Spencer Rascoff, the co-founder and longtime former CEO of Zillow believes the traditional system by which companies go public — through an initial public offering (IPO) — is broken.
It was his own experience with Zillow’s 2011 initial public offering that, in part, led him to start his own special purpose acquisition company (SPAC).
Zillow undervalued it’s own IPO share price, Rascoff explained further in an opinion piece on his own website, dot.LA, a publication that covers the Southern California tech industry.
“I have long been a proponent of going public because I believe it creates stronger, more disciplined companies that deliver greater shareholder value,” Rascoff wrote. “It’s great to see the pendulum in the founder and venture capital community swinging away from the “stay private longer” attitude that dominated tech over the last decade.”
“That said, the traditional IPO listing path has many shortcomings,” Rascoff continued.
Zillow, according to Rascoff, initially priced its shares at $12-$14 per share, then upped it slightly due to strong demand. Eventually, the company priced its shares at $20 per share for the IPO. It ballooned to open trading at $60 a share.
“So on what should have been a day of high-fives and champagne, I couldn’t help but feel disappointment that we left a huge amount of money on the table by underpricing our IPO,” Rascoff wrote.
“Our employees and our venture capital owners were penalized by this broken system,” Rascoff added, in his column on dot.LA. “And it’s not just the Zillow IPO — this problem is systemic; the typical tech IPO trades up by 43% one day later. That’s a massive amount of money to leave on the table for an issuer.”
Rascoff’s experience is one of the reasons why he’s advocating for the use of SPAC’s, as an alternative to an IPO.
Earlier this month, Supernova Partners Acquisition Company, Inc., the SPAC started by Rascoff made its public debut. Supernova Partners Acquisition Company, Inc., is a special purpose acquisition company that, after going public, will seek to merge or acquire a privately held company, with the purpose of taking that company public.
A number of top technology companies, including Opendoor, have opted for the SPAC route. Opendoor recently went public through a merger with Social Capital Hedosophia Holdings Corp. II, a SPAC founded by Chamath Palihapitiya, also the chairman of Virgin Galactic.
Choosing a SPAC allows companies to shield specifics about company financials — and in Opendoor’s case that it was under investigation by the Federal Trade Commission — from the public prior to an IPO. Scrutiny over pre-IPO paperwork can often lead to IPOs being pulled, as was the case with WeWork, in part.
Rascoff also believes the SPAC route offers tech startups an “express route to basecamp,” and “Being a fast-scaling, successful public company is the summit.”
“SPACs remedy many of the problems with IPOs and offer new benefits like the ability for a company to provide financial projections at the time of the SPAC IPO,” Rascoff wrote, on Twitter. “The SPAC model also offers a quicker, more certain path to going public.”