THE SPAC BOOM HAS LEAD TO THE RISE OF SOCIAL CAPITAL VC CHAMATH WHO REFERS TO HIMSELF AS THE NEXT BUFFET. HERE'S HIS PROFILE, SCANNED.
The Stock Market seems to be on a different tangent in comparison to the economy in nations around the globe. Wall Street is no anomaly to this phenomena. In a volatile year, SPACs seemed to have come under an intense spotlight.
A 'SPAC'TACULAR YEAR
Before diving deeper, let's first understand what SPACs are. Special Purpose Acquisition Companies are basically blank cheque companies. They launch their IPO with the only aim of acquiring a company. The catch is that at the time of the acquisition, the company to be acquired is not known to the investors. If no acquisition is made in 2 years, the money is returned to the investors who subscribed to the IPO. Now let me answer some commonly asked questions:
Q. Why would a company go for a SPAC lead investment?
A. It's convenient! An IPO has a lot of legal formalities and financial requirements. There is also the fear of under subscription. You need to woo many established institutional investors as well as millions of retail ones. Whereas in the case of a SPAC, the only party to be influenced is one: the SPAC management. So as a unicorn founder, you would obviously go for a SPAC! And 2020 has been a splendid year for SPACs. Due to the uncertainty created by the pandemic, a record number of companies are choosing the SPAC route as aptly illustrated by VC datastream below.
Q. Why would an investor subscribe to a SPAC IPO?
A. The lure of exorbitant returns! As I said before, the company to be merged with or acquired is unknown. Obviously, there is a high amount of tangible risk involved here. But as always, the greater the risk, the greater the reward!
Q. Why would a SPAC promoter go for it?
A. Equity Stakes! Promoters like Chamath receive an equity stake in the region of 20%. So if the company goes public, the promoter has a stake in the merged entity.
THE CURIOUS CASE OF CHAMATH
Chamath has had a heck of a ride. From lofty heights to serious lawsuits, he has seen it all. He earned the big bucks at Facebook where he joined only after a year of its founding. Tasked with the enviable role of increasing userbase, he excelled at his job and also earned a lot. He also started investing in companies on the side while still working at FB. His successful investment in Palantir, Playdom & Bumptop made him richer by millions of dollars.
Finally, in 2011 he started his own venture capital firm, Social Capital.
The vision of Social Capital is to focus on sectors like healthcare, financial service & education, domains that were neglected by the VC community a decade ago. Started with the mission to democratise investing, Chamath has completely pivoted to tech-based SPACs. Some of his notable investments are:
Yammer (acquired by Microsoft for $1,2 billion)
Impermium (acquired by Google for an undisclosed fee)
Slack (acquired by Salesforce for $27.7 billion)
These do not include the millions he made from SPAC deals in 2020!
So you can see what an interesting career trajectory Chamath has had! Hope the article was similar. Also before investing in SPACs in America, check out this stat courtesy of SeekingAlpha:
Of the 313 SPACs IPOs since the start of 2015, 93 have completed mergers and taken a company public. Of these, the common shares have delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs since 2015.
Happy Investing!!!
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