SPACs: big blank-check deals

After decades of fraudulent deals gave them a bad rap, SPACs are hot again. In 2020, more SPAC capital was raised than ever before. A SPAC bought Virgin Galactic, for instance, and billionaire investor Bill Ackman tried to buy Airbnb through his SPAC. Mofreover, Reinvent Technology Partners, a SPAC led by LinkedIn co-founder Reid Hoffman, which is merging with Joby Aviation, might even make flying taxis a public business soon.

A SPAC is essentially a blank-check company in which the investment manager collects capital from a group of stock-market investors for the explicit purpose of buying an unspecified private company at a later date. Through the acquisition, the target company assumes the SPAC listing and thereby becomes publicly listed itself. In other words, a SPAC is a way to take a company public without an IPO.

High-profile investors are thrilled. They can attract funds with their big name, essentially receiving a big blank check they can spend at their discretion, while at the same allowing them to bypass the often expensive and time-consuming IPO process.

And target companies benefit, too. As Elizabeth Lopatto writes in The Verge: “With a SPAC, the IPO is already done. All you’re doing is negotiating with one party: the SPAC that might acquire you. That means you already know the valuation, you don’t have to do a roadshow, and you can cash out your existing investors.”

Some also tout SPACs as effective instruments for more sustainable investing: electric vehicle makers have been one of the most popular targets for SPACs.

But critics worry about hidden fees and a fundamental misalignment of incentives between the sponsors who put up a SPAC’s initial capital and the investors who come later, especially after a company is bought. There is also increased regulatory scrutiny, with a particular focus on incentives and compensation of the SPAC sponsors.

So are SPACs worth it? An analysis from the Financial Times found the majority of companies bought by SPACs between 2015 and 2019 trade below their original IPO price. But, as always, it's a great deal for the middleman, just this time SPAC sponsors and not the banks. In many ways, SPACs epitomize the fault lines between tech billionaires wanting fewer regulatory hurdles for unleashed exponential innovation—and the rest of us.

When VC met ESG

“Responsible investment” is what asset managers typically say when they mean these four broader areas: ethical exclusion, responsible practice, sustainable solutions, and impact funds (and to cut through the jargon, check these Financial Times definitions). In 2018 more than 70% of institutional investors integrated ESG “environmental-social-governance” considerations into the selection and management of their investments and yet only now, venture capital is paying attention.

In contrast to impact investing, ESG focuses mostly on “internal practices and processes, including issues from diversity and board structures to labor relations, supply chains, data ethics, environmental impact, and legal requirements,” writes Johannes Lenhard in TechCrunch, shedding light on European VC funds building momentum around ESG initiatives, at the right time, for the necessary things. “In the watershed year of 2020, startup leaders and investors were influenced by social movements as much as by new research how ESG can help advance business objectives in venture capital.”

Big deal. Why? VC firms were the first investors in Big Tech, and thus arguably dramatically influenced the societies we live in today, the values we uphold (or don’t), and the cultures we share. When investors start basing their decisions on a set of principles that include a positive effect on global security, public health, democracy, social justice, and other areas, we are headed in a good direction. As Susan Winterberg, former fellow at Belfer Center and the co-author of a report on this very subject, argues, “managing ESG and other public purpose issues” is linked to better financial outcomes for companies, though lowering risk, boosting brands, and stronger customer relationships. Sounds like a win-win, without a loser in the equation.

What’s next? Make noise for ESG! Many investors don’t know the difference between impact and ESG. Then, set a standard framework to mitigate the risk of greenwashing, improve scoring of ESG performance, and more.

Baguettes for some and breadcrumbs for others

Megan Markle and (ex-)Prince Harry signed a massive deal with Spotify to produce an exclusive podcast. The exact figure of the deal is not known, but an amount of £18 million has been floating around. Contrast that with British singer-songwriter Gary Numan who received £37 for a song that has been streamed more than a million times.

Steve Brine, Tory MP for Winchester in England, says the deal “sticks in the craw of some of the artists who are driving Uber cars right now to pay the rent.”

Currently, Spotify has about eight million creators on its platform with more than 60,000 tracks being uploaded daily. Co-founder and CEO Daniel Ek believes that by 2025 as many as 50 million creators could be on the platform.

