternative. We will continue to see a greater proliferation of options for capital for emerging ecosystem founders, including greater access to venture capital, revenue based financing and direct listings (another IPO innovation that is likely to spread to emerging markets). And SPACs will be a key arrow in the quiver for companies.
For now, congratulations to the Grab team, one of the first to ‘grab’ this opportunity, but certainly not the last.