I'm always somewhat amazed that Chamath Palihapitiya doesn't have a much worse reputation:
1. My understanding is that he was the primary initial architect of "A/B testing for engagement" at Facebook that turned social media into a tribalistic, outrage generating machine (nothing engages like hate), and that the rest of SV essentially copied. I think this trajectory would have happened regardless, but he was first, so to speak.
2. He was the primary booster of selling the shit sandwiches known as SPACs as filet mignon. I'm sure he made out, any downstream investors not so much.
The interesting thing is a few years ago (before becoming the "SPAC King") he did a media tour where he criticized Venture Capital as being a "massive Ponzi scheme". [1]
Then he went all-in on SPACs... Which ended up being the ultimate Ponzi.
How are SPACs a ponzi? My understanding is that its a pool of money that gets raised to essentially take a private organization public through a merger with (theoretically) less red tape and cost. You buy into the SPAC without knowing exactly what is being bought but at the time of purchase you have the option to redeem you investment. There are other clauses if the organizer can't find a suitable takeover target.
You can criticize the fees or the fact that they are essentially trying to get around regulatory and reporting requirements. They did well a few years ago now they are doing poorly. But how is it a ponzi? Not everything that loses money is a ponzi
SPACs make it easier to get the next round of money for your Ponzi with less due diligence needed (where Ponzi is used in the loose sense of "there's no long term real business model, just sell it off to the suckers before it blows up").
So, sure, more accurate to say "SPACs make passing laughable-business-plan Ponzi schemes off as real businesses and cashing out to public investors" than "SPACs are ponzis directly" but... I'm not sure this hair needs splitting.
SPACs may not always be ponzi schemes, but plenty are of dubious, unvetted businesses and for the principle purpose of paying returns to prior investors.
I lot of legitimate businesses fall into that category.
Also illegitimate businesss. Theranos was definitely illegitimate (and had the characteristic of little fish investors trying to sell to bigger fish), but it would be a pretty severe category error to call it a ponzi scheme.
I dont agree, many others consider what she did no different than a ponzi scheme. It's not just me and the patent commenter:
"Holmes duped just about everyone about the efficacy of Edison. For 12 years, she essentially ran a Ponzi scheme by attracting millions of dollars from primarily venture capitalists that saw it as a unique opportunity to cash in on the boom in Silicon Valley."
I would appreciate, for my own edification, what specific things you believe are different between what Ms Holmes did and what Maydoff or Ponzi did. I'm genuinely curious.
Theranos was fraud. She made material lies about what the machines do.
Ponzis are accounting malpractice that don't even necessarily involve defrauding anyone.
It's a problem if you're going to call everything that goes south a ponzi scheme, because it elides failure modes and dulls peoples ability to distingush and analyze bad situations. Is social security, for example, a ponzi scheme?
Didn't Ponzi make material lies about what his company did also? It just seems like a dubious distinction. More than what they did being different, I think the laws and terminology around those laws are different now. I don't think there is much pragmatic difference, mostly just semantics no?
There is a meaningful difference. A ponzi scheme involves: schemer takes money from Mr. A. At a later date he takes money from Mr B. He gives some of the money from Mr. B to Mr A, and tells Mr. A that it's "returns". He tells Mr B. all is fine. Then Mr C comes along and his money is given to Mr. A and Mr. B, as "returns". This continues.
It's a very specific type of fraud. Most fraud isn't a ponzi, just like every injury isn't a broken arm. It's silly to go around calling all injuries a broken arm.
It's not because A ==> B that B ==> A. A Ponzi scheme is a fraud but a frauds doesn't necessarily imply a Ponzi scheme. That's is not just semantic, it's a logic falacy.
I believe that may be correct, although in practice there is often/usually/historically-always (?) deception involved, because presumably no morally competent adult would willingly give their money to an honest Ponzi unless they knew they stood to benefit by being one of the first to pull out.
But as you point out, I don't think deception per se is really the defining feature of the Ponzi.
> many others consider what she did no different than a ponzi scheme
I can interpret this in many different ways. Maybe they mean "no different than" in the sense of "no better than", ie.: as a moral or value judgment.
But if I interpret the words literally, then these people are just wrong. Theranos was a terrible waste of capital, and there was plenty of fraud involved, but it was not a Ponzi.
