2020 was, among other things, the year of the special purpose acquisition company, or SPAC. Data from Goldman Sachs found that 200 "blank check" companies were formed last year, raising more than $73 billion in total proceeds, an increase of nearly 500% from the prior year. More money was raised by this method than through traditional initial public offerings (IPOs).
You can't mention the growth of SPACs without discussing Chamath Palihapitiya. An early Facebook employee, Palihapitiya founded Social Capital and became one of the most influential venture-capital investors in the world. Increasingly, Palihapitiya has ventured into the public markets and is quickly becoming the face of SPACs, with high-profile names like Virgin Galactic, Opendoor Technologies, Clover Health, and SoFi going public via his Social Capital Hedosophia Holdings SPACs.
However, Palihapitiya has more deals to make, already announcing additional Social Capital Hedosophia funds. If he's looking for a good private company to bring to market, he should consider Instacart.
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Why Instacart makes sense as Palihapitiya's next target
At first glance, Instacart might appear to make little sense for Palihapitiya. In his 2019 annual letter, Palihapitiya criticized investors for "fawning over social networks ... and other consumer-oriented investments" while reiterating Social Capital's mission to invest in companies tackling the world's hardest problems, like space exploration and health. It appears Palihapitiya is continuing this mission with the companies he's chosen to take public, and an on-demand grocery delivery company might not be high on his list of society-changing investments.
However, I'd argue that over the past year, Instacart has been as beneficial for society as any company Palihapitiya took public because the pandemic has had bifurcated economic effects. For Palihapitiya and others who have been able to take advantage of the market's surge, it's been among the best years ever. However, for many middle- and lower-income workers, often minorities, the pandemic has been an economic disaster that's destroyed more than 10 million jobs. Palihapitiya agrees, making impassioned arguments for the Federal Reserve to help Main Street more than the investor class.
While Congress contemplates sending additional aid to Americans hurt by the pandemic, Instacart continues to be a financial lifeline for its contracted delivery and shopping workforce, many of whom lost their jobs as the economy shut down. It's also been a lifesaver for customers with preexisting conditions who should not venture out to buy groceries in person. COVID-19 has been the most difficult problem society has faced in decades, and helping to limit the health and economic impacts seems significantly more important than having commercial flights to outer space far off in the future.
Putting the capital in Social Capital
Changing the world is an admirable endeavor, but the goal of investing is to turn a profit. And that's why investors are flocking to Palihapitiya's SPACs. Virgin Galactic's market cap has more than tripled from its late-2019 SPAC debut, and Opendoor has roughly roubled from the value when the deal was announced.
There's no reason why Instacart can't provide investors similar mindboggling returns. After all, 2020 was also the year Instacart took on the world's largest retailer and won. According to data from Second Measure, Instacart represented more than half the total online grocery market during the height of the pandemic, stealing significant share from Walmart in the process.
Instacart faces a host of competitors, but they all lack the scale, focus, and depth of partnerships in the online grocery delivery market. Delivery companies like Postmates and DoorDash mostly focus on restaurant delivery. And it would be difficult for low-margin grocers to build out a competing solution -- forming a partnership with Instacart is much easier. Shipt was starting to become a key competitor until it was acquired by Target for $550 million in 2017 to primarily focus on the retailer's e-commerce buildout.
There's likely to be a slowdown in Instacart's operations when life returns to normal, but it may not be as bad as anticipated. Once users become accustomed to the convenience of online grocery delivery, like e-commerce, they tend to move to a hybrid model. In many ways, the online grocery business reminds me of the regular e-commerce market a decade ago. There's considerable space for long-term growth.
There's no better time for Instacart
Things are going well for Instacart, as the service can be considered essential. Although it remains a private company with undisclosed financials, reports are that the company has seen orders jump as much as 500% percent. That surge helped lead to a $13.7 billion valuation in June 2020, up 72% from its 2018 valuation.
The company will eventually need to go public, and there's no better time than the present. While we'd all like to believe that investing is a fully rational endeavor, the truth is, narratives play into market sentiment. This is particularly important in the IPO/SPAC markets, as private companies pay close attention to valuation multiples for public competitors and recent IPOs. A notable example is the recent explosion in electric vehicle stocks going public, brought on by Tesla's strong performance and other successful SPACs in the space.
Investors can gauge sentiment from publicly traded company Uber Technologies. Uber has seen its primary taxi business wither during the pandemic: Revenue in its mobility segment was down 53% over the prior year in the third quarter. Against that backdrop, you'd expect the stock to struggle. But you'd be wrong. Uber's stock is up nearly 70% on a one-year basis on account of Wall Street's increased bullish sentiment on its delivery business, Uber Eats. Additionally, DoorDash went public late last year and saw its price nearly double on the first day.
The unique confluence of factors suggest that it's unlikely Instacart will get initial valuation multiples -- like the ones it has had in this environment -- ever again. This will allow the company to tap the public markets, build out its grocer partnerships, and continue to lead in a space with ample room for long-term growth.
Chamath Palihapitiya taking Instacart public via one of his SPACs seems like a win-win for all parties, including public investors.
