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Here's Why Clover Health Chose To Go Public Via SPAC

By Keith Speights - Jan 23, 2021 at 6:05AM

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The company's CEO explains how the key decision was made.

Clover Health (CLOV -0.77%) considered its alternatives before going public. Ultimately, though, the innovative health insurer decided to be bought by a special purpose acquisitions company (SPAC).

In this Motley Fool Live video recorded on Nov. 16, 2020, Tom Gardner, co-founder and CEO of The Motley Fool, and Bill Mann, director of Small Cap Research, spoke with Clover Health co-founder and CEO Vivek Garipalli about why Clover Health chose to go public via a SPAC.

Tom Gardner: Vivek and Andrew, you went down the pathway with underwriters toward filing an S1 and an IPO. You've now gone down the pathway and are partnering with Social Capital and Chamath. Can you talk about the differences between the two and a little bit about how this process is different for you as entrepreneurs and the business leaders so that we as investors can understand what those different processes and negotiations look like?

Vivek Garipalli: Yeah, absolutely. We're really excited to be here today. Just a quick backdrop, you guys probably don't know, but I've been a Motley Fool subscriber for I think over 20 years since I was in [inaudible]. It's fun to actually talk about our company. But you guys have done very well for me and I'm sure all of your subscribers over the years. It's awesome to be here.

Tom Gardner: Thank you.

Bill Mann: Thank you.

Vivek Garipalli: It's really interesting obviously for Andrew and I, maybe not obvious, but this is the first time we've actually went down the route of taking a company public. Andrew and I, respectively, we have backgrounds and building multiple companies in technology, outside of technology, but either selling them or retaining those companies.

This was a net new process for us both. I think what was really interesting, again, our n is of one. We are experienced. We can only speak for Clover in terms of having gone down the IPO route and SPAC route. But if at the beginning of the year, my first experience with SPAC was just as a retail investor so I think was an article earlier this year about DraftKings and Barets and I think the merger hadn't happened yet. I thought it was a compelling thesis, it made a lot of sense and I didn't actually know at the time that you could buy into DraftKings pre-merger close. I was, OK, I'll wait for the deal to close. Just even something as basic as that, it wasn't clear to me as a semi sophisticated retail investor.

That was my first introduction as to what a SPAC was. I didn't really spend much time looking at the structure of the thing. I was more focused on the company as I think anyone should be. Then myself and Andrew made the decision probably around April or May or late April, early May to make the formal decision that we were going to take the company public this year. That's always been our plan over the last many years and we went through a testing the waters process toward the latter part of last year with some very reputable institution investors to really get a feel for what would be the receptivity of our company in the public markets based upon us hitting certain milestones and so forth.

Once certain metrics started becoming really clear in a positive way, we decided to pull the trigger. We embarked on that process routine, banking advisors on that. Citi, JPMorgan, and Jefferies went through the whole S-1 process, which was hugely valuable for us. It really forces alignment internally as a company to go through that process, went through underwriting, due diligence, and to Chamath's point, while there is a ton of diligence done by the underwriters and a lot of work that went into the S-1, it's all-around historical narrative, which is perfectly fine.

I think it's vital for any investors buying securities in a publicly traded company or prospective public traded company that all the facts and data history, financial story, etc, is clear, and vetted by third-party professionals are part of the filing. But we were pretty limited in terms of as we learned it, describing anything related to components of our platform and business that we were going to build going forward, which frankly are pretty important components of our story and our future financial performance and value we're going to be creating.

The second aspect to it was don't really have a lot of flexibility to select your investor base. When you go from a private S-1 filing, get comments and flip to a public filing, it's about a two-to-three-week roadshow process where you are on a very rapid sprint. I think Bill, you had brought up the point where you get to this median price and while you have control over your investor base, you're very much leaning on the guidance from investment banks. There's a lot of decisions that get made there around who gets in your cap table, who doesn't, and also importantly, whether you are bringing in Fidelity or a Jennison, two investors that we brought on as part of our pipe.

It doesn't necessarily mean it's necessarily the portfolio manager from the technology side or the healthcare side. It's not as if you're determining who are the actual PMs that are going to be on your cap table and you're going to build that long-term relationship with and understanding the story. That felt very foreign to Andrew and I. We historically have, respectively, as we built our businesses, like many of my businesses, I started with my own capital, even Clover, with 40 million of my own money in the first few years.

Bringing on investors was a very rigorous process for us because we really viewed it as bringing on permanent partners into our business. When we look at our fund raise history, first around capital leading our Series A, Sequoia leading our Series B, Greenoaks Capital leading our C, D and E, these are investors who not only have great track records, but can add a lot of value to a company at different stages of its life-cycle and frankly did a ton of due diligence on us.

We learned a lot about some of the weaknesses in our businesses at those points in time, helped us with our strategic thinking for that next stage and have been great value-add partners and importantly, understand our mission, understand what we're here to do in terms of improving every life and driving the value to the healthcare ecosystem but also how technology can really drive, mass disruption in a positive way in regulated industries, complex industries, large industries. What was really unusual for us, where we felt a little bit of a fish out of water, was there isn't actually a lead investor, a lead sponsor, an attrition IPO process which is very unusual to how we've thought about bringing on investors and partners historically.

We had originally met with Chamath in the early days of Clover when he was looking at an early round and got familiar with Clover at that point in time and when we got reconnected with Chamath, it's obviously been clear obviously to I think not only The Motley Fool community but to us, there's a big difference between investors who can really look out over a 10 plus year period and see can a company really drive or build a moat? Can it build a business that's not only sustainable but build a true differentiation in a way that's going to drive value in a different way than incumbents, in a way where we also view where we're building a moat around how we're generating business value in a way that's adding societal value versus potentially not.

When Andrew and I think about building a business, it's what's going to stand the test of time over many decades, not over just the next two, three, four, five years, and that's just not generally what you're able to accomplish in a two-to-three-week rapid roadshow. But when partnering with someone like Chamath, he and his team were extremely beneficial.

When you think about making the shift from a private company to a publicly traded company, there's a lot of things that was very helpful in terms of getting educated from Chamath's team just in terms of thinking of the public markets' expectations. How to not just be transparent and authentic with what our goals and ambitions are over the long term, but how to think about expectations in a way where we're setting ourselves up for success.

I think importantly really understanding our business in a way where Chamath and his team can narrate whether we're there or not as to what we're building and why and how it's adding long-term value. It's very possible we could have went down the IPO process and ended up with a much higher valuation or a much lower valuation. You just don't know what the markets are in those two to three week period and what the momentum is going to be. For us it was fair valuation and one where both sides felt very motivated around potential upside that each can garner.

I think most importantly that there is a real partnership that can be built there. I think it would have been a very low probability that if we didn't partner with Chamath, that we would have partnered with another SPAC. We probably would've just went the traditional public offering.

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