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SPAC Mergers Boost Israeli Tech’s Scale-Up Trend

Innoviz, an Israeli company that develops and manufactures sensors for use in self-driving cars, is the first Israeli tech enterprise to complete its merger with a SPAC, the Collective Growth Corporation. The merger was approved by Collective Growth at a stockholders’ meeting on March 31, and finalized this week.

SPACs, or special purpose acquisition companies, are shell companies founded by entrepreneurs with the intention of later merging with an operational private company. The SPAC founders raise money from investors, who believe in the founders’ business acumen and their ability to choose the right company to merge with, one that has great potential for growth. Once the money is secured, the entrepreneurs list the shell company on a stock exchange and go looking for a promising company to merge with.

The merger with Collective Growth has poured $371 million into Innoviz, which will allow it to increase production of its sensors to cope with what Innoviz CEO Omer Keilaf called “booming demand,” in an interview with Yahoo Finance. The move set the tech company’s value at $1.4 billion, but the increase in its shares’ value since its listing on the NASDAQ has pushed it beyond the $1.5 billion mark.

While the company ended 2020 at a loss, recording only $5 million in earnings and a loss of tens of millions of dollars, it is expecting earnings in excess of $200 million in 2024, which will put the company in the black. By 2025, Innoviz says that it predicts it will achieve $500 million in earnings.

This merger is the first in an expected parade of mergers between SPACs and Israeli tech companies, which have shown great interest in the SPAC model.

David Wertheimer, partner in the technology cluster of BDO. (Courtesy BDO)

David Wertheimer, a partner in the technology cluster of BDO, a large Israeli accounting firm, manages the firm’s clients that intend to pursue a merger with a SPAC. At present, he told The Media Line, “there are already over 10 Israeli companies that have announced a deal with SPACs” Each of these deals, he says, represents “a value of over $1 billion and sometimes even over $10 billion.” BDO estimates that at least 10 additional companies in the country “are in the initial or advanced process of finding their SPAC,” he says.

The popularity of SPACs in Israel is part of a global spike its popularity. “Currently, the amount of money raised during 2021 by SPAC’s initial public offerings stands at about $98 billion,” Wertheimer said. With 2021’s first quarter just closing, more money has been raised by SPACs than in all of 2020, according to Wertheimer.

“At this stage the entrepreneurs raise the money based on their reputation alone,” Nimrod Cohen, co-founder and managing partner of TAU Ventures, a venture capital fund linked to Tel Aviv University, told The Media Line. The entrepreneurs have two years to find a company to merge with, Cohen says. If a suitable private company isn’t found by the period’s end, the money is returned to the investors.

Nimrod Cohen, co-founder and managing partner of TAU Ventures. (Courtesy TAU Ventures)

SPACs are public companies, and this is what makes them attractive to startups. Cohen explains that startups that want to list on a stock exchange and through that raise funds, have to go through a tiresome and long process, at the end of which nothing is guaranteed. With a traditional initial public offering (IPO), Cohen says, “you don’t know if you’ll succeed until the day of the IPO, you don’t know at what value [your company will be traded], you don’t know whether you will raise the funds or not.” And if things do go sideways, not only has the attempt failed, but the company’s management has wasted months of its attention, instead of focusing on other possible paths of progress – a terrible cost for a company in its first years.

With SPACs, once the agreement between the sides has been signed, “there is no uncertainty, the thing is done the next day, you know the value of the deal, you know how much money the company has received. The process has a lot more certainty, compared to an IPO,” he said.

The skyrocketing popularity of SPACs also has to do with the fact that there is a lot of money right now, looking for investment opportunities, according to Cohen. This is combined with the huge incentive offered by SPACs to seasoned financial entrepreneurs who, he says, “receive very significant compensation, something around 20% of the shares that they create, without investing any money themselves.” At 20%, Collective Growth’s founders have netted some $300 million dollars in shares. One can understand why “they have a very strong incentive to push this thing forward,” Cohen says.

The SPAC model’s success in Israel has to do with the nature of companies in the country, according to Cohen. Startup companies looking for investments and wishing to list on a stock exchange are obvious candidates for this financial system. This is because SPACs allow companies to raise large sums of money, at least dozens of millions of dollars, and it is also a much easier path to becoming public.

An additional factor that is pushing the success of the model in the country is the maturing of the local industry. Over the last decade, the goal of Israeli tech entrepreneurs has changed.

“If, until a few years ago, startups that had the opportunity to be bought for hundreds of millions of dollars or more had achieved the dream, today we’re seeing more and more companies that aren’t looking for these ‘exits’, but instead are looking to build large and established companies … and these SPACs are a tool that helps,” Cohen said.

Wertheimer adds that “the SPAC track puts companies on the American stock exchanges, which is considered very attractive, especially for companies of high value.” In addition, at present, the Israeli stock exchange does not allow SPAC IPOs.

One such company is eToro, an Israeli fintech company that has developed an innovative social investment platform. The company announced in March that it will be merging with a SPAC called Fintech Acquisition Corporation V at a value of $10.4 billion.

Yoni Assia, eToro CEO, told The Media Line that “going public was a logical step in the ongoing evolution of our company. Becoming a publicly traded company supports our continued expansion as a business and allows us to increase our market share, expand into new markets and continue to grow our innovative product offering to meet the evolving needs of our customers.”

Assia pointed to an additional advantage to the merger, the opportunity for creating partnerships with seasoned financiers who can help a company wishing to grow. “The SPAC route gave us the opportunity to partner with a sponsor who has deep expertise in the fintech space and an impressive track record in partnering with companies who are looking to become public,” he said.

The tech industry is central to the Israeli economy, and approximately 10% of workers in the country are employed by high-tech companies.

Cohen says that as long as everything goes smoothly, “it’s great. The companies receive a sizable amount of money and tools to continue to realize their plans, and to advance and become large corporations.” Its impact on the tech industry in Israel is also positive, although the expert says it isn’t a game-changer. Money that flows into the industry “gives it a boost,” he says, and brings money to the sector.

Wertheimer agrees that as money flows in, the industry will continue to flourish. He says that the Israeli SPAC trend “is definitely in the direction of expansion.” Among the reasons for this growth is the maturation of technologies and their potential users, assisted by the pandemic, which pushed many first-time users to rely on video-conferencing and digital financial management. Another reason “is a huge supply of SPACs whose clock is ticking, which allows companies to achieve high values relative to those they have received in the past.” And while this may be attractive to entrepreneurs, it points to a danger intrinsic to the model, according to Cohen.

The SPACs’ founders have a very strong incentive to ensure that a merger partner is found. Compound this with the limited time they have to achieve success, and, “at least in some cases, companies may be valued at a higher price than they are actually worth,” Cohen says. If a company is overvalued, only to plummet once it becomes public, it could reflect on other companies that have gone through the same process, sending them into a downward spiral that, Cohen says, “is less than convenient.”