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March 23, 2021

Joe Tonnos on SPACS and more:

Joe Tonnos on SPACS and more:



Joe Tonnos is a principal at Mistral Equity Partners and a Co-Founder of Ketch Ventures, which is a syndicate group he co-founded with a colleague from his investment banking days. Mistral Equity Partners is primarily focused on middle market buyouts and the growth equity of consumer and retail businesses whereas Ketch is focused on investing in early stage consumer facing businesses. Ketch Ventures started as a way for Joe and his co-founder to pool their own money together and make investments as a team, but it quickly evolved to becoming a syndicate group. They have now made about 12 investments via Ketch Ventures. The syndicate has made investments as small as 50k and as high as 350k. Joe also tries to add value to the companies invested in, beyond just writing a check. 



Joe has successfully done SPACS deals as a sponsor through Mistral Equity Partners and an affiliate called Haymaker Acquisition Corp. Joe and Mistral Equity started their SPACS strategy as early as 2017. SPAC, or special purpose acquisition company, is  a shell company that is formed to raise capital through an IPO. The intention being of using that money to buy an existing company or companies. SPACS have been around for decades, but they have recently experienced a spike in popularity, attracting big name investors and underwriters. SPACS are also commonly referred to as blank check companies. The reason being is that they usually do not have a merger target when they are formed. The mergers and deals SPAC’S look for are quite large. In fact, SPACS usually do deals that are of a minimum two or three times the size of the SPAC. 

For example, a 200 Million SPAC is probably looking to do a deal that is 500 - 750 million of value in order to minimize dilution. Joe also notes that the valuation of SPACS has steadily increased because of how much dry powder there is .Now sponsors will pay more to put the capital to work. Once a SPAC buys a company, the company the SPAC purchased becomes a stand- alone public company. The management of the company that was bought by the SPAC usually remains the same. However the SPACS sponsors usually take a few seats on the board of directors. As Joe puts it, “ SPACS are akin to reverse IPO.” 


SPACS and IPOS are very similar. However SPACS look for more mature businesses that have stable cash flows. Whereas, any business that meets the SEC requirements can go public. However, as SPACS has exploded in popularity the type of companies going public via SPACS has increased. According to Joe, even some pre-revenue companies have gone public via SPACS. In contrast, seldom do pre-revenue companies go public via a traditional IPO. In essence, SPACS has more flexibility in deal structure as opposed to traditional IPOS. Additionally, there is more certainty in valuation when it comes to SPACS. Also the SPAC sponsor/management team can be an invaluable resource to the founder/CEO of the company that is going public via the SPAC. According to Joe this can ensure a smooth and successful deal. While that is not the case with IPOS. 

Negative Aspects of SPACS

Following the IPO the proceeds a SPAC raises are placed in a trust account and the SPAC usually has about 18-24 months to find and acquire a target company. If a SPAC is unable to find a target company and complete the merger in that time frame then it liquidates and proceeds are returned to the shareholders. As a result, this causes the SPAC management team/ sponsors to forgo the necessary amount of due diligence in order to meet the time constraints. Or as Joe puts it: “The biggest problem with SPACs is that given the shot clock they are on it has forced sponsors (in some cases, not all) to reduce the amount of diligence being done on a deal. Statistics will show that the time between SPAC IPO and deal announcement is shrinking, which is an indicator less due diligence is being done. Separately, there is a disruption happening to the VC ecosystem and high-growth companies are electing to forgo late stage private rounds to go public via SPAC. In many cases, these companies may not be ripe for the public markets and get there too early because of the pressure of SPAC sponsors.””.

Important Advice for early stage founders

Joe urges early stage founders to create medium to long term financial plans. He also states that as an investor he knows that every number does not have to be perfect, but it is important for investors because it shows that the founder is thinking ahead. Moreover, Joe reiterates the words of Mark Cuban, that if a founder is thinking about an exit investors generally won’t want to invest because it shows that the founder cares more about the exit than building his company . Furthermore, Joe notes that thinking about an acquisition should not even be top of mind until a business is approached by a potential acquirer or is of a stable size and still growing. 

Where are consumer facing Deals Headed

Joe remarks that there is a huge uptick in direct to consumer and e-commerce, mostly driven by the COVID-19 crisis. In fact, Joe claims that in 2020 e-commerce grew about 5 years worth based on what the projections were prior to COVID. Moreover, he also notes that people were trying new products based on what they saw on social media. Additionally, he also acknowledges that after the pandemic investors will be wary to invest money based on a 2020 growth rate. Indeed, he says that investors will want to see if that pandemic induced growth can be sustained. In essence, they will want to see if a company that was thriving during the pandemic can also thrive after the pandemic when things go back to normal. However, he does recognize that the pandemic has permanently changed consumer behavior. He also urges readers to try to figure out how consumer behavior will be going forward and how you dear reader can make your brand or service resonate with consumers in this new paradigm. 


This blog post was written by Luis Bravo.