Chamath Palihapitiya Warns Against Investing in His New SPAC

A New SPAC Launches with a Cautionary Note

This Tuesday marked the public debut of a new Special Purpose Acquisition Company (SPAC) spearheaded by venture capitalist and All-In podcast host, Chamath Palihapitiya. The vehicle, named “American Exceptionalism,” successfully secured $345 million in funding.

The stated objective of this SPAC is to identify and acquire one or more emerging companies operating within the sectors of energy, artificial intelligence, cryptocurrency/DeFi, or defense. Following acquisition, the intention is to facilitate these companies’ transition to publicly traded status.

A Direct Advisory to Retail Investors

However, Palihapitiya is issuing a strong recommendation to retail investors: he advises against purchasing the stock. Despite allocating a small percentage – slightly over 1% – for public market trading, a substantial 98.7% has already been distributed to select institutional investors.

He expressed his desire to moderate retail investor participation in his SPAC ventures. In a post on X (formerly Twitter), he explained that the structure was intentionally designed with significant institutional backing.

SPACs: Not Ideal for Most Investors

Palihapitiya believes that SPACs are not well-suited for the majority of retail investors. He asserts that these financial instruments require investors capable of managing inherent volatility.

Investors should be able to integrate SPAC investments into a diversified portfolio and possess the financial resources to provide sustained support to the acquired company over an extended period. This is a departure from the typical IPO launch strategy.

He even extends a “buyer beware” warning to those who choose to disregard his advice, particularly those within his large All-In podcast audience. He urges potential investors to thoroughly review all disclosures before making a decision.

From “SPAC King” to Cautionary Voice

The reasoning behind these warnings is noteworthy. Palihapitiya was instrumental in the surge of SPAC popularity between 2019 and 2021, earning him the moniker “SPAC King.”

His initial SPAC, Social Capital Hedosophia Holdings (IPOA), raised $600 million and successfully brought Virgin Galactic public in 2019. However, the stock currently trades below $4.

SPACs gained traction as a rapid pathway to public listing during a period of inflated venture capital valuations.

Post-Merger Returns and Institutional Concerns

However, subsequent data revealed that while SPAC sponsors, like Palihapitiya, and sometimes the acquired companies benefited, investors frequently experienced limited returns. As noted by the Yale Journal on Regulation, SPACs have historically yielded disappointing post-merger performance for shareholders.

Goldman Sachs even implemented a three-year ban on underwriting SPACs, though it recently lifted the restriction and resumed involvement. This prompted Palihapitiya to solicit opinions on X regarding launching another SPAC.

An overwhelming 71% of the nearly 58,000 respondents voted against the idea, reflecting concerns about Palihapitiya’s past SPAC performance.

Acknowledging Past Performance

MarketWatch recently documented the underperformance of many of Palihapitiya’s SPACs, with numerous ventures experiencing declines exceeding 90% from their initial launch prices.

Despite this, Palihapitiya maintains that SPACs can be advantageous for startups, their employees, and early-stage venture capital investors.

He argues that the disparity between private and public markets has widened, creating challenges for employees seeking liquidity from their equity and for early investors looking to reinvest in new ventures.

Addressing Criticisms and Sponsor Payouts

Palihapitiya acknowledges that past experiences “haven’t been all roses” and is attempting to address criticisms regarding SPACs disproportionately benefiting their sponsors.

The “American Exceptionalism” SPAC incorporates a payout structure where sponsor stock vests only upon achieving 50%, 75%, and 100% increases in stock price. He believes this aligns incentives, ensuring shared success.

“If the deal is a dog, no one wins. If it is a winner, we will all win … together,” he stated.

The Future of SPACs

However, considering the current market landscape, the question remains: should a startup pursue an IPO via a SPAC, whether through Palihapitiya’s vehicle or another? Historical data suggests that, for long-term stock performance, a traditional IPO may be a more prudent choice.