Ek confirmed this week that more than five billion dollars were paid to music rights-holders last year. About 7,500 artists are earning more than $100,000 annually. That leaves about 7,992,500 creators who are earning less than $100,000, and likely substantially less.

Eight years ago, David Byrne, the artist, musician, and co-founder of the band Talking Heads, penned an op-ed in which he cautioned that streaming services wouldn’t enable up-and-coming artists to make a living. It’s more established artists like him, who have had prior help from music labels, who can draw a crowd to a live concert, and who can generate income from licensing deals, who benefit from streaming because they don’t depend on it alone for their livelihood.

Byrne goes on to question: “I’d be even more curious if the folks who ‘discover’ music on these services then go on to purchase it. Why would you click and go elsewhere and pay when the free version is sitting right in front of you? Am I crazy?”

And: “Are these services evil? Are they simply a legalised version of file-sharing sites such as Napster and Pirate Bay—with the difference being that with streaming services, the big labels now get hefty advances?”

The cost of unspoken deals

On many levels, the most frustrating deals are silent ones. Unspoken agreements permeate our lives, at home and at work. They sneak into our relationships in ways that tip the power balance and enforce the rules of societal constraints, limiting our growth and causing resentment.

Take marriage—a petri dish of festering unspoken rules. In most (male-female) cases the woman takes on the role of household manager. And it’s usually not written into the contract. But what happens after a breakup? A recent divorce court ruling in China decreed housework done during a marriage as worthy of compensation after a divorce. The first legislative order of its kind since the country adopted a civil code to better protect individual rights last year, the woman’s husband had to pay her 50,000 Yuan ($7,700) as compensation for the five years she kept house during their marriage.

Will the ruling inspire more communication about what we take for granted? Or will it mean more prenups? And did the woman in China get a good deal? According to a poll, she didn’t get enough.

Boss, I need more

What’s the deal between an employer and employee nowadays? One thing’s certain: For the white-collar workers it’s about a lot more than just a salary. As we’ve argued in a previous Beauty Shot edition—the future of work is the future of experiences. Employees expect and want more from their employers. There’s now an expectation of many added bonuses: gym memberships, daily lunches, transport concessions (or ergonomic WFH equipment), health and wellbeing provisions, team retreats, you name it. Employees want to be seen and treated as individuals, not as mere HR numbers. Just ask startup Fringe that has put together a whole marketplace of perks which can be tailored to each employee: Netflix, Uber, Airbnb, Headspace, Talkspace, and many more. As Fringe rightly argues, what’s the benefit of company childcare for the childfree employee?

On the other side of the spectrum we find the freelancers and gig workers who often get a raw deal compared to their full-time counterparts. In the U.K., Uber has lost a landmark case that forces the company to treat its drivers as employees by providing them with minimum wage and holiday pay. The decision will apply to the 25 drivers who brought the case but likely will pave the way for many other gig workers in the UK and beyond. Uber South Africa is the latest to be facing a class-action lawsuit from drivers who want their employment rights to be recognized in the same way.

And when there’s no employer? Well, the self-employed tend to have a tough time with governments taking on the role of the provider of employee protections, but often failing. In the U.S. during the pandemic, self-employed workers struggled to access business aid and in the EU, several member states also failed to accommodate the self-employed workers’ needs adequately.

Your babysitter’s price is right

First come the negotiations. Then comes the deal. But it doesn’t end there. Research says we should start thinking more about how the negotiation process affects what comes after—when the work relationship starts or when the service agreement takes effect.

According to a study by Wharton School professor Maurice Schweitzer and Einav Hart, a postdoc at the time of publication, the negotiation process has serious implications for how the work relationship progresses and how much value ends up being created. Negotiations, they say, can illuminate points of conflict that can later breed resentment.

“What we’re finding… is that sometimes by being more assertive, by being more aggressive, you might end up with a better negotiated outcome… but ultimately, through that process, create conflict that causes you to end up with worse value overall.”

Consider for example the person you're entrusting the care of your children to. “There might be a reason you don’t negotiate really hard with your babysitter,” Schweitzer says in a Wharton School podcast.

Their solution? Go at it from a softer standpoint.

There’s much debate over the benefits of soft versus hard negotiating, but there’s no denying that the soft approach provides a better opportunity for building rapport and identifying common interests so the collaboration can develop in a positive way and create more value for everyone.