How so? I'm genuinely curious,
what are the specific distinctions? Many others consider it so:
"Holmes duped just about everyone about the efficacy of Edison. For 12 years, she essentially ran a Ponzi scheme by attracting millions of dollars from primarily venture capitalists that saw it as a unique opportunity to cash in on the boom in Silicon Valley."
SPACs aren't a ponzi scheme but they are set up for the creator to win. Typically they get 20% of the business at lower than market rate and sometimes have clauses for them to still win if it can't find a business to acquire.
So theres some small startup that seems maybe interesting, you're looking forward to investing when they go public.
Suddenly you hear they are going public through a SPAC. Why? Why aren't they going through the usual channels, crossing their eyes and dotting their tees? Laying everything out on the table so everyone can feel confident?
The very fact they are going for this SPAC backdoor is a HUGE red flag.
The argument is that VC A's returns a propped up by VC B making an investment at a higher valuation, thereby making VC A's marks look great. They can go raise more money. This can continue for quite some time. While it's not a completely ridiculous analogy to a true ponzi, it's probably better to just call it a bubble. It's closer to a credit bubble, housing bubble etc.
When people say something is a ponzi, they generally mean that they think it's deceptive, fraudulent, or otherwise unsavoury. They don't mean that it's literally the sort of scheme made infamous by Charles Ponzi.
I think there's value in using precise language, so I reget this usage, but it's common whether I like it or not.
Most of the time I’ve seen something called a Ponzi scheme, there is at least some purported element where earlier investors in an asset make money off of later investors in the same asset, without the asset’s true worth actually increasing. That definition isn’t hard to satisfy – it could be something as simple as a stock price becoming overinflated due to hype – and it may even apply to SPACs, but it’s still a more specific requirement than just being fraudulent or unsavory. YMMV.
> essentially trying to get around regulatory and reporting requirements.
It's just a great tool for a ponzi scheme. A ponzi tool rather than a ponzi scheme. When it gets so tightly coupled to the schemes it enables specifically to get around regulatory and reporting requirements... Tomato, Tomahto.
For some reason calling out "it's not achshually a Ponzi scheme!" is the new "correlation is not causation!!"
Yes, I agree with you, it doesn't have the features of the Wikipedia definition of a Ponzi scheme. But language changes over time. I think the salient point that people now think about when calling things a Ponzi scheme is "Early investors are aware that, at its root, the investment sucks. So their goal is to entice new investors to buy into the original investment, which has the effect of transferring wealth from new to old investors, with the hope that the old investors can get out before the gig is up, thus leaving the newer investors as bag holders." That description applies both to the original definition of a Ponzi scheme, and to newer uses that don't include other features of the original Ponzi scheme.
And language change results in miscommunication and confusion where a community meets another that doesn't have the same changes in theirs... as has happened here. The use of the more general term fraud would have been more appropriate. That's why we typically aim to use a sanitized, more standard and formal register when communicating broadly rather than to friends and family.
This response to should have all but conclusively ended the silly debate in outlining the semantic drift of the term “Ponzi scheme” to encapsulate the relevant spectrum of linguistic variations, and yet…
You described any business going south where the incumbent insiders know that and future investors do not. As long as the company sells some sort of real product and earns revenue, even if it's lying about how much or the quality of that product, it's not a Ponzi. What makes a Ponzi is money from investors is the only money at all. There is no actual investment being made, not even bad ones.
But the point here is that SPAC as an investment vehicle allows sidestepping a bunch of due diligence in the name of 'just avoiding wallstreet commissions'. that basically ends up becoming prime target for any non-IPO-worthy-but-shiny security to be offloaded to general public. then the next argument from same folks will be .. well price of anything is what somebody will pay for it, so buyer beware.
This is true. However, much like "crackers" are always looking for the next exploit ... chasing that dragon of the next n00b who doesn't sanitize strings passed to their DB, or, above that rather script kiddie level, oh, say, something like infecting all the computers in Iran related to running centrifuges to enrich uranium ... there are various kinds of economic fraudsters looking for that next way to extract piles of money into their own personal "Scrooge McDuck"-style "money bins". And, Silicon Valley has been ground-zero of this sort of activity* in recent years as well.
But, IPOs became rather passé post-2010ish, for the truly depraved. Too much regulation, you see. SPACs are ever so much more exploitable. Though, IPOs continue to be successfully used to funnel money from the have-nots to the already-haves.** And so, here we are.
