SPAC Wipeout Is Punishing Followers of Chamath Palihapitiya
bloomberg.com
bloomberg.com
Then I saw him on CNBC in the midst of the GameStop fiasco, railing against Robinhood on the premise that people should be outraged because Robinhood almost ran out of money and had to restrict trades.
Whether or not that’s something to be outraged about is one question. What turned me off is that he seemed to be completely ignoring parts of the story, instead finding new angles to throw on the fire to keep people riled up. The whole thing was a major red flag for me.
Several brokerages were capitalised well enough to allow GameStop trades, Robinhood wasn't because of incompetence and/or malice. This isn't their first blunder, remember when they tried to create bank accounts with zero insurance because their legal and/or executive team is incompetent?
0 = Steven Levy's Facebook: The inside story
I don't doubt this, but how much of this is the same exact thing we see of his current persona, which tends to have no tolerance for the BS Silicon Valley 'wokeness' and general softness with the Ivy league/Stanford CS types that generally are the rank and file and lower tier devs in most FAANGs?
I ask, because as a Californian that remembers the SV of the late 80s and 90s I felt utter disgusted by what it had become in the min 2010s when I moved there for a Summer wlaunching my startup and realized in the first week that what it had become was a massively distorted perversion of it's former self.
Money served as much as an insulator to keep their norms fixed and provided as a (compromised?) barrier of entry, as much as anything else, but somehow it was effective enough to negate the obscene amount of human misery due to massive homelessness and wealth inequality you see on every corner.
He is a great talker, great hype man, possibly a great growth marketer, but he is certainly not a great investor.
SPACS are loot boxes. You have a chance at some point in the next 2 years that it may open. If you don’t like the opened stock, you can get a refund of 10$ plus interest. If it doesn’t open the same thing occurs.
As long as you are buying spacs (not companies that have completed the spac merger) at or below NAV you won’t get burned. You just pay in opportunity cost. If you pay for a pre LOI spac above NAV u are taking on risk and it is expected that you will get burned.
Lots of Chamath’s followers over paid for his spacs which ultimately burned them.
SPACs usually start at $10 when formed, then shoot up at least 4x on announcements and hype, the early investors (i.e. people like Chamath) cash out at the peak, then the stock price tanks to $15. Technically the stock is "up" from the original listing price, but it's really just a big scam.
This is a very rare phenomenon, and even with the most prominent SPAC sponsor (Chamath), of his current 4 SPAC deals that are post-DA, only 1 has exemplified what you characterize (Virgin Galactic's $55 ATH). The others have never broke $40 or above. This includes every SPAC he has been in the PIPE (5) with exception of 1 (NYSE: MP) which has broke $40.
Therefore, of the 9 post-DA SPACs that have had some form of association with the one of the most popular SPAC sponsors (Chamath), only 2 exemplify what you describe.
However, I do agree with the general premise of your comment. SPACs without founder and PIPE lockups are most likely destined to perform poor in the long term.
Is this a big scam? Considering the fact that most of the 130~ SPACs that have a DA do not fit into your characterization (most do not shoot up even 2x after LOI/DA announcement & hype, most sponsors have not cashed out - whether that be peak or not, most do not trade at $15 but rather way closer to NAV), I would be inclined to say they are not scams in that regard. I would say they are unfair rather than scams (most SPACs have a high % of founder shares, no lockup etc).
It's kind of like around the time of the Dutch East India Company when tons of bogus companies popped up and publicly sold shares that completely tanked shortly after (e.g. a company claiming it invented a perpetual motion wheel machine, etc).
I'm referencing tickers such as APPH, NKLA, HYLN, THCB, LACQ. I'd wager a bet that most of the early investors for these examples are already cashed out at a significant profit knowing they would tank shortly after they did.
Part of the SPAC structure is that you can redeem each share for roughly the IPO price in cash instead of taking shares in the new company (actually it's tied to the amount of the cash in the SPAC), at merger. So this basically sets a price floor on pre-merger SPACs, minus opportunity cost.
And, indeed, 1 out of his 3 merged SPACs is below IPO price.
That's just treating the symptoms, though?
Then why don't you propose to just ban forward-looking projections and including more transparency?