In Harvard Business Review, Carolyn O’Hara details how to go soft, without being a pushover.

Dan Shapiro and negotiating the nonnegotiable

Effective negotiation is often hampered by our blind spots. Dan Shapiro, the founder and director of the Harvard International Negotiation Program and a conflict resolution expert, has helped thousands of organizations, world leaders, and families to resolve the most emotionally charged conflicts, which he characterizes as those that threaten our identity.

In his latest book, Negotiating the Nonnegotiable, Shapiro likens the three dimensions of conflict—rationality, emotion, and identity—to a three-pronged cake. In an interview with ZKM, he says:

“The deepest layer…., spirituality, is the most pertinent to resolving an emotionally charged conflict. This dimension is not necessarily about the divine, but represents our deeper sense of purpose. Whereas a clash of rational perspectives leads to animated debate, a spiritual clash can lead to zealous opposition. Spirituality motivates us through a calling-a gut-level directive about how best to fulfill our life’s purpose. Our rational mind may answer this call, and our emotional mind may urge us forward. But the calling radiates from the inner sanctums of our identity, from what the religious might term the ‘soul.’”

Shapiro introduces a set of hidden emotional forces that tend to lure conflict parties toward impasse—even when doing so goes against their rational interests. These “five lures of the tribal mind” are vertigo, repetition compulsion, taboos, assault on the sacred, and identity politics. He believes that helping parties think through and understand these lures can turn a seemingly nonnegotiable conflict into one that may be negotiable.

Read the full interview with Dan Shapiro on “Identity and Conflict”

Don’t follow any of the above and improvise!

Sometimes the best way to react to prescriptions is a “no, thanks.” So how about sidestepping negotiation guidebooks and leaning into play? As Francois Oustry points out in his article, “exploring the skills of artists and therapists who improvise professionally offers insights to negotiators who also seek to comfortably and confidently navigate the unpredictable twists and turns of a negotiation.” By moving away from conditioned reactions and replies, you might surprise yourself in the end—and have more fun along the way.

I hear you (but not really)

If you’ve enjoyed haggling during travelling, you know that getting what you want in Rio de Janeiro, Marrakech, or Shanghai can take very different skill sets. British linguist Richard D. Lewis has pulled together fascinating insights on negotiating with people around the world. Take a look here to see which characteristic you relate to most.

In China, for example, sharing a meal is your key to making a deal. The cultural importance of food and the ritual of sitting together at a table and literally sharing bowls, usually three-times as many as you’d normally be able to consume, sits at the core of all good relations. This is true in family and in business, as the study “Shared Plates, Shared Minds: Consuming from a Shared Plate Promotes Cooperation” from the University of Chicago Booth School of Business found: “Teams with shared bowls took nine strike days, on average, to reach a deal, four fewer than pairs that had eaten from separate bowls. This difference translated into significant dollar values, saving both parties a combined, if hypothetical, $1.5 million in losses.”

Ignore ultimatums, sit with feelings

What if your negotiating partner is acting like a child? In this article from The Atlantic on negotiating with actual children, we get the wisdom of Harvard Business School professor Michael Wheeler, who has been teaching the principles of negotiation for more than 25 years. Wheeler advises moving away, in conversation, from the particular issue at stake to the process. In the face of someone digging in their heels, try narrating the progress made in the negotiation thus far, or “a recap of previous successful agreements, or something like, ‘I’ve seen the family across the street try such-and-such solution. Do you think we should try that?’”

He also cites the counsel of his colleague Deepak Malhotra, who advised on the peace-brokering process between the Colombian government and FARC rebels. “His advice on ultimatums—take-it-or-leave-it kinds of statements—is to ignore them.

If you ask people, ‘Do you really mean it?’ the answer you’re going to get is ‘Yes.’ Which will probably only make a child more intractable.”

But most important when negotiating with people who are unhappy and may doubt your good intentions is to let their feelings be feelings, chimes in Wendy Thomas Russell, co-author of ParentShift: Ten Universal Truths That Will Change the Way You Raise Your Kids. Empathy—“allowing ourselves to just sit with our children in their feelings”—is important. Don’t agree or disagree, forcefully apply logic, or try to cheer them up. “It’s only from a place of calm that children can negotiate in any real way.”