Yes, there have been people legitimately trying to use SPACs to finance efforts they truly believed in. My sense, having traded SPACs myself during the height of the frenzy was: much less than 50% had much of any real legitimacy. And, solidly more than 10% or even 20% were scammy as hell ... particularly at that time when the money taps were wide open and fraud was absolutely rife across many vehicles etc. (helped along by ... survey says: the very "internet" Silicon Valley made such a massive economic force...).
* On a much larger scale and with a much more "legitimate face" than some of the other "operators" better known in this area, generally
** See, for example: https://www.businessinsider.com/venture-capital-big-tech-ant... ... I'd provide more refs in general, but sadly, super pressed for time right now ... so, obviously, I would advise anyone to take what I've written without solid refs with the usual grain of salt. Plenty can be found with some searches (quite neutral searches ... i.e., no "leading the search engine" required).
He also headed the Facebook Phone and Facebook Beacon where the phone is something no one remembers and Beacon had a public apology from Zuckerberg after many lawsuits. But all of this is on his Wikipedia page…
well, so did Greenspan after he found the 'flaw' in his thinking but the damage is already done. its not like he is taking his FB earnings and using it to do some philanthropy if he really felt that bad. these are mostly billionaire crocodile tears.
Having a billion dollars in your bank account is all the reputation that is needed. He could murder someone in broad daylight and would still have a long line of Twitter simps and "influencers" cheering him on.
He was also a huge bully at Facebook —- it’s well known that everyone strongly disliked him personally —- and his behavior at SocialCapital was so bizarre that every other partner in the firm quit.
Your comment pretty much highlights my point. I've seen Chamath interviewed talking about the evils of Silicon Valley and social media. Meanwhile, I'm like "Queen, please, you were a primary architect of it, and it made you wildly rich!" Why isn't he challenged more often when he talks about the negative impacts of stuff he created?
But none of the criticism here is about what he said it's about what he did which is 99.9999% overlapping with standard "fuck you got mine" neocon/liberal SV/Wall Street status quo.
I don't hate on him because for me those SPACs were obvious money grabbers (I won't invest in an IRC client/server architecture. It can be useful but not _that_ useful. Virgin Galactic was also clearly nothing like SpaceX, especially for needing people inside it for manuevering).
I have sent my mom to full body MRI scan partly because of him and other people in her age generally getting cancer.
He's interesting when he's not pushing his own investments.
> I'm always somewhat amazed that Chamath Palihapitiya doesn't have a much worse reputation:
One of the thing he did right was to call out the VCs involved in the FTX scam. They all turned a very blind eye to SBF's wrongdoings while any five minutes googling before investing would have led to posts explaining the very scam SBF was running. VCs basically basically participated in the pump and dump of shit tokens by FTX. To me they're complicit in the FTX scam.
Not even five minutes. Two minutes of googling was all it took to discover who SBF really was. But I take it maybe the VCs knew but still wanted their share of the scam.
Chamath Palihapitiya very clearly talked about this: at best the complete lack of due diligence and amateurism, at worst being complicit in the Alameda/FTX scam.
He used the term "our own brethren" to refer to VCs participating and encouraging the FTX ponzi.
> amazed that Chamath Palihapitiya doesn't have a much worse reputation
Does he? I thought he was clearly Jim Cramer for VC watchers. The brightest light in the All In listener dorm room. His niche is lucrative. But he isn’t taken seriously, particularly given recent questions around his personal and firm’s solvency.
He's smart, he speaks in a way that is very appeasing to news outlet and quite easy to understand and follow, and he seems to understand things really well. This is why he's quite popular.
His SPACs made him billions, and costed a few billions more to the average joe who believed in him.
I think he should be seen as an evil capitalist, from this point of view. I'm not sure if this is the correct way to depict him or not.
Can someone verify - did he really the architect for A/B test at early Facebook? It’s undoubtedly one of the worst Pandora’s box at internet history, but I do have respect for who created this - it’s probably the largest scale statistic application ever.
Are you trying to engage us? :) Get rid of engagement optimization and I'd guess that it still turns bad. It is what grabs attention in a low-agency mood.
This is one of those things that was just totally obvious to professional market participants while it was happening. I was working as an investment analyst at a huge ($10b+ AUM) hedge fund at the time and couldn’t believe the insanity and greed that was being displayed daily by SPAC sponsors and “investors”.
