The method or the madness

Internet maximalism comes to public markets.

The internet, as a general construct, trends towards empowering the most extreme version of anything. 

Ben Thompson has for years written about this idea in the context of content moderation. Thompson’s general view, as I read it, is that choosing to empower all users and restrict (basically) none allows anything built on or centered around the web — a political movement, a business, etc. — to best unlock the power of the digital world. 

The shortcomings of this approach are, of course, obvious. See: Facebook. 

But the simplest path to resolve these tensions leaves us with a choice to either selectively censor users or let everyone figure it out for themselves. We can either empower platforms and large companies over individuals — leaving debates about the power wielded by these censorious entities for later — or let whatever we’re calling nature run its course online. The tech industry generally favors the latter, but is now being forced into the former. 

This basic framework is what I think of as internet maximalism. 

We can think of internet maximalism as a continuum along which to measure anything that happens, whether it be online or irl, as either being heavily regulated or an unmoderated free for all. 

The western world today tends to be quite regulated, which is why it both works for so many citizens and proves durable in times of stress. Political and cultural rifts emerge along narrow disagreements in the general direction of policy preferences. Or: they did. Before the internet got involved. The political instability we feel bubbling all around us is the outgrowth of a widening distance between what had tended to be small disagreements. 

Politics trails business in this area, however. The business world’s view of what is possible in a given industry has always been more extreme than those of political or cultural movements. There is probably an argument that what we’re calling internet maximalism is actually downstream from a kind of modern capitalist conception of whatever we think of as “free markets.” 

Financial markets themselves, however, are highly regulated entities with this regulation generally growing after times of stress. The main goal of financial markets is to “grease the gears” of the economy or some similar analogy, and every flash point at which the market has threatened to bring the system to a halt has resulted in tighter controls. But that there are rules in financial markets does not mean there is no innovation or competition within them. Regulations increased as the cost of trading decreased and free online trading is not offered out of the goodness of brokers’ hearts. But the misinterpretation of rules as the antithesis of freedom is perhaps the most foundational of current American myths. Rules don’t restrict but in fact ensure freedom. It is this misunderstanding which more than any other explains everything. 

But so in financial markets today we are currently witnessing an innovation of sorts that has few parallels. And that is the SPAC boom.

It’s funny to think that in mid-December, Goldman Sachs proclaimed 2020 the year of the SPAC. In extremely Goldman terms, the note said specifically: “But from a capital markets perspective, this year will undoubtedly be known as the year of the SPAC.” Since I wrote about that report at Yahoo Finance ~9 weeks ago, no fewer than 130 additional Special Purpose Acquisition Companies have come to market. 

We’re joking but also serious — if you’re a business-adjacent person of any stature, you need to be involved in a SPAC right now. The frantic pace of SPAC formation and the still-warm reception it seems every new issue on the market gets from investors predictably draws out commentary defined by a kind of worried, marveled, and knowinger-than-thou tone which broadly gestures in the direction of “sentiment is overheated.” Whatever that might mean. 

I think if you’re an investor, this is the more useful frame for sentiment available at any one time. And certainly now. Spend less time arguing about why the market should do something and more time understanding why it’s doing something.

But the energy the SPAC boom is unlocking looks less to me like traditional “permanently high plateau”-style financial froth and more like internet maximalism coming into financial markets. SPACs have gone from a structure for companies going public to the structure for these businesses because web-based logic says the most people doing the most extreme thing most often will yield a better result than careful deliberations about how to proceed.

As we suggest in the title of this piece, we can choose the method by which something is done or choose the madness which results from allowing anything to go. The internet’s preference is clear: madness it is. 

The speed with which new SPACs are coming to market and the leadership against which these opportunities are being leveraged — there are now multiple sports-adjacent personalities involved in SPAC projects, for instance — is currently testing the mettle of the inherently conservative business commentariat. And what so rankles traditional business leaders and market participants about the SPAC structure is simply that they cannot understand the why of this boom inside their traditional analytical loops. This “why,” however, can be explained by internet maximalism. 

Internet maximalism, again, says simply that the most extreme version of anything will eventually be tried when empowered by the web. And as we’ve seen for more than a year now internet culture is pushing forward financial markets. As we noted last week, Luke Kawa’s Bloomberg story about Reddit’s influence in the options market is a year old. So if it is internet culture driving marginal innovations in markets today then it follows that the most extreme inversion of how a company comes public would thrive as the primary method by which companies now proceed. If the process of going public on the one hand involves years of careful planning in concert with a major Wall Street firm and a carefully selected management team and on the other involves Colin Kaepernick, the internet sees Kaepernick as the obvious preference. The maximalist framework rewards madness, rewards the most inflammatory approach for making your point.¹ It’s an attention game, after all. 

What today’s SPAC boom is also responding to is another theme we’ve written about in this space: the lack of new public companies. 

