Arrowroot Acquisition Corporation

If I had written this blog post 12 months ago, a lot of you might have asked what is a ‘special purpose acquisition company?’  Today, SPACs are all over mainstream news.  With that said, many still do not know the ‘ins & outs.’  Candidly I generally knew about SPACs, but after some deeper research (and midnight oil burned) over the past several months, I have come to appreciate the value they bring not only to companies, but to a legacy IPO process that has needed some fine tuning over the years.  The number of SPACs that filed, went public, and successfully merged with an operating company has grown monstrously in the last 12 months.  There has been $63 billion of IPO fundraising in January 2021 alone, of which SPACs were $26 billion, or nearly 40%!  After analyzing the environment, Arrowroot has decided to sponsor one – Arrowroot Acquisition Corporation.  We filed with the SEC in January, went out on our virtual ‘roadshow’, held a successful IPO last month, and we are on the hunt for the deal!  We raised $290 million to invest into the type of company we have been investing in all along – growing enterprise software businesses with recurring revenue, high gross margins, high net retention, a mature and scalable product, and the highest quality management teams possible.

As part of the formation of Arrowroot Acquisition Corp., I am happy to welcome Tom Olivier to the Arrowroot Family! Tom joins us from Houlihan Lokey where he was a Managing Director with over 22 years of experience solely focused on software investment banking. I am excited to have Tom helping lead our SPAC strategy. Also, I have brought alongside a few colleagues that will serve on the Board of Arrowroot Acquisition Corp. including Dixon Doll (Co-Founder & Partner Emeritus at DCM Ventures and previously served on the Board of the NVCA where he helped lead the creation and passing of the JOBS Act), Gaurav Dhillon (Chairman & CEO of SnapLogic and previously Co-Founder & CEO of Informatica), and Will Semple (Director of eBay’s Cybercrime Security function and board member of eBay SARL; previously EMEA leader of the PwC Software Security & Assurance practice and Head of Global Threats for the NYSE). I am looking forward to working with the Board on this exciting endeavor.

The Opportunity:

Yes, there are many SPACs filing and going public. It seems to be quite crowded, but if you dig in, you will notice first that there aren’t many SPACs focused strictly on enterprise software (let alone sponsored by a preeminent investment firm that has been solely focused on enterprise software since founding, like Arrowroot).

Secondly, the demand in the public markets for high quality enterprise software companies with top tier unit economics is off the charts.  There are close to 100 SaaS platforms, of a total of approximately 6,000 companies, that trade across the NYSE and Nasdaq – less than 2%.  Through COVID, we have seen the resilience of the SaaS business model and how the acceleration of digital transformation at the enterprise is undeniable – it is a mega trend. As the phrase goes, software is eating the world and by now enterprise software is at least acknowledged by your everyday citizen (cue billboards across the San Francisco Bay Area). For all of us who have still experienced the pen & paper sign-in at doctors’ offices, the important document that came through the mail only to get lost in a pile of other less important papers, and the catchy elevator music playing while you are on hold with customer service for the third hour in a row – software is still in its early days.

Lastly, think about every investment firm’s portfolio – every Sand Hill Road VC, every Boston-based growth equity firm, or every Chicago / New York-based private equity firm – they all need exits.

Finding the Deal:

This is what we do.  Our daily work sources SaaS investment opportunities across the spectrum of venture capital, growth equity, leveraged buyout, restructuring, and debt.  We track over 20,000 software companies globally. Our deal flow is from proactive outbound sourcing mixed in with substantial inbound leads.  Arrowroot’s global and expansive network of lenders, investment bankers, board members, executives, and limited partners generates tremendous reach. Additionally, our SPAC strategy is not competitive with Arrowroot’s core focus on growth equity investments. Arrowroot provides a fully resourced team to find, analyze and diligence SPAC investment opportunities.

The Highest Quality Deal:

During our eight-year history, we have only operated with a single focus – enterprise SaaS.  Our firm’s portfolio companies are in the middle of most software and enterprise trends with several classified as leaders in magic quadrants, waves, etc.  We have researched and executed due diligence on countless enterprise software companies.  Arrowroot’s internal and external resources are solely dedicated to SaaS investing.

Value Creation:

Once you find a target, execute a merger with an operating company, and finally ‘de-SPAC’ – that is just the beginning. The deal must perform!  Luckily for Arrowroot we have our Strategic Resources Group (‘SRG’).  SRG includes a Talent Acquisition Group (internally referred to as ‘TAG’) and consulting practices within Technology & Operations and Sales, Marketing & Customer Success.  While we hope to tackle most projects internally, SRG also manages and constantly updates our ‘preferred vendors’ e.g., better pricing, shared best practices, vertical expertise, etc.  We know which accountants, lawyers, lenders, software vendors, and other services successful SaaS companies are implementing and using. SRG will be leveraged within our SPAC strategy to drive operational improvements post-investment. Let’s not forget our Board members who’ve ‘seen the movie’ a few times over and can provide management teams with invaluable guidance.

In Conclusion:

It is unclear if SPACs are here to stay at this level of sustained activity.  Given the issues with the traditional IPO process, I believe they will stick around in some fashion.  Currently, there is strong demand for even more of these offerings.  With that said, there will always be high demand for quality enterprise software companies in the public market.  Arrowroot is well positioned to find, close, and add value to companies within a SPAC framework.  Endeavoring into SPACs seems like a natural extension of our global enterprise software investing platform.