Often the way this game worked was that if you were a large institutional investor who could be relied on to take a large allocation of the shares, you got special treatment and then could dump your shares on unsuspecting (and highly irrational) retail investors, at least while the insanity continued. It was fascinating to see how a bunch of professionals, who should have known better, each of whom were acting rationally (if not exactly ethically, although it was basically all totally legal), could nevertheless result in totally crazy malinvestment and capital destruction.
Of course, it was all possible only because of uninformed retail holding the bag of worthless companies like Virgin Galactic, or real companies that were valued at silly levels because they were SPACs. It was amazing too just how many times the big SPAC sponsors (like Chamath, but also Alec Gores, Michael Klein, etc.) "went back to the well" to do the same thing again and again. The most egregious of all of these that I'm aware of is David Hamamoto, who did the SPAC deal for Lordstown Motors, which was basically an outright fraud (I shorted this one to the bottom in size at the time).
Sadly, I doubt any of the people responsible for these huge losses by the public will ever be held accountable in any way, nor will the legions of professionals (lawyers, accountants, investment bankers, etc.) who enriched themselves while facilitating what they must have known were guaranteed duds for whomever would be left holding the bag (i.e., stupid retail investors losing their meager life savings.)
I had trouble believing that these things were even legal given that we'd made the same mistakes during the 1920s. The very idea of 'let's form a company to get a bunch of money but we're not going to tell you what for' is entirely reminiscent of the south seas bubble language from the 1720s. I'm glad the SEC finally effectively killed these things.
Yes, just like the joint stock company that someone attempted to float during the time of the South Sea bubble that was described in the Madness of Crowds as being “For carrying-on an undertaking of great advantage but no-one to know what it is.”
That always made me laugh. Crazy then and crazy now.
SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly. the high failure rate suggests a misalignment of incentives: founders and sponsors capture immediate liquidity, while long-term outcomes get obfuscated by the structure.
I once had a chat with a founder who merged his startup with a SPAC. He mentioned that the allure wasn't just the capital but the perceived simplicity of the process, compared to a traditional IPO. But looking back, he felt that the rigorous scrutiny of the traditional path might have forced his team to address underlying business challenges they'd later face.
in any event the real question here isn’t whether SPACs as a vehicle are intrinsically flawed, but if the market’s appetite for risk, combined with the allure of quick liquidity, blinded many to fundamentals during the 2020 bubble. With any financial innovation, there's often a cycle: initial excitement, over-extension, contraction, and then matured understanding. Perhaps we're in the contraction phase for spacs, but they might still find a place in a more judicious market
> SPACs, in theory, democratized access to late-stage private markets
Working in finance made me extremely cynical about anything that claims to “democratize” finance. It’s a great idea, as you say, in theory; but in practice what gets branded as “democratization” is really selling retail investors on the table scraps that professionals have already picked over.
"Money" is as productive as the underlying system of production it sits on. You and I can invent foo and bar, with some creative financing sell it to each other for a million dollars, and have a million dollar net worth starting from zero while not producing anything of value. A lot of modern day financial "inventions" seem to be of this kind of "money productivity" with zero net value added to the world.
It's their job. The finance bros aren't engineers, technicians, doctors, writers, etc. They cook up this crap all day and sell it. But this stuff isn't real, because that's not what they do, they don't know how.
Real businesses,, business that have value and add value to the world are not built by bros in suits yelling at eachother on Wallstreet. Businesses are built by the Hank Hill types wearing Levi's and showing up to work in snowstorms and summer heat to load trucks and weld iron. Value isn't created by a stock ticker, it's created with the blood sweat and tears of the common person. Finance bros do not know how to bleed, sweat or cry - so they can't make things of real value.
Finance of course. If you're born into that class, then go for it. If you're not, you gotta work first, then if you're lucky and diligent you have a shot at moving up into it later in life. Most average folks of average background can't just decide to be a big finance person on Wall Street. You gotta know people, you know, cronies, cronie capitalism, but it's not just limited to political ties, it's nepotism, etc.
True. In general, we need maximal amount of investment and new credit/money creation going into innovation and productivity rather than financial asset speculation or consumption. If it mainly goes into consumption, we get inflation without growth. If it mainly goes into financial asset speculation, we get bubbles and crises. But if it mainly goes into innovation and productivity, we get steady and sustained economic growth without crises or inflation.
