Chamath Palihapitiya speaks to SPAC concerns, from fees to disclosures to quality

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Chamath Palihapitiya
Image Credits: Michael Kovac / Contributor / Getty Images

It was almost exactly two years ago that a special purpose acquisition vehicle (SPAC) spearheaded by investor Chamath Palihapitiya took public the space tourism company Virgin Galactic. It was the first human spaceflight company to trade on the NYSE — or any exchange, for that matter — and it was so successful, with the company’s shares trading higher and higher for so many months afterward, that it almost immediately kicked off the SPAC frenzy.

Consider that in the first three months of this year alone, SPACs raised $87.9 billion, exceeding the total issuance in all of 2020, according to data from SPAC Research. So far, according to SPAC Insider, 450 blank check companies have been successfully formed, compared with 15 just 10 years ago.

Palihapitiya has been among the biggest beneficiaries of the craze. Called the “Pied Piper of SPACs” by The New Yorker and the “King of SPACs” by Bloomberg, he has formed at least 10 blank check companies and publicly shared plans to raise many more. (On the “All-In Podcast” that he co-hosts, Palihapitiya last year revealed he had reserved the symbols from “IPOA” to “IPOZ” on the NYSE.)

Of course, whenever market activity grows too feverish, retail investors get bruised. Indeed, after a number of companies taken public via blank check companies were discovered to have fudged some of their numbers — in June, for example, Lordstown Motors admitted it did not have binding orders from customers for its electric Endurance pickup truck after all — fears have grown that SPACs don’t feature enough disclosures and that they mostly benefit the people organizing them, like Palihapitiya, who joined us last week to talk about that concern and others.

Excerpts from that beginning of that conversation, held during TechCrunch Disrupt, have been edited lightly for length. You can also catch the full conversation below.

TC: When you successfully helped take Virgin Galactic public in the fall of 2019, did you foresee what would happen? Did the market play out in a way that you had anticipated?

CP: To be completely honest, I didn’t anticipate that there would be this much activity. But it somewhat makes sense because I think whenever there is any innovation of any kind, you sort of tend to see this euphoric fervor. The first phase of something is just all these people getting extremely excited. And then you have what people somewhat say is a valley of disillusionment. And then you have a long-term business. That has happened in everything that we know today, whether it’s internet search or social media [or] the boon with crypto. I think SPACs are following very much the same trajectory. The big important takeaway is that it’s a really important tool in the hands of the right people.

It’s so interesting — considering the world of companies that you could have chosen [to take public at the outset] — that you chose a company that had never sent a space tourist into space, had lost a lot of money and was tied to the deaths of a few people because of a rocket explosion. Why this company?

Let me just clean up some of this history. When there was that unfortunate death, it was a pilot error when that business was run in part through a third-party contractor. And it was at that moment — and that was many, many, many years ago — that [founder] Richard Branson decided to vertically integrate the business and take complete responsibility, [which is] not dissimilar to what Bezos does or what Elon does at SpaceX.

So fast-forward some number of years, and it was a business that had a handful of successful test flights with internal passengers, and it had basically validated that it was ready to commercialize. The problem was that it needed a large amount of money to do that, and the capital markets don’t really support that type of activity. They don’t understand necessarily how to do it.

Now the interesting thing about a SPAC is that it actually allows you to raise a really large amount of money to go to a broad base of institutional investors, and it allows you to tell them what you think the future can look like. And why that’s very important is when you’re talking about that much money — I think we raised about a billion dollars for the business — investors were able to get under the hood, do an enormous amount of their own diligence and underwrite something. That’s why this company has been successful, because people were able to see the technical diligence, they were able to build their own models, they were able to interact with the company to understand what the financial forecast could look like and then come to their own conclusion.

The typical IPO doesn’t allow you to do that, right? You can only talk about the past. And I think there are many technology entrepreneurs who would say, “My past is not nearly as good a reflection of the future as I could tell you if you actually ask.” And so the IPO, you’re not allowed to talk about the future. That doesn’t mean you should exaggerate, [it] doesn’t mean you should lie. It just means that you have to have a very thoughtful way of telling the story.

I think the big concern with SPACs is there’s a lot of pixie dust.

If you look at social media, there was Facebook, and then there [were] a bunch of other crappy social networks that went out of business. I think SPAC sponsorship will look the same way. I think there will be a handful of groups that prove consistently through their actions that they are doing a great job for investors, for disclosure, for regulators [and] for these companies. . .

Check out the video above to hear more about why Palihapitiya advocates getting rid of warrants as they relate to SPAC deals; what he thinks of Hindenberg Research, a short seller that published a damning report about one of Palihapitiya’s deals earlier this year; and why he thinks the rich fees that some SPAC sponsors collect “upset” industry watchers. 

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