Why did SPACs explode?

Financial trading data

Why did SPACs popularity suddenly rise? A SPAC, or Special Purpose Acquisition Company, is disrupting the status quo, empowering new types of companies. DTC brands like BarkBox have utilized a SPAC to thrive, go public, and maintain focus without doing traditional funding rounds or getting acquired. There's no doubt the humble SPAC has momentum. 

Why did SPACs become popular?

From May to August 2020, companies like Nikola and Hyliion announced their use of the SPAC vehicle; and closer to year-end, companies like BarkBox and Opendoor also adopted the method. Over the past year, SPACs popularity has soared with an MFactor of 6 in January 2020, to an all-time high of 38 in January 2021. Fluctuations during that period reflect their role in various companies’ IPOs. The height of SPACs’ momentum in January 2021 correlated with the investor craze surrounding GameStop & Reddit vs. Wall Street. 

The widespread adoption of SPACs is giving DTC companies an alterante route to massive market growth. BarkBox’s CEO believes the merger with Northern Star Acquisition Corp. (a SPAC) will accelerate BARK’s ability to scale and continue to disrupt pet retail while remaining consumer-focused. The efficiency and consumer-focus of the DTC model meant greater momentum for companies that were able to bypass the middleman. Now, many of these companies are leveraging SPACs to go public.

SPACS MFactor score is up from 4 to 47. MFactor is a proprietary tool that measures cultural momentum through topic modeling and sentiment analysis.

SPACs popularity with retail investors

This fresh approach to a public offering is good for banks and growing companies, but also for retail investors. SPACs offer investors more companies to choose from, and greater diversity in the stock exchange means investors can manage their risk better and reduce the volatility of their assets. Better still, the last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading.

Risks With SPACs

Analysis of SPACs’ long-term performance, however, reveals that SPACs with completed mergers have an average median return of -29.1%, compared to a return of 47.1% for traditional IPOs. This suggests a need for caution when investing. SPACs will remain a great opportunity for companies and funds in 2021, but they may pose a larger risk for individual investors.

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As America prepares for a post-COVID future, 2021 will likely be remembered as the year that SPACs helped new types of companies go public, intensifying market diversity.