Back in the summer we called for there to be more public companies, citing extensively the work of Michael Mauboussin who has chronicled the decline of publicly-listed firms and the rise of exchange-traded funds as ways to repackage this dwindling supply of primary issues. Notably, Mauboussin’s research found that not only are there fewer companies but that excess returns from the largest companies have decreased over time. 

So not only are there fewer companies but the dispersion of returns within those companies has decreased. In other words, opportunities for generating alpha have declined. The obvious upshot of this, which is also borne out in Mauboussin’s work, is that money has moved into areas like venture capital and private equity in search of desired returns. 

The conclusion we drew from this more uniform performance among the market’s largest constituents is that the public market itself — not any alternative asset space — was crying out for more participants. 

What we should expect, then, is that if this opportunity for [issuers] offering a supply-starved set of investors new issues is real, the void will be filled quickly. But this doesn’t mean the opportunity isn’t attractive and won’t remain so for some time.  

Whether an IPO, a SPAC, or a direct listing is the best opportunity for a business is the topic for another conversation. But in an industry this competitive, several unrelated players circling the same idea says more about the idea than it does the players.

Indeed, as we outlined above, there are brand name companies and brand name investors sniffing out the same opportunity.

And the opportunity is simple: issue common equity.

And the preferred path for getting this issuance done is now through the SPAC.

It’s worth noting, however, that SPAC structure is not new. Traditionally the purview of turnaround stories, the basic outline is that investors put money into the hands of a few trusted managers and then those managers use the money to acquire a private business and bring it to public markets. 

What the SPAC structure traffics in more than anything else is trust. There is trust from initial investors in the management team to which they’ve given money with only a time-restricted promise (typically a SPAC’s capital is either deployed within two years or returned with some interest). And there is trust from the management and investor base of the company being acquired by a SPAC that this capital will help the business reach some new potential. 

There is also nothing inherently special about a SPAC, business-wise. That a company is taken public via SPAC theoretically has no bearing on their business success; it is merely a financing choice. Byrne Hobart writes this week, however, that this view might not be quite right. Or at least not exclusively so. 

The rise of special purpose acquisition vehicles, or SPACs, is a general testament to a more forward-looking market. In a conventional IPO, an operating company sells shares to the public; with a SPAC, an empty shell company goes public, and then identifies a private company to merge with. Due to a quirk in securities laws, a traditional IPO prospectus only shows a company’s backwards-looking estimates, and makes heavily-qualified statements about the future. A company that goes public through a SPAC is technically engaging in a merger, rather than an IPO, and the rules are different. When a public company buys another company, securities laws allow it to talk about that company’s anticipated growth, or the likely cost savings of the merger. Similarly, SPAC offerings can talk up a company’s long-term prospects, and even make exact estimates of future revenue.

We’ve written previously about the idea that markets are more forward-looking than has become popularly fashionable to believe over the last decade. And against this backdrop, going public via SPAC makes more sense than a direct listing or a traditional IPO. A SPAC enables a company to quickly realize the full potential of an investor base ready, willing, and able to place big bets on the future. And moreover, as Byrne notes, at least the SPAC’d company can talk about that future. 

But so we called this post “the method or the madness” because what the internet tells us, time and again, is that we can have one but not both.² Internet maximalism chooses madness; deciding the method is for someone else. 

And so as the logic of the internet increasingly influences what we might call the “real world,” the decisions rewarded by the web are those we see increasingly made in all areas.

In financial markets, this means you can choke off new public company formation by radically clamping down on SPAC issuance or allow a new era of corporate dynamism to find its footing by essentially exploiting a loophole which will bring in both tomorrow’s corporate stars and new kinds of barely legal accounting shenanigans. Markets increasingly giving themselves over to an internet maximalist view are of course endorsing the latter. 

This binary framework against which to decide how entities wield their power also requires us here at Late to accept the entire SPAC era, all the good and all the bad. We called for more public companies. We got them. We cannot now turn around when it happens and say, “No! Not like that!” 

Breaking the world in two like this might, however, be its own meta-error applying the logic of bits to the world of people. Then again, the most universal question we grapple with as humans is whether to believe in a higher power. The implications of how we come down on an answer to that question set us on distinct courses which constantly ask of us whether we’ve made the right decision. This letter is not, however, the place to argue about whether a belief in God is choosing the method or the madness. 

But that we all face this same basic question and know, somewhere way down, that it must be one or the other speaks to the collective aversion we have to authorities that try to control both. And helps, I think, explain why it seems we’re so quickly giving ourselves over to the logic of a new digital culture. There must be something in our hardware that makes “or” more acceptable than “and also.” 

Or maybe it’s just me. 

1. Everything related to crypto bullishness is the obvious example.

2. It is not a coincidence that “One but not both” is the title of a past edition of this newsletter. In that essay it was argued that post-COVID companies could have a physically headquartered company or a fully distributed workforce. Splitting the difference would lead to the worst of both worlds. It is no surprise that corporate consensus seems to be doing just that.