Bloomberg published an article on February 12th 2021 titled: He Wants You To Know That He Is The Next Warren Buffett.
Chamath Palihapitiya was the man in question.
Chamath did not shy away from his label. In an interview with Front Row, the investor stated, “Nobody is going to listen” to Buffett. There must be others who can take up the mantle and baton to speak to the younger generation.
The quote was made after Chamath’s tweet in November 2020, which stated that Buffett had GEICO. I choose MetroMile.”
*MetroMile, is of course, an insurance start-up company Palihapitiya invested in, which went public through SPAC merger. The stock then crashed by 90%, before being bought by Lemonade – an insurance startup with a stock that has dropped by 80%. *
The bubble in SPACs peaked with the now-infamous Bloomberg article. The ‘SPAC king’ announced 18 months later that he was closing his two biggest SPACs.
In 2020 and 2021, SPACs became a hot topic. Chamath, however, deserves credit for being the first on the scene. Chamath announced in the fall of 2019 that his first SPAC IPOA was bringing Richard Branson’s Virgin Galactic to public via a “reverse merge.”
Normaly, a company that wants to go public hires a bank to help them find investors and underwrite their deal. SPACs accelerated the process by allowing private companies to “reverse-merge” with SPACs. These SPACs were basically publicly traded bank accounts. The private company would receive the SPAC capital in exchange of X% ownership of the newly formed company.
This was an easy decision that would benefit all parties.
Sponsors of SPACs would receive free shares in return for their efforts to close the deal. Private companies would be able to raise capital much more easily through SPACs than via IPOs. Retail investors could also invest in SPACs prior to the deal closing, giving them a chance for the little guy to purchase private companies before going public.
Everyone won.
It was the story. SPACs love stories.
The traditional finance system teaches that all assets can be valued based on their fundamental metrics. All that matters are cash flows, earnings and capital structure. In reality, this is not true. Fundamentals do not have the monopoly over valuations.
Fundamentals and stories are in a constant tug-of war.
Investors are often willing to pay more for assets if they can imagine what the asset “could” be. Steve Jobs understood storytelling better than anyone else. Elon Musk’s storytelling made Tesla the most valuable automaker in the world. Bitcoin’s value is heavily based on constantly changing stories.
The price you pay for assets is determined by the value the market assigns to these stories.
Fundamentals and stories, however, are not static, but dynamic. They are based on a sliding system. Stories are the most popular during periods of euphoria.
Fundame
ntals are the only metrics that can be used to stop bleeding during periods of decline.
SPACs will be the most important players in 2020 and early 2021. The stories of most SPACs are what made them valuable. Nothing more, nothing else.
It is a rigorous process, and the companies must produce detailed financial statements for everyone to see. Your finances are immediately exposed if there is anything suspicious. Future projections *cannot* be included, as they are subjective.
The SPACs also publish financial reports, but with a twist. They *can* include revenue projections. But not just any revenue forecasts. But projections ranging from 0 to billions of dollars in sales over five years. It’s ambitious to say the least. SPAC investor presentation also includes Total Addressable Markets ( which look so good! ), forecasted margin increases and profitability, competitor analysis ( that always looks so favorable! ), and pretty much everything else you can imagine.
The only thing that they leave out is the actual revenue.
Each SPAC has a unique story. Space tourism. Electric vehicles iBuying houses. Few of them have sold anything. Even fewer of them had made a profit.
When interest rates are at 0%, and pictures of rocks can sell for $1M each and growth stocks worth 50x revenues and everyone is stuck home day trading their stimulus checks while we inject literally trillions into the financial markets, then stories are worth billions.
Fundamentals be damned. The stories are more compelling the more explosive the bull markets.
But interest rates cannot remain 0% for ever. Should rocks be worth $1M in pictures? Growth stocks cease to grow. Workers return to work. Stimulus checks disappear. Stories are no longer as valuable. When stories aren’t as valuable, you need to have the basics.
18 months ago SPACs spun enticing stories. When your 2020 investor presentation forecasts $2B of revenue in two-years, but you barely cleared $100,000 in 2022 your story falls apart. Fundamentals will not save you if you were valued at multi-billions of dollars and barely cleared $100M in revenue.
SPAC was marketed as a disruptive IPO. The SPAC was marketed as a way for companies that want to go public faster. Retail investors can invest in companies before they go public. The SPAC was meant to “democratize investing”.
SPACs were the ideal way for companies who didn’t have any money to convince investors they would make tons of money one day. If enough investors bought into the story, SPACs and insiders of the company could make a fortune by selling their own shares to investors who believed it.
What happens when the former SPAC misses its expectations for earnings and drops 80%? Who cares? No one forced you to invest. Not financial advice.
Chamath is a master storyteller. He was second only to Elon Musk when it came to his grasp of Twitter’s zeitgeist. Chamath was able to tweet one-page word documents of his “investment thesis” at the height of the SPAC bubble. Any SPAC that received the document would immediately double or triple.
$IPOE and @SoFi are merging to become public.
This company is a leader in fintech and banking, with the potential to be a winner-takes-most scenario.
Watch @cnbc now or listen to call at 1pm ET (https://t.co/6Ebp0kS2nf) to hear from me and @anthonynoto.
1-pager below. https://t.co/HY89KqRLCD
— Chamath Palihapitiya (@chamath)
Jan 7, 2021
The contents of word documents were not the real investment thesis. The real investment thesis was quite simple: Tell a good story to the mass, and they might just believe it. If people believe in a story they may buy it. If they buy it, then you can sell it for a lot more money.
Repeat: Invest, promote the company to your followers and then quietly sell it (to manage liquidity) when your lockup period is over. SPACs are nothing more than a way for insiders who want to make money to transfer risk to retail investors.
How can you earn $750M from investments that have collectively declined by 60%+?
It’s progress that makes me support big bets like space tourism. And I applaud the people who are trying to make these longshots a reality. The person who will benefit from the success of a venture should also be at risk if it fails.
It may not be criminal to transfer this risk to retail investor by selling your shares after your lockup period expires. However, it is disingenuous, particularly after months of promoting the investments to exactly this same audience.
Finance is a messy, volatile field. But there are three constants.
- If a new innovation claims to “democratize” something, the people who are being democratized may be left with someone else’s bag.
- If someone claims to be Buffett’s successor, this should raise red alerts.
- If something is worth billions but has no revenue, it’s unlikely that the investment will work out.
What if you had all three? It was a fun investment.