The problem with cryptocurrency is that it is inherently separate from the real economy, and difficult to use for direct investment into real world innovation or productivity. Right now, new money creation in cryptocurrency goes mainly into digital asset speculation, resulting in periodic bubbles, and then failures of centralized crypto businesses like FTX, Celsius, etc.
False. It's hard to get cryptocurrency to do anything productive, it's hard to get cryptocurrency do anything other than gamble, pump, and dump, scam and make bubbles.
But the rest of the economy has been making people's lives better for thousands of years. Would you rather live now, or a hundred years ago? a hundred years ago or 200 years ago? repeat till you're satisfied with my argument. If you hit any snags, just repeat a few times more.
The real economy certainly makes things, but it does also evolve frauds; the difference is that they get banned and you have to think up a new type of fraud.
There's also the issue of the "business cycle". Why do we have recessions? What can be done about them? Can we mitigate the damage of crashes? Not a solved problem.
The “economy” you attribute these increases in QoL to is pretty mercurial - are we talking about mercantilism during the 1700s, robber baron capitalism of the 1910’s, Chinese state capitalism of today, or Western neoliberalism of the 1990’s?
It’s pretty easy. You need rules and regulators with teeth.
Crypto is the ultimate example of financial anarchy. A sector born from online fraud, metastasizing in its peak off of fad investors setting government transfer payments on fire.
Same. Money people don’t give a shit about democracy. If the deals weren’t garbage, their sacred duty to shareholders would take them to a more profitable place.
The funny thing is that this was actually the third SPAC boom. I cut my teeth on Wall Street in 2008 and they were all the rage then too:
"SPACs have a distasteful reputation due to a number of scandals associated with them in the 1980s. But like Frankenstein arisen from the dead, they are back. Initially, when they first reappeared on the scene the major banks and M&A law firms refused to represent them. Morgan Joseph and Ladenburg Thalmann did the hard work of establishing a market." [1]
Also, I don't think anyone launching a SPAC believes they are about democratizing access to certain deals. They're just another structure for raising funds for acquisitions. If the status quo is doing it through private equity firms, an alternative structure is search funds for the small deals and SPACs for the large deals.
> SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly.
This is highly misleading IMO. The democratization narrative is a complete marketing ploy — anyone that understands how the SPAC structure works would not call it “democratic” in any sense of the term. Participants in the SPAC fund and buyers of the public market equity are two completely different parties. For one the funders of the SPAC get their capital back (plus interest) if the SPAC fails to find a target. But even when they find one, the funders get many sweeteners over and above the resulting equity shares. In some cases there are minimum payouts and all kinds of other things that create a two tiered system.
The SPAC “craze” can be boiled down to a few causes — overheated stock speculation that caused retail investors to put their money all over the board, and low interest rates that made this kind of risk free betting possible (the opportunity cost was very low when T-bills paid nothing). It was a way for companies to specifically and intentionally avoid public market regulations to sell to a perceived “dumb money” retail pool. There’s absolutely nothing democratic about it. Also why many of the companies using SPACs were “retail friendly” businesses like electric car companies that were perceived to be “exciting businesses” for retail buyers.
I think you’re conflating the SPAC sponsors and the owners of the public equity. The owners of the equity get their money back (plus interest) if the SPAC doesn’t find a target. The sponsors are out whatever money they put up to form the SPAC, take it public and search unsuccessfully for a target. The sponsors do typically have very rich upside if they find a deal - like, 20% of the post-merger company - but it’s not a risk-free thing for them.
Don’t get me wrong, I think SPACs are fucking stupid and bad for retail investors and I would never want to be involved in one, but the pre-deal owners of shares of the SPAC are actually fairly decently protected (opt-out rights, money held in trust, not liable for SPAC expenses).
I agree with your overall point, but I would note that US security regulation focuses heavily on disclosure as a mechanism to protect investors, and the owners of pre-deal SPAC shares are not well protected in that regard.
It's good that they get to decide if they want their money back; it's bad they they're required to make that decision with so little information.
Misalignment of incentives is such an understatement.
> But looking back, he felt that the rigorous scrutiny of the traditional path might have forced his team to address underlying business challenges they'd later face.
This is such a politically correct way of saying “we didn’t want to be scrutinized so we took the quick cash and ran instead.”
