The Pied Piper of SPACs
The Pied Piper of SPACs
Characteristics of Operating managers / Investing managers to Avoid
1) Two-faced inconsistent communication style between trusted followers <Rebellious Teen> and social media <Social Justice Capitalism>. Hustler like personality and shameless self promotion
Particularly talented at manipulating the media, combining storytelling, narratives and buzzwords
“Polarization gets you on CNBC, it gets you Twitter followers, it gets you a megaphone. If you believe that Chamath can get an hour on CNBC to explain Virgin Galactic, then you want to buy into this deal, because attention is money.”
On CNBC, he adopted the calm and serious language of high finance. On podcasts, he waxed sincere, confessing (https://www.vox.com/podcasts/2019/3/4/18247010/chamath-palihapitiya-social-capital-happiness-identity-crisis-kara-swisher-teddy-schleifer-podcast) that, by working with two therapists, he had “realized how emotionally broken I was, and incapable of really connecting with people.” Twitter was for extreme booster-ism and the occasional“Fuuuuuuuuccckkkkk!!!!!”
2) Crafting the narrative to put inexperienced hapless investors to idolise himself as the visionary champion against the injustices of the world
The tech industry is indeed filled with white guys who went to Ivy League schools, and who say ridiculous things online and buy planes and post selfies of their muscles. Palihapitiya has adopted a kind of braggadocio once reserved for the already powerful, and such boldness can be galvanizing.
Having a great story, and knowing how to tell it, can be a quick way to get rich.
financial storytelling regularly take off during times of unease, such as after a war or a recession:
“You often see a lot of conspiracy theories floating around, and maybe some new kind of technology—like the telegraph or a faster printing press—that makes it easier for stories to spread.” Shiller notes that people like Milken and Mozilo “understand you have to tell as exy story if you want it to be sticky—they understand it’s good to be a little bit controversial.” Such storytellers often tap into investor resentments, “saying stuff like ‘It’s us underdogs versus the élite’ or ‘I grew up poor but became rich, and you can, too.’ ”
The American economy has thrived because we have agreed to collectively believe in a common set of stories,many of which aggrandize innovation, celebrate extreme optimism, and lionize the strengths and weaknesses that Palihapitiya embodies. This willing suspension of disbelief has spurred our economic growth. Now that set of stories includes SPACs, thanks to Palihapitiya
After Palihapitiya devised his I.P.O. 2.0 concept, he went on CNBC,
podcasts, and social media to proclaim that SPACs were a way to preserve
American resilience. “We don’t have capital markets that can support
young, high-growing, fast companies in a way that really builds for the
future of America,” he told one podcast host (https://unchainedpodcast.com/chamath-palihapitiya-why-bitcoin-will-be-the-category-winner/).
“We need thousands of companies to go public.”
Palihapitiya argued that SPACs allowed companies to go public faster, and at a lower cost, than traditional I.P.O.s. SPACs also gave investors access to Palihapitiya’s savvy and connections. He told the podcast host, “I’m using sort of, you know, my accumulated quote- unquote ‘social capital’ and credibility to say, ‘Let me explain to you why you want to own this thing.’ ” But the most important advantage of SPACs, he said, was that they let executives tell the public about anticipated profits and expected breakthroughs. In an interview posted on YouTube, Palihapitiya complained, “In a traditional I.P.O., you can’t show a forecast,and you can’t talk about the future of how you want to do things.”
Palihapitiya and Branson hit it off. “These guys are born salesmen,” a tech-industry banker who is familiar with both men told me. “It’s like watching someone trying to have sex with their reflection.” They rapidly came to an agreement: Virgin Galactic would receive hundreds of millions of dollars from I.P.O.A, as well as a hundred million dollars of Palihapitiya’s personal funds; Palihapitiya would own nearly seventeen per cent of Virgin Galactic.Palihapitiya then had to persuade the mutual funds, the Wall Street chieftains, and the individual shareholders who had written checks for the SPAC to approve the deal. He prepared a series of flashy presentations explaining that Virgin Galactic’s technologies
wouldn’t just put tourists into space; they would one day make it possible for people to travel from Los Angeles to Japan in two hours, on hypersonic jets. The company would build and operate sleek “spaceports.” Companies would pay millions to advertise to Virgin Galactic’s clients. One slide from Palihapitiya’s presentation noted that it costs about half a million dollars to rent a yacht for a week—meaning that a hundred thousand dollars for a spaceflight was a bargain.
When Palihapitiya spoke to me about Virgin Galactic, he avoided blithe talk of profits. Instead, he portrayed investing in the company as noble, likening it to supporting the Apollo program
in 1969. And he emphasized that the company faced real challenges: “When you make these big leaps technologically,you fund something that’s very complicated. But, when Palihapitiya was making his case to investors, he let loose with wildly optimistic projections. In the first nine months of 2019, Virgin Galactic had collected only $3.3 million in revenues and had lost a hundred and thirty-eight million dollars.Yet Palihapitiya’s SPAC predicted that, shortly after closing the merger, the company would start
sending people into space,and that annual profits would hit a quarter billion dollars by2023.