SPACs have their distinct use cases and have unique advantages and disadvantages compared with IPOs & DPOs. A blanket-ban on these vehicles is, in my opinion, limiting optionality, which wouldn't be a problem if the IPO & DPO processes were perfect, however, they are not.
In other words, there are a number of SPACs which have already posted their target company, their financials, future projections, as well as other things like PIPE investors, % SPAC ownership etc. Most of these, due to the current climate, are trading at or slightly above NAV, therefore, they are akin to buying stock in any other company with a small downside if the deal does not materalise [1].
What you would be referring to in your example are pre-DA SPACs, in which you are correct as it relies on the sponsors prior performance and praying they will find a good target at an appetizing valuation. However, even here there is a small downside, since of the 430 SPACs searching for a target [1], the majority are trading at or below NAV with very few breaking this rule, which is why it is so lucrative for investors and arbitrage HFs.
For instance, if you do proper due diligence on a particular SPAC sponsor and have mild conviction on their ability to obtain a good target, chances are their SPAC is trading at or below NAV, therefore, it opens an opportunity to invest in something near risk-free. If a deal does not materalize, then you get $10 (or NAV) back, and if it is a good target you reap relatively good rewards. If it is a bad deal or you do not like the company, you have the ability to sell at or near the same price you bought (provided it was close to NAV), since very rarely in the window of post-DA to de-SPAC will the SPAC price fall below NAV. The only significant downside is opportunity cost since the core idea revolves around parking money and not utilizing until the sponsor announces a deal, and other investments even in index funds may have provided higher returns in that timeframe, which could be a good or a bad thing, especially in volatile markets.
This doesn't necessarily mean SPACs cannot go below $10 before a merger. It just means that you as a shareholder have the ability to ask for your money back at $10/share regardless of the stock's current price.
Surely you can see why this can make SPACs an attractive place to "park" one's money. The potential upside is pretty large, whereas risks are relatively low as long as you don't continue holding post-merger (where the price can indeed go down to $0 and you are no longer protected by the NAV floor).
When I first started hearing about them a few months ago (oddly enough because I was listening to one of Jason Calacanis’s shows with Chamath) they sounded off. Had also just recently rewatched The Big Short.
Back in 2006-ish an old boss at the time was doing some hinky shit with penny stocks. First time I had ever heard about them back then.
After doing some research to learn about SPACs, the whole concept is incredibly scammy. It’s all just a weird mutated combo of penny stocks and the crap being pulled in 2007. I know, that’s not an exact true definition. I’m trying to make a generalization.
I still think he's an interesting listen, but you've got to be thoughtful about it. Slippery dude.
Tenev became a scapegoat for the GME fiasco, and, as the facts came out, it seemed he really didn't deserve to. I get that Tenev's "we don't have liquidity problems" answer was a little disingenuous, but it also wasn't totally wrong if you include a bunch of fine print, and I get how it was necessary. In the end, it turned out that the whole T+2 system was stupid, and leaked through the abstractions built on top. He didn't have enough capital to handle a crazy outlier, and he went back to get more money for next time. What else was the guy supposed to do?
So attacking Vlad for "ethics" was low. Remember that, before Robinhood, we all paid a bunch of trading fees. The dude has done some good. Chamath just piled on to an easy target. I don't like people who cast stones so they can look good.
I don't know why I'm here doing Robinhood's PR for them. I guess Chamath's grandstanding just left a really bad taste.
The discount broker always gets paid. It might be from fees or it might be from PFOF and lending shares in margin accounts and pocketing the proceeds, but either way, they get their money.
Other brokers like IKBR charge fees for all trades, but split the share lending proceeds with you 50/50.
While T+2 is antiquated, that doesn't excuse Robinhood giving margin accounts to unsophisticated participants (who don't understand the consequences of trading on margin), fronting them funds with "instant funding" while their ACH transfers are in flight, all while having limited capital on hand. Vlad could've come out honestly and pointed out their sleight of hand was also a contributor alongside clearinghouse requirements, but instead, smokescreen.
It's ironic because this prevents small brokerages from building their own clearing houses and reducing competition in that space. Robinhood innovated to push the feature development cycle faster and got punished for it due to an archaic rule about settlement time. T+2 is really 99% of the reason this happened -- sure RH could have raised additional funds, but a black swan event isn't usually what a smaller bank plans for.