I think there’s a pretty good chance that’s not a very fair statement. OP’s friend was management, not the SPAC sponsor. He would have been subject to a lock-up on his stock following the de-SPAC transaction. There’s a very good chance that the stock price would have declined substantially during that period, so I’m not sure what cash there was for him to grab in the context of the de-SPAC transaction. To briefly be an executive of a failing public company doesn’t sound very enticing to me. At all.
It sounds to me like OP’s friend’s company was overly eager to go public but with the benefit of hindsight realized that it wasn’t the right choice for the business.
There also may be some timing bias. The SPAC craze coincided with the apex of late stage money losing “startups”. Anecdotal evidence indicates that the private markets have done a major repricing of private firms in the last 2 years.
It’s intrinsically difficult to value money losing firms. Apple was famously 90 days from bankruptcy, and Uber is now suddenly profitable. Sears is bankrupt, and GE is on the same path.
There was certainly exuberance in 2021, and that likely lead to a number of bad deals.
A more cynical take is that financial innovation is roughly the task of figuring out how to leave retail investors holding the bag while insiders/financial service providers make off with a kings' ransom in commissions.
In that sense a "matured understanding" is just regulation. And it seems a tall stretch to imagine SPACs reaching that when their sole existence is a loophole in regulation designed to protect retail investors from exactly these kinds of losses.
> SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table.
I question how that's even true in theory. A SPAC is an elaborate (and expensive) mechanism to bring a private company public with less disclosure; even if it works as designed, you're not letting retail investors invest in early stage companies.
> He mentioned that the allure wasn't just the capital but the perceived simplicity of the process, compared to a traditional IPO.
There's very little simple about a SPAC, which suggests the founder may not have understood them as much as he thought he did. Perhaps he meant easier?
Also, I mean, there is a simple process for going public that does at least partially democratize the process: Direct listings. I've always found it fascinating how unpopular they are.
Whenever I see the term "democratizing access," my spidey-sense starts to tingle and I get a strong suspicion that I'm about to encounter something kinda-to-very skeezy that _really_ needs a good "power to the people" cover story in order to be accepted.
1. Regulated, standardized
2. Less regulated alternative
Which sort of companies are going to dominate in #2?
It's not going to be the ones that could have gone with #1, but decided not to for reasons. It's going to be a lot of companies that couldn't go with #1.
Which will drag down the median of #2, which will increase the cost of using it (because everyone will assume you're a scam by default), which will decrease its attractiveness and cause even more companies who can to pursue #1, GOTO 10.
um, lemon markets don't get fixed by simple regulation.
A seller has a motivation to sell which the buyer doesn't have direct access to: "I'm moving, need to sell my car"; "I get a new car every year, sell my old one"; "this car has tons of problems". The buyer's motivation is clear, "I want a good car for the price".
Since the market is a mix of lemon cars and good cars, the prices are somewhere in between. If the prices for good cars reflect lemons, the guy selling will say "I can't get enough for my car, I'll buy a new car every two years." The guys with the lemons still want to sell their cars. Now there are fewer good cars in the pool, and prices drop even more.
Now the guy who is moving will try to find somebody in his family he can sell it too, but the lemon guys still want to sell theirs.
This is why a brand new car loses so much value the minute you drive it off the lot. It's not a problem that can be completely solved with regulation; although some of the large players, like rental car companies, can be more easily regulated to not roll their odometers back, keep repair records, etc. However, they still get caught cheating.
Lemon markets can be fixed by regulation, because regulation effectively sets a floor to cheating.
And it's cheating (or buyer perception of cheating) that increases the discount the lemon market takes to true value, which leads to lemons dominating non-lemons in that market.
The more you can do to keep lemons out of a market via regulation, the less of a discount the buyer will demand relative to true value.
I would like to not that you didn't suggest any regulations, you just professed faith in them.
you can't have a law that people can't sell property, it's what property is, that which's ownership can be transferred. People with lemons always want to sell them, they are always in the market, always bringing prices down. You cannot create a perfect information marketplace through regulation, though you can improve it, for example major insurance incidents.
> With any financial innovation, there's often a cycle: initial excitement, over-extension, contraction, and then matured understanding
I'm a little more cynical, I think the cycle is: a new financial invention comes out, greed causes people to people to pump money into it, eventually the bubble pops or regulators step in. We've seen it time and time again: the dot com bubble, the subprime mortgage bubble, SPACs, and now/soon (IMO) with PE. My question is how many times this has to happen before we stop viewing it as an isolated with specific product and start to see it as a system issue with our financial system.