Palihapitiya assured Facebook colleagues that, if they joined him, they were showing up every bully—landing a blow for people who looked different and had unfamiliar pedigrees. Soon, many top employees were clamoring to join Palihapitiya’s group. One told me, “It’s intoxicating to hear someone describe your work like it’s this noble calling.”
3) Track record of insulting potential investors whom dont agree to his views. Megalomaniac personality
gave a dazzling speech about helping mankind reach for the heavens. It went unmentioned that Virgin Galactic had burned through nearly a billion dollars,and that in its fifteen-year history it had missed every major deadline that it had set for itself. Instead, Palihapitiya proclaimed that the company would likely earn enormous profits—and change the world.
One listener—an older gentleman, conservatively dressed—began interrupting Palihapitiya to question
both his track record and his projections. Palihapitiya let the man spout off for a bit,and then replied, “You’re a complete fucking idiot. The older man looked as if someone had just punched him.“Have you even looked at the prospectus? Did you even fucking Google me before you came in here?”All the eyes in the room went wide. “How lazy are you?”Palihapitiya said. “I don’t even want your fucking money.”
But, as the company matured, what seemed to excite Palihapitiya most wash is heightened influence. “He went to this one hedge-fund conference and talked onstage about why one of our investments”—the file-sharing service Box—“was a great buy,” A former Social Capital colleague told me. “When he came back,he had his phone out, showing us Twitter and all these blogs, and he was so pumped at how much he had moved the stock price.” In a matter of weeks, Box’s stock leaped by more than a third,
to twenty-nine dollars a share, a price that it has never reached again. (It is now at about twenty-three dollars.)
A close friend of Palihapitiya’s told me, “He’s the kind of guy who can convince himself that whatever he’s telling you right now is absolutely true, which can be intoxicating. But that also means there’s less oxygen for people who see things differently
The online forums that had made Palihapitiya a star were turning against him. He went on the offensive, telling reporters that his co-founders had been arrogant. As for his employees, he told one journalist
(https://www.axios.com/social-capital-chamath-burns-down-6bf0f8de-854f-4ad9-86da-2eb9ec520871.html),“They probably felt maybe not listened to as much as they should have been by me. Tough
Recently, someone tweeted that he was not excited about seeing Palihapitiya speak at a forthcoming cryptocurrency conference. Palihapitiya tweeted back, “You’re a joke,” followed by
“I owned Bitcoin when you were still living in Mommy’s basement.” He cancelled the appearance. His friend told me,“It’s like he can’t stop from going dark sometimes.”
Palihapitiyais not alone in this regard: Elon Musk, Donald Trump(https://www.newyorker.com/tag/donald-trump), and others who have profited from adopting bellicose stances online
clearly have trouble knowing when to stop
4) Manager whom is not focusing on improving the business / investment returns, but using the company for empire building purposes
media appearances were taking precedence over Social Capital’s needs. The company was posting impressive returns,but Palihapitiya, they said, was missing meetings and ignoring e-mails. When he was in the office, he hijacked discussions to talk about social-media strategies or to offer monologues on income inequality.
“There was a lot of erratic behavior,” a former Social Capital executive told me. “He was always making big pronouncements about his visions for the future, which didn’t really have anything to do with the deals we were trying to close.” Colleagues encouraged him to step back from day-to-day operations, but he resisted. Another former Social Capital executive said, “Chamath wanted to optimize
for what served him best, instead of the companies we invested in or the team we built.”
5) Design incentive schemes that overcompensates him, without any skin in the game or personal risk to himself. Very money hungry and competitive
sponsors are paid lavishly—much better than they would be compensated in a traditional I.P.O. Sponsors often receive twenty per cent of a SPAC’s stock, simply for bringing it into existence. Such paydays can be worth hundreds of millions of dollars. In a recent influential study (https://law.stanford.edu/publications/a-sober-look-at-spacs/), Ohlrogge and some colleagues wrote that the“costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized” and are mostly paid, unknowingly, by the individual shareholders whom Palihapitiya and others have claimed to be championing.
Thanks in part to the twenty-per-cent giveaway to the sponsor,“although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target,
it holds just $6.67 in cash for each outstanding share.” One of Ohlrogge’s co-authors, the Stanford law professor Michael Klausner, told me, “The real reason SPACs are so popular
right now, I think, is mostly because sponsors are making so much money off them.” A banker who has worked on a number of SPACs agrees: “There’s a lot of money to be made in
convincing people to believe in something new.
