Blank-check companies are making a big comeback, and two financial industry veterans with an affinity for fintechs have teamed up to join the trend.
Betsy Z. Cohen, founder of The Bancorp Bank, and the venture capitalist Ryan Gilbert have partnered to form a special-purpose acquisition company (or SPAC) named FTAC Olympus Corp. It began an initial public offering on Nasdaq on Wednesday that seeks to raise $750 million.
Over the next 24 months, FTAC plans to choose a promising fintech startup to give those proceeds to and take public within two years.
Gilbert and Cohen have been friends to fintechs for years.
Gilbert will remain general partner of Propel Venture Partners, the venture capital arm that BBVA spun off in 2016 and that Gilbert co-founded. BBVA remains a limited partner. Coinbase, Kasisto and Prosper are among the fintechs Propel has funded.
Cohen founded The Bancorp Bank in 2000 as the first fintech-friendly bank. It provides the regulated, federally insured banking services behind disruptors such as Betterment, Chime and PayPal.
Cohen and Gilbert are the latest executives to form a SPAC, which allows founders to quickly raise capital to buy existing businesses and platforms rather than develop them from scratch. Founders are using their experience and track records to sell investors on their vision and ability to choose a solid target company.
The trend includes FinTech Acquisition Corp. III, which recently merged with the commerce technology provider Paya. Another example is Ribbit Capital, an investor in fintech startups including cryptocurrency and blockchain ventures, which announced this week it's seeking to raise $350 million for a SPAC that would make fintech acquisitions.
Meanwhile, a SPAC with ties to former House Speaker Paul Ryan has emerged. And another, Megalith Acquisition, recently agreed to buy BankMobile from Customers Bancorp; that deal involves companies with ties to Customers Chairman and CEO Jay Sidhu.
After a blank-check company is established, as FTAC Olympus was on Tuesday, the managers have 24 months to find an acquisition. With the SPAC shareholders’ approval, the assets of the target company and the SPAC will be merged, there will be an exchange of stock and the chosen startup will become a public company.
SPACs in the United States had raised $23.6 billion in 2020 as of Aug. 5, according to Refinitiv.
Stessa Cohen, consultant at PivotAssets, said the emergence of SPACs in the fintech sector is a sign of its maturity.
“It's just another aspect of that hunger for what fintechs are doing,” she said. “How do you bottle it and how do you make it available, because really isn't that what it's there for?”
However, such transactions might not be right for all fintechs, she said. “I could see a lot of potential or for fintechs that do fraud detection and contactless payments — technologies that really need to scale and be everywhere.”
Why a SPAC?
Betsy Cohen says creating a SPAC is another way to help the fintech industry.
At The Bancorp Bank, “we have seen many fintechs scale their businesses, grow their products, become part of an ecosystem, and develop in different ways.” Cohen left the bank in 2014 after 15 years there and 45 years of working in business. At the time, “I thought enough was enough,” she said.
Shortly after she left, she started forming SPACs for fintechs; this will be her fourth.
“I loved my companies and could see on a going-forward basis there would be many that would succeed and many that would fail,” she said. “I thought another approach to the industry might be to try to identify those companies that had come to a level of maturity where they could make a transition from being a private company to being public company and have greater access to capital. I looked for a structure that was not as market-timing-sensitive as an IPO so that I could be helpful to these companies.”
Gilbert views the SPAC opportunity as a logical next step on the financing continuum.
“At Propel, a lot of my focus is on seed and Series A businesses,” he said. “We've seen so many companies grow from seed stage to being a massive operation. Some are commanding very generous evaluations.”
Using a SPAC provides certainty of execution, Gilbert said.
“IPO filings are never a slam dunk,” he said.
How they’ll choose a fintech
The qualities Cohen and Gilbert are looking for in a fintech startup are similar to those a venture capitalist would seek.
Gilbert said he’s looking for three Ts: team, technology and total addressable market.
Specifically, he seeks a “management team that remains excited about the business and wants to continue to grow, an addressable market where there's an opportunity for continued organic growth in that market and to introduce new products and services. We often talk about allowing a company that does one thing very, very well to also sell other products and services, because it's a good way of getting your payback period or return on investment improved on an expensive cost of acquisition business or market.”
Unlike a venture fund that might support 10 to 15 startups, with a SPAC “you have one shot that you have to take really, really well,” Gilbert said. “So there’s a lot of emphasis on people, being sure these are people that you can work with. And there’s a lot of emphasis on the product market fit and then the type of business, so that the sponsor group feels that we can make a difference.”
The fintech could end up being in payments, savings, credit, wealth management or some other area, he said.
Cohen said she’s looking for a company with good management, a pathway to profitability and a distinctive product.
How can they be sure that the company they pick will be a good bet for investors?
“You can never be sure of anything,” Cohen said. “But to the extent that both Ryan and I have been founders, operators, we’ve gotten our hands dirty in every part of the business; we think we’ve gained at least a modicum of wisdom into what are the red lights that should go off while we’re understanding the company and its management and technology. We can take all this information that was gathered over a relatively long period of time and think together and apply it to making the choice. We think that that puts the investor ahead of the game.”