Metromile began trading as a public company yesterday. Its exit from the private market was accelerated by its decision to combine with a special purpose acquisition company, or SPAC.
Such transactions have exploded in popularity in recent years, bridging the gap between a host of richly valued private companies and endless bored capital. SPACs raise cash, go public and then merge with a private entity. The SPAC then dissolves itself into the combined entity, a process that often includes an additional slug of money (PIPE) for good measure.
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SPAC-led debuts can move faster than a traditional IPO, making them attractive to companies in a hurry. And with more visibility into how much capital might be raised than during a traditional public-offering pricing run, they can smooth worries amongst target-companies regarding how much cash they can attract by leaving the private-market fold.
Metromile is hardly the final company we expect to debut this year via a SPAC. The list is long and may include fellow neoinsurance company Hippo. (Hippo declined to comment on the matter.)
But with many more SPACs coming our way, we took Metromile’s debut as a learning moment. To that end, we got on the horn with CEO Dan Preston to chat about what the day meant for his company, and to elicit a note or two on the SPAC process for our own enjoyment.
Metromile’s SPACtacular debut
TechCrunch asked Preston about the SPAC world and how his combination came about. He said his firm started by dipping its toe into the blank-check waters, kicking off with a small set of conversations, chats that quickly gathered traction.
But don’t take that to mean that any company will elicit a similar market response. Preston said SPACs are designed for a specific class of company; namely those that want or need to share a bit more story when they go public. Younger companies, in other words, for whom a traditional S-1 filing might not be provide a sufficient summation of its potential.
Metromile was, implicitly, one of the companies for whom the SPAC model fit.
Which advantages did Metromile derive from using a SPAC to go public instead of a traditional IPO? If his company had pursued an initial public offering, Preston said it would have taken place 12 to 18 months later. Such a timeline would have likely led to his company taking on additional private capital. So why not get “fully funded,” as he put it, right now instead of waiting to accelerate?
And who doesn’t want to have all the money they need? Per Preston, fully funded for Metromile means the amount of cash it needs break even, after which it will have more control of its destiny. Raising that much money a year or more before a more traditional IPO would have been possible is enticing.
To raise that much money companies will need to go deeper, Preston said, than they might have to if they waited to go public. If you’ve read any SPAC presentations, this means a long dig into market health, marketing sizing, expected financial results and trailing metrics.
Traditional IPO filings may be longer and wordier, but you could argue that SPAC-led debuts get to say a lot more and use more images. When you have seen a company talk about its expected revenues several years in the future in an S-1? Never? Correct. Yet, every SPAC-led debut is heavy on the future; these are younger companies, so they work to entice investors with more than just trailing results.
Preston said Metromile enjoyed a competitive SPAC process and was surprised at how quickly it progressed. His company started conversations, the CEO said, and a week or two later had offers from SPACs to go public.
TechCrunch was curious in particular about the level of sophistication regarding insurance products among the investors Metromile spoke to. Preston said it varied from investor to investor, with some sporting a heavier tech background than insurance grounding. So, any insurtech startup looking to SPAC their way onto the public markets had better have answers ready for tech folks who aren’t read up on the nuances of the insurance market.
What did Preston have to explain to investors? He mentioned three things:
- Why it made sense to focus on unit economics over growing aggregate financial metrics in the near term (you want to first nail the model, then scale).
- Creating a sustainable moat in insurance (claims technology, pricing model and user experience).
- How to “map” GAAP financials to insurance contribution margin (the impact of reinsurance, etc.).
Each are reasonable points, things I’ve had to learn over the last year or so as I covered other neoinsurance startups.
Preston’s company is now public and flush. What’s ahead? Per its CEO, the company is working on a nationwide expansion, and with a now-liquid stock, Metromile can make future acquisitions easier. (At the moment, Preston said it has no plans to buy other companies).
What about downsides? Preston walked TechCrunch through the SPAC process from his company’s perspective, saying that it likely took less time and caused less disruption than a traditional IPO, adding that the real work comes after going public. But that’s all stuff that impacts every company that gets public, regardless of how they do it. So, he didn’t have much to say regarding downsides for what that’s worth.
All told Metromile is now trading, slipping around 2.8% today after having picked up some early-day gains. A perfectly neutral debut, then. Now let’s see what the company can get done with its fresh haul.
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