Why Most SPACs Underperform the Market

SPACs — Special Purpose Acquisition Companies — exploded in popularity during 2020 and 2021. They were pitched as a faster, more flexible, more innovative way for companies to go public. Investors loved the story. Sponsors loved the economics. And for a brief moment, it felt like SPACs were rewriting the rules of the market.

Then the results came in.

Most SPACs dramatically underperformed the broader market. Many collapsed. A few imploded spectacularly. And investors were left asking what went wrong.

The truth is simple: SPACs are designed in ways that make long-term underperformance not an accident, but almost inevitable.

Here’s why.

SPACs Begin With a Built-In Structural Problem: Dilution

Every SPAC starts as a blank-check company that raises money without having a business attached. That money comes with strings:

• Sponsors get a large equity stake for almost no cost.
• Early investors receive warrants and incentives.
• PIPE investors negotiate favorable terms.
• Merged companies inherit all of this dilution on day one.

By the time the deal closes, the effective share count is much higher than what the headline number suggests.

This means the company must grow far more than investors realize just to break even on valuation.

Most don't.

The Target Companies Are Often Not Strong Enough for Traditional IPOs

SPACs often pitch themselves as an alternative to the traditional IPO process — faster, more flexible, less restrictive. That's true. But the flip side is this:

Many SPAC targets chose the SPAC route because they could not pass the scrutiny of a traditional IPO.

Common issues include:

• Limited revenue
• Unproven business models
• Weak unit economics
• High cash burn
• Overly optimistic forecasts

SPACs became a haven for companies that looked exciting on slides but lacked solid financial foundations.

Excitement doesn’t compensate for weak fundamentals.

The Process Incentivizes Overly Aggressive Projections

Traditional IPOs don’t allow companies to make forward projections. SPACs do.

This small difference became a huge problem.

To justify big valuations, many SPAC targets issued extremely rosy forecasts — projections of exponential growth, massive revenue jumps, or near-instant profitability. These forecasts helped close deals.

But reality rarely matched the slide decks.

Within a year or two:

• Growth targets missed
• Revenue guidance dropped
• Losses expanded
• Cash burn accelerated

Public markets punish missed expectations. SPACs repeatedly set expectations too high.

Redemptions Create Immediate Financial Pressure

When SPAC shareholders vote on a merger, they can redeem their shares for the cash they originally invested. During the SPAC boom, redemptions were low. But when sentiment cooled, redemptions soared — often above 80% or even 90%.

High redemptions mean:

• Less cash for the target company
• Higher reliance on PIPE financing
• Immediate balance sheet weakness

A company expected to receive $300 million might walk away with $30 million.

That’s a brutal way to start life as a public company.

SPACs Often Go Public Too Early

A traditional IPO forces a company to demonstrate:

• Audited financial history
• Stable revenue
• Operational maturity
• Clear competitive positioning

SPACs sometimes skip several of these steps.

Going public prematurely exposes companies that are:

• Still building their product
• Pre-revenue
• Pre-profit
• Not ready for Wall Street scrutiny

Public markets are unforgiving. Weakness gets priced in immediately.

The Incentives of SPAC Sponsors Are Not Aligned With Retail Investors

SPAC sponsors make money when the deal closes — not when the company performs well afterward.

This misalignment creates incentives to:

• Complete any deal, not necessarily a great one
• Promote overly optimistic projections
• Push mergers through even during poor market conditions
• Focus on speed over due diligence

Many SPAC teams became deal-makers, not value creators.

Markets eventually punished that.

Hype Fades, Fundamentals Remain

During the SPAC boom, investors chased themes:

• EVs
• Space exploration
• Online sports betting
• Biotech breakthroughs
• Fintech disruption

Most SPAC stocks soared before ever proving they could execute. When fundamentals didn’t catch up to hype, valuations collapsed.

The hype cycle always ends. Fundamentals always remain.

Survivorship Bias Distorts the Story

A few SPACs did succeed — DraftKings, Iridium, some energy companies. These winners get attention.

The failures don’t.

But the broad data is clear: Most SPACs fall significantly below their $10 initial offering price and trail far behind major indexes like the S&P 500 and Nasdaq.

When you look at the entire cohort, not just the survivors, the picture is undeniable.

What Investors Can Learn

SPACs aren’t inherently bad. But they require careful analysis and realistic expectations.

Key lessons:

• Dilution matters — understand the real share count.
• Projections are not guarantees — check the underlying assumptions.
• Many SPAC companies are early-stage and speculative.
• Sponsor incentives do not always align with long-term performance.
• Fundamentals are more important than flashy investor presentations.

If a business wouldn’t survive a traditional IPO process, it may not be ready for public markets.

The Bottom Line

SPACs promised to democratize investing and streamline the path to going public. Instead, they revealed the dangers of misaligned incentives, premature public listings, aggressive projections, and dilution that most investors never fully understood.

The underperformance wasn’t random. It was structural.

Most SPACs underperform the market because they were designed to emphasize speed and excitement over durability and fundamentals.

And as always, the market eventually rewards fundamentals — not stories.

Tools like Stock Taper help investors cut through hype and analyze businesses for what they are, not what the slide deck says they could become.