We could probably switch to T+1 without significant problems. Real-time settlement would be a whole other kettle of fish.
Even on T+2, hundreds of millions of dollars' worth of GME stock failed to deliver. Thus, I thumb my nose at the suggestion that T+1 (which is what we use in the options market) would have resolved the issue.
In actuality, Vlad is correct that faster settlement would have liberated some of his firm's cash, but it's not a real solution considering that other parts of the settlement process would break. It's easier for him to point fingers than to admit "We were writing checks that our firm couldn't cash."
A customer with a given amount of capital can buy far more stock on margin than on cash. Buying additional stock on the firm's dime puts the firm itself at risk and also increases deposit requirements. DTCC deposit requirements take margin into account but even if that were not the case RH bought more stock on margin than it would have in a cash-only restriction.
When Robinhood clients trade on margin, Robinhood itself takes risk on the position. There is no guarantee that margined trades will be liquidated when they go beyond minimum maintenance. Markets have discontinuous jumps all the time. So you can get situations like what happened with Archegos, where banks lost billions on the margin leverage that they provided to the customer.
T+2 isn't archaic, it was introduced a few years ago and even in T+2 many firms are unable to deliver shares on time. Vlad started to blame T+2 because his firm didn't have enough money to cover deposits, but (A) that could have been resolved by restricting margin to reduce GME buying power, and (B) hundreds of thousands of those shares failed to deliver on T+2 anyway.
I’m a follower of Chamath, but that doesn’t mean I believe he can predict the stock market any better than I can.
What are his self serving/pretending behaviors? Who has he conned, and how?
Edit: I’m genuinely curious and asking to get better informed. Why the downvotes?
Chamath being Mr-Correct-and-influential-Money-Guy is only to be a self serving salesman
Wealthy enough people hear about it and can buy into Social Capital as a limited partner. Or be a SPAC co-sponsor, or part investor in a new SPAC, or be part of the retail investing hoard that also provides liquidity.
There is no other reason for him to talk at all.
Riding and stoking the populist sentiment is only self serving. That doesn't mean he conned anyone (the grandparent post did not use that term), maybe ripped off but this aspect is no different than any other investment that you’re allowed to take risks on. There isnt anything special about Chamath, except that his niche involves pandering to “the little guy”.
The on with that women at Standford comes to mind, he flat out comes out and says he 'wants to be wealthy in order to be influential,' and is what is left when you're a billionaire: so, given his presence within the high profile VC World and now his spots on the 'all in' podcast I'd say he is making his move. He kind of teased that we would run for Governor on the run up to Newson's recall, only to back track on that. I also saw he is a default 'who to follow' on Clubhouse when I was invited.
The truth is I'm a fan of Chamath, mainly because he calls entrenched the SV wealthy on their BS; it doesn't mean he is a saint but you can tell he gets fed up about it as much as any reasonable person does about how much self-serving non-sense it's built on.
But I also like him because he is cognizant of how his position in life as a billionaire has more to do with sheer luck and timing than anything else, including working hard, and fully acknowledges how his position is untenable for most millennials and Gen Z despite all the kool-aid drinking in SV filling every founder's head that they can be Elon 2.0 if he just works hard enough.
I'm not that familiar with his SPAC positions, it all sounds too much like the derivatives of 2008, which is enough to keep me the hell away from it.
I like what Social Capital stands for, but I would never invest in it, but I'm glad it exists.
His position in Bitcoin, 2012 was early despite what another poster says: I was there back then and you seriously could only get drugs or socks with it so I'd say a tech person getting involved was rather early.
Incidentally, that was the year we finally got retail merchant's attention and did a lot of merchant adoption for Black Friday so it was a remarkable and notable year for many. What followed with the 2013 ATH is when we had our first Eternal September moment.
The new era of RobinHood traders has brought an incredible degree of financial populism, youtube is crowded with people giving their opnion.
Some of it is really great, often more insightful and detailed than what a lot of banks dare publish - but a lot of it is rubbish.
His primary skill appears to be promoting himself as a first mover when he's always a johnny-come-lately.
And on the particular topic of the article: Bloomberg notes that "His three open SPACs are all in the bottom 20th percentile for returns since the market top" compared to other SPACs, and over the course of the past 2 months alone, have all lost at least 20% of their value.