VCs 'living in a fantasy world', Fed rate hikes 'akin to cold water thrown in our faces' says 'SPAC King' Chamath Palihapitiya

By Joseph Adinolfi

The former 'SPAC King' released a letter to investors

Erstwhile "SPAC King" Chamath Palihapitiya, the founder of investment firm Social Capital, accused venture capitalists of living in a "fantasy world" and likened recent Federal Reserve interest rate hikes to having "cold water thrown in our faces" in a letter to investors.

Palihapitiya earned notoriety during the post-COVID-19 era by sponsoring a number of Special Purpose Acquisition Vehicles, or "SPACs." Those companies saw their stocks fly high during the post-pandemic period. However, their valuations came crashing back to earth last year, as the Fed's rate hikes triggered a broad market selloff.

Palihapitiya was ultimately forced to return $1.5 billion to investors after failing to find acquisition targets for his last few company launches. He has also been drawn into lawsuits alleging insider stock sales.

SPACs, a previously obscure investment vehicle, allowed sponsors to raise a pool of money from investors via a publicly-traded shell company, with an additional sum from associated private backers.

The management team then used this money to engineer a takeover of a private business, eventually bringing it public in an event known as a "de-SPAC" where the target takes the place of the former publicly listed shell company. Management teams are then rewarded with a "promote," that is, a large slug of equity, for their efforts.

SPACs soared during the pandemic boom as "free money flooded the economy," as Palihapitiya put it, but the trend came crashing down in 2022 as unprofitable technology companies led a broad market selloff that also hammered many more established technology names.

The Fed has raised interest rates by roughly five percentage points over the past year in an effort to quash inflation which rose to a 40-year high.

After falling more than 30% last year, the Nasdaq Composite is up nearly 16% year-to-date, according to FactSet data.

This selloff in all corners of the technology space, from biotech to cryptocurrencies, was far more severe than many had anticipated, Palihapitiya said.

"The amount of absolute value destruction, not just in companies, but entire sectors including crypto, SaaS, SPACs, and biotech was alarming," he said.

Since demand in the U.S. economy remains strong, it's possible "there may still be more medicine" needed to decisively defeat inflation. In other words, the Fed may need to raise interest-rates further.

He also accused venture capitalists and other "capital allocators" of having "lived in a fantasy world where paper marks were deemed just as good as actual cash distributed to their LPs -- and now many need to face reality."

Many of the companies that Palihapitiya brought to market via SPAC have seen their market capitalizations shrivel over the past 16 months. Virgin Galactic (SPCE) is down nearly 75% since Jan. 1, 2022, according to FactSet data. Clover Health (CLOV) has fallen 78%. Opendoor Technologies (OPEN) is down nearly 90%. SoFi Technologies (SOFI) is down 63%.

-Joseph Adinolfi

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04-05-23 0927ET

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