I'm curious what your reasoning on PE is. I know the space is struggling, (I'm not exactly rooting for them), but could you give a little context on what bubble and potential regulation is called for?
SPACs also suffer from an adverse selection problem. The people who self select to do a SPAC because they have low tolerance for rigorous scrutiny are more likely to fail when the tides go out.
For some context, looking at traditional IPOs during the same year[1], the median return was 3.3%, the mean -22%. Like SPACs there were a couple outlier that gave high returns. Around 45% of IPOs gave small positive returns, while only 4% of SPACs did. Around 35% of IPOs lost half their value or more, while 80% of SPACs did.
SPAC Boom was coincident with money supply and one the most inflationary times.
Median return of 2022 SPAC mergers was -82%, but so was pretty much all high P/E ratio companies.
Cloudflare is down -72% from ATH in 2022.
Defending against the inevitable strawman: I am not saying anything about whether SPACs are good/bad investments. But, in order to show the full strength of their "badness", the author needs to tell us more about the overall market and contrast that with SPACs.
People don’t like IPOs because the share price often pops immediately, and you feel like you’ve left money on the table. SPACs have 100% solved that problem.
Yup. I generally enjoy some of the topics the guys on that podcast cover, but any time Chamath is on it's fairly cringey.
I've seen enough scammy crap in my life, and unfortunately was part of briefly earlier in life, that when things like SPACs pop up the scams are fairly obvious.
If anyone tries to sell you on something that doesn't make sense even after you spend some time researching it, it's probably in the scam bucket.
Isn't the goal of an SPAC to basically circumvent the IPO auditing and reporting rules to allow them to scam purchasers^w^w "streamline listing the stock"?
Yes. People will try and come up with long winded justifications for them but there's really nothing deeper going on. Failing companies want to dump shares on retail investors but don't want to go through IPO due diligence and reporting, hence SPACs.
Wall Street banks made a lot of money off of that craze and that’s really the reason number one the Fed didn’t tighten its policy when inflation was flashing red. Never trust the Fed. They merely exist to facilitate monetary policies for Wall Street banks.
If the sole purpose of the Fed is to facilitate easy monetary policy for banks then it sure is odd they're continuing to hike interest rates even though most banks are massively underwater on their bond portfolios (some to catastrophic effect) .
The suckers aren’t just investors, but also employees who work at companies that hinted/promised liquidity via one of these transactions. I didn’t work at a company that failed to ipo via spac, but I almost did and although every technical interviewer felt earnest, something felt off about their lack of detail around business and the equity part of the comp.
Too much of it felt like hot air and I went elsewhere. This was two years ago, and indeed some BS press release from a year ago says their “deal” fell apart. Seemingly reputable investors too, wtf.
I’m a quant. If all you care about is the realized return of a equal-weighted portfolio than sure, just look at mean return. If you’re trying to understand a strategy in depth you’ll want to look at the entire distribution of hypothetical returns, precisely because financial returns are fat-tailed and portfolio returns are often driven by outliers. I don’t know about SPACs, but for common stock often the outlier returns are in small illiquid stocks where you couldn’t take a large position.
Sure. What I mean is there is only so much space in a headline. Give one stat to report the success, the weighted mean is best. It represents the laymens idea if what did I get out if I put $1 across all of it. Imagine a headline about the median SPY company growth in 2022. That number isn’t how much the SPY went up.
Looks like it was called SOGU and run by AXS. Seems to have died in June of this year (based on the observation that it's price chart ends). I didn't find documentation as to why, there's bits and pieces like old prospectuses on AXS's website but they've taken down it's page. I haven't found a notice about wrapping up the fund, and I haven't found anything on Edgar. Their last annual report (per archive.org) seems to be a broken PDF.
But I didn't try that hard, I'm sure the documentation must exist somewhere.
1. My understanding is that he was the primary initial architect of "A/B testing for engagement" at Facebook that turned social media into a tribalistic, outrage generating machine (nothing engages like hate), and that the rest of SV essentially copied. I think this trajectory would have happened regardless, but he was first, so to speak.
2. He was the primary booster of selling the shit sandwiches known as SPACs as filet mignon. I'm sure he made out, any downstream investors not so much.