Chamath Palihapitiya on SPACs: Fees, Disclosures & Quality

The Rise and Scrutiny of SPACs

Approximately two years ago, a special purpose acquisition company (SPAC), led by investor Chamath Palihapitiya, initiated the public listing of Virgin Galactic, a space tourism enterprise. This marked the first instance of a human spaceflight company being traded on the NYSE – or any stock exchange, for that matter.

The initial success of Virgin Galactic, with its share price steadily increasing for months, effectively triggered a surge in SPAC activity. Data from SPAC Research indicates that in the first quarter of this year alone, SPACs garnered $87.9 billion in funding, surpassing the total for all of 2020.

Chamath Palihapitiya and the SPAC Boom

Palihapitiya has significantly benefited from this trend. Dubbed the “Pied Piper of SPACs” by The New Yorker and the “King of SPACs” by Bloomberg, he has established at least ten blank check companies and openly expressed intentions to create more.

He even revealed on the “All-In Podcast” that he had reserved ticker symbols ranging from “IPOA” to “IPOZ” on the NYSE, demonstrating his commitment to this investment vehicle.

Investor Concerns and Scrutiny

However, heightened market activity often leads to risks for retail investors. Following revelations that some companies brought public through SPACs had misrepresented their financial data – such as Lordstown Motors admitting in June it lacked confirmed customer orders for its electric Endurance truck – concerns have grown.

These concerns center on the adequacy of disclosures provided by SPACs and whether they primarily benefit organizers like Palihapitiya. He recently addressed these issues in an interview with TechCrunch.

The following are excerpts from that conversation, lightly edited for brevity. The full discussion is also available for viewing.

Interview Excerpts

TC: When Virgin Galactic went public in the fall of 2019, did you anticipate the subsequent market response? Did events unfold as you expected?

CP: Honestly, I didn’t foresee such a high level of activity. However, it’s understandable, as innovation often sparks euphoric enthusiasm. A new venture typically begins with widespread excitement, followed by a period of disillusionment, and ultimately evolves into a sustainable business.

This pattern has been observed in various fields, including internet search, social media, and cryptocurrency. SPACs appear to be following a similar path. A crucial point is that SPACs can be a valuable tool when utilized responsibly.

TC: Considering the numerous companies you could have chosen to take public, why did you select Virgin Galactic, a company that hadn’t yet sent a space tourist to space, had experienced financial losses, and was linked to past rocket explosion fatalities?

CP: Let me clarify the historical context. The unfortunate incident was attributed to pilot error during a period when the business relied on a third-party contractor. Following this event, founder Richard Branson made the decision to fully integrate operations and assume complete accountability, mirroring the approaches of Bezos at Amazon and Elon Musk at SpaceX.

Years later, the company had successfully completed several test flights with internal personnel, validating its readiness for commercialization. The primary challenge was securing substantial funding, as traditional capital markets weren’t well-equipped to support such endeavors.

A SPAC offers a unique advantage: it enables the raising of significant capital from a broad base of institutional investors, allowing for a clear articulation of future prospects. This is particularly important when dealing with substantial sums – we secured approximately $1 billion for the business – as it allows investors to conduct thorough due diligence and assess the potential risks and rewards.

Unlike a traditional IPO, which focuses solely on past performance, a SPAC allows for a discussion of future possibilities. Many technology entrepreneurs believe their vision for the future is more indicative of potential than historical data alone. While it’s crucial to avoid exaggeration or falsehoods, a thoughtful narrative is essential.

Addressing Concerns About "Pixie Dust"

TC: A common criticism of SPACs is that they rely heavily on speculation and unrealistic projections.

CP: The experience with social media provides a relevant analogy. While Facebook achieved success, numerous other social networks failed. I anticipate a similar outcome with SPACs. A select few groups will consistently demonstrate their ability to deliver value to investors, maintain transparency, comply with regulations, and support the growth of the companies they sponsor.

To learn more about Palihapitiya’s views on warrants, his assessment of Hindenberg Research, and his perspective on SPAC sponsor fees, watch the complete video interview above.