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What the SPAC phenomenon is doing for VC-backed companies

Yahoo Finance’s Akiko Fujita and Zack Guzman discuss navigating the VC investing space with Sarah Foley, Partner at SWAT Equity Partners.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. We were very interested in seeing how VC activity, particularly early stage activity, might be impacted by the pandemic. And that was the focus of a new survey from 500 startups. And the group was able to find out that when you looked at the impact relative to where things were pre-pandemic, about 37% of early stage investors said that their investment activity since the pandemic began would be more than planned. Prior to the pandemic, 36% said it'd be about the same, and 26% said it would be less than pre-pandemic levels.

And our next guest has seen this all play out firsthand. Sarah Foley is partner at SWAT Equity Partners, an early stage venture capital firm focused on investing in emerging consumer brands. It's backed some of the brands we've had on this show, including 305 Fitness and college affordability startup, Frank. And Sarah, appreciate you coming on here to chat with us today. I mean, how big of a snapback has it been relative to, I guess, March of last year, when this was really getting kicked off, and how worried a lot of VCs were about these early stage brands?

SARAH FOLEY: Well, thank you for having me very much, Zack. It's a pleasure. Look, I think in the beginning of the pandemic period, most venture capital firms were very focused on putting their arms around the portfolio to make sure that they had the wherewithal in terms of operations, capital, and runway to make it to the other side.

We probably didn't expect the other side to take quite as long to arrive, but it slowed down activity in, I would say, the first quarter, second quarter of last year, but has definitely snapped back. I think you would say across all stages of VC, record levels of investment occurred in 2020, which meant they kind of made up for it in the third and fourth quarters of last year. That's where we found ourselves at SWAT Equity Partners as well. And our pipeline at the moment is at more active than it ever has been.

AKIKO FUJITA: Looking at your portfolio, it seems like there's a number of themes that we have seen pre-pandemic, but also really emerged during the pandemic. Sustainability a big one, fitness another one. We were talking new ways of fitness, but also affordability around education. When you talk about the growth, the funding side is something that you can certainly address. But I wonder in terms of the pitches you've been getting, what areas have really seen the biggest spike?

SARAH FOLEY: So it's a great question. One of the areas, amazingly, that we found a lot of traction in the last eight weeks is feminine health, specifically feminine health and areas within feminine health that have been stigmatized historically. We've seen countless pitches. Sometimes that's just the ebb and flow of our business.

But it's been a lot of fun and thoroughly enjoying to talk to diverse founders. As you would imagine, a feminine health company is generally probably going to be founded by a female or females. And they're working toward solutions to pain points of problems women are experiencing either shopping for products in the drugstore that they might feel embarrassed or awkward buying, but putting them in an access channel of ecommerce that makes the receipt, safety, and convenience, discretion of using those products in the safety of their own home, a wonderful journey and experience for that consumer.

ZACK GUZMAN: Yeah, that was another takeaway in that 500 startups survey. By far and away the most active sector, they said. Investors had said health care, 41%.

SARAH FOLEY: Yes.

ZACK GUZMAN: That was the one that they had been investing in since the early beginning of the pandemic. But Sarah, when you look at maybe some of the ways that some of these smaller companies have had to navigate all this, I mean, we've spoken multiple times to 305 Fitness about their pathway to accessing PPP funding and kind of the pain points around that. When you look at your involvement as a VC, I mean, how much does that maybe plays into helping companies navigate that, being there's a backstop? What did it look like early on when there were a lot of fears of, we don't have enough money to put the lights on?

SARAH FOLEY: It was scary, no question. And I appreciate the wherewithal and the resilience of the company-- the founders in our portfolio, and particularly the 305 team and the way they handled the situation, not having any visibility and certainly never having navigated this type of shutdown before. And by the way, their studios are still closed.

So what that team has done is really work together with their team, talking to the community of 305 fanatics and loyal users of the product to figure out at first a YouTube channel that they could access in order to have a class or two a day that was fresh content that would help them get through a very uncertain time in March and April. That then emerged into a streaming channel they launched in September, called 305 At Home.

That is available for a subscription price, but less expensive than joining the studio itself, but gives the consumer now continued access, more content from amazing instructors across the country they continue to certify. So it's been a journey. But the ability to be agile, innovate, and pivot your business model to react to environments that largely are out of your control is what we love most about backing amazing founders. And we know that team is going to be exceptional and successful as they get through this last bit, hopefully, of reopening studios and going back to work.

AKIKO FUJITA: Sarah, you invest early stage, so you're not necessarily connecting with companies at the point where they're big enough to go public yet. But I wonder how the SPAC boom has changed the roadmap for some of these companies who eventually hope to go public. Does it create a shorter runway because they don't necessarily need to have the balance sheet, really, that traditionally would have been required to go public, if they can do that, through a blank check company?

SARAH FOLEY: I think that's exactly right, Akiko. I think that the SPAC phenomenon, this current boom, has really been accelerating the last part of the journey that a venture capital-backed company will go through to ultimately access the public markets. So that's one thing. They can raise in much larger quantum perhaps of capital at a certain stage than they would have otherwise had access to. Call it, now with the SPAC opportunity in front of them, 250 plus million or more, if more private equity comes into that particular deal.

It gives access to Main Street investors who wouldn't otherwise necessarily see a venture capital-backed company until it was long public participate in the journey of understanding how these businesses will continue to evolve. But the SPAC prospectus process itself enables these companies to provide projections of what they think their business model will achieve over the next three to four to five years, which is not something that's an option during an IPO process. So that difference is a big distinction and I think one that will really enable venture capital oriented backed companies to access SPAC capital much more quickly.

AKIKO FUJITA: Sarah Foley, partner at SWAT Equity Partners, appreciate you stopping by today.