Bloomberg Businessweek recently reported(https://www.bloomberg.com/news/features/2021-05-13/spac-king-chamath-palihapitiya-hopes-his-hype-will-keep-mesmerizing-you), of one
Palihapitiya SPAC, that “the way the deal was structured made it almost impossible for him to lose.”In February, a firm named Hindenburg Research, which often bets against stocks, accused Palihapitiya of misleading investors about ongoing regulatory issues with Clover Health—an insurance company that merged with I.P.O.C earlier this year. Palihapitiya defended himself on Twitter: “Yesterday’s report was rife with personal attacks, thin facts, and bluster that has been rebuked by the company.” But this time his narrative failedto stick: the company’s stock has declined more than forty-five per cent since the tweet. All told, Clover’s shareholders have lost nearly a billion dollars. Palihapitiya and his
partners, however,are still doing fine. Their profits from I.P.O.C are estimated to be about a hundred million dollars.
6) Spiteful personality of buying his way to power
Palihapitiya sometimes recalled a time he’d won fifty thousand dollars playing poker and then had gone to a BMW dealership. The salesman—eying Palihapitiya’s rumpled clothes and brown skin—refused him a test drive. Palihapitiya walked across the street to Mercedes-Benz, bought a car, and then drove it into the BMW parking lot to taunt the guy who’d rebuffed him.
7) Consistent track record of his actions completely contradicting what he is promoting about
“I don’t want to be a slave to money,” he later told a reporter(https://www.fastcompany.com/40525495/social-capitals-chamath-palihapitiya-wants-to-fix-capitalism). “I want to be a slave to something bigger—an ambition.” Palihapitiya quit the company, spent a month playing poker in Las Vegas, then bought a small share in the Golden State Warriors.Before long, he was showing up on CNBC—where he extolled the virtues of cryptocurrencies—and appearing in articles with such headlines as “The League of Extraordinarily Rich Gentlemen(https://www.bloomberg.com/news/articles/2012-07-26/social-plus-capital-the-league-of-extraordinarily-rich-gentlemen).”
Reporters learned that he could reliably dispense colorfulquotes(https://www.vox.com/podcasts/2019/3/4/18247010/chamath-palihapitiya-social-capital-happiness-identity-crisis-kara-swisher-teddy-schleifer-podcast): “To all the people that worked for me and whose money I took, you’re fucking welcome”; “I’mgoing to buy @GoldmanSachs and rename it ChamathmanSachs”; “In moments of uncertainty, when courage and strength are required, you find out who the true corporatist scumbags are.” He later assured one journalist(https://www.bloomberg.com/news/articles/2021-02-12/the-king-of-spacs-wants-you-to-know-he-s-the-next-warren-buffett)that, in a few years, “nobody’s going to listen” to Warren Buffett,because the world would need someone else to “take the baton and do it as well to this younger generation in the language they understand.” He was the obvious candidate
Palihapitiya insists that he does not tell stories; rather, he says,he reveals truth discovered through careful deliberation, hard work, and unbiased reasoning. He told me, “I think why people want to work with me is because I do a reasonable job, and it’s gotten better over time, of being able to dial down bias, dial up facts and intuition.”
Countering the notion that he offered simplistic pitches to the public, he argued that complex explanations are distracting: “The problem that I think happens sometimes is,
when you’re trying to make important decisions, a lot of the times people make them exceedingly complicated,and it’s almost to get other people’s validation. In my experience, when I’ve gotten things really, really right, it was very simple.” He disagrees with the notion that SPACs are optimistic narratives built on shaky evidence, or a way for a new Milken or Mozilo to earn quick fortunes. He views SPACs as “an on-ramp to the capital markets”—a hack that allows everyday people access to wealth long reserved for the already rich
None of Palihapitiya’s SPACs have devoted significant money to fighting income inequality, and some of his most profitable investments, such as bitcoin—and some of his purchases, such as the private jet—have devastating environmental costs. His friends, however, say that his stated ambitions are genuine.
Palihapitiya, who is now reportedly worth multiple billions of dollars thanks to his SPACs, bitcoin holdings, and other investments, told me that he has “given a lot of money away,”
and is planning future philanthropy “in the half a billion dollars of aggregate commitment.” This may well be true, but the only major donation attributed to him thus far is a
twenty-five-million-dollar gift to the University of Waterloo. He declined to name other contributions. “In the Buddhist faith, which—I’m Buddhist—you do these things because they’re
part of your moral culture,” he told me. “You don’t do it for labels and press releases.” (This modesty is not altogether confining: a few months ago,Palihapitiya triggered a flood of headlines by hinting
that he was running for governor of California, then triggered yet more by announcing that he’d changed his mind.)
Palihapitiya has formed six SPACs thus far, yielding him and his firm more than a billion dollars. “The returns that we’ve generated—you can’t B.S. those,” he told me. In March, he sold the entirety of his personal stake in Virgin Galactic, worth some two hundred and thirteen million dollars. He might have needed the cash: a few months earlier, he’d reportedly acquired a seventy-five-million-dollar private jet.
He’s talking about climate change while he’s wearing a three-hundred-thousand-dollar watch and flying around on a private jet,” one of the former employees said. “You know it’s ridiculous, but he makes you want to believe it can be true.”