The Pied Piper of SPACs
Chamath Palihapitiya says that the investment tool lets ordinary people get rich off startups. It may be hype—but hype can be its own economic engine.
In Silicon Valley, Chamath Palihapitiya, who has earned billions of dollars while tweeting things like “Im about to really fuck some shit up” to his 1.5 million followers, rarely requires identification beyond his first name. That’s in part because, in the past decade, he has spent significant time saying things in public that rich people aren’t supposed to say. Venture capitalists are “a bunch of soulless cowards.” Of hedge-fund managers: “Let them get wiped out. Who cares? They don’t get to summer in the Hamptons? Who cares?” (He made both proclamations after he had become a venture capitalist and started a hedge fund; he has yachted off the Italian coast.)
Recently, Palihapitiya has achieved even greater prominence by launching a series of special-purpose acquisition companies, or spacs, which are among the fastest-growing financial instruments in the world. A spac takes a company public by attempting to sidestep regulations that help protect investors from potentially dodgy new businesses. People place money in a “blank check” fund, which then merges with an existing private company, allowing it to sell shares without having a formal initial public offering, a process that involves rigorous scrutiny by banks and regulators. spacs have been celebrated as a way to spread Wall Street riches more equitably—you can often buy a share in one for just ten dollars—and condemned as potential catalysts of a financial crash. Palihapitiya promotes the spac as an innovation that “democratizes access to high-growth companies” while “dismantling” the “traditional capital market.” But he has sometimes acknowledged a simpler allegiance. “I want the fucking money,” he told students at Stanford’s business school, in 2017. “I will play the goddam game, and I will win.”
For the many people in tech circles who once proudly considered themselves outsiders and now control some of the most powerful firms in the world, Palihapitiya embodies the kind of interloper currently in ascendance: the bitcoin millionaire, the Reddit oversharer, the arriviste who moves markets by tweeting memes. Palihapitiya has gained notoriety by telling seductive stories of quick riches and upended hierarchies. These narratives have become such mainstays of how the technology industry sees itself that executives refer to enrapturing a roomful of people as “Chamathing the audience.”
Palihapitiya’s tales often serve an inspirational purpose. He has frequently spoken of how in 1982, when he was six, his family escaped civil unrest in Sri Lanka by immigrating to Canada. His father had been a government official, but in Ottawa the family lived in a cramped apartment above a laundromat; his mother worked as a housekeeper while his father—when he wasn’t drinking—applied to mid-level administrative positions, filing hundreds of rejection letters into binders. In high school, Palihapitiya began calling managers who had signed the rejection notes, suggesting that they reward his youthful determination by giving him a summer job. Newbridge Networks hired Palihapitiya to work on its I.T. help desk, where he bet his manager a fast-food lunch that he’d clear six thousand trouble tickets before school resumed. By August, Palihapitiya told me recently, he had “crushed all the trouble tickets.” He went on, “The guy took me to McDonald’s and I ate seven Big Macs. It was crazy.”
This origin story has been repeated dozens of times, one banker told me, as a demonstration of the can-do determination powering the tech industry. The banker—who has worked alongside Palihapitiya, and has taught clients to imitate his tactics—regularly goes into rooms filled with white pension-fund managers in places like Des Moines or Biloxi and asks them to invest in obscure tech companies run by people with foreign accents. “They can’t even pronounce the company’s name, let alone the C.E.O.’s,” he said. Then the banker tells them that Palihapitiya is considering investing in the startup, and shares the story of Palihapitiya’s background. Suddenly, the investors feel that they’re being invited to join a narrative of heroic capitalism. “Now they have an up-by-the-bootstraps story to tell at the Rotary Club,” the banker said. “It’s like pixie dust.”
Other tales about Palihapitiya reinforce the tech industry’s rebellious self-image, which is increasingly difficult to maintain. After he received an electrical-engineering degree from the University of Waterloo, in Ontario, he followed his girlfriend to California and, in 2007, got a job at a small startup called Facebook. The C.E.O., Mark Zuckerberg, asked him to oversee efforts to grow the social network’s audience. Given that Facebook was expanding with little effort, this task, as one of Palihapitiya’s former colleagues put it to me, “wasn’t sexy,” and few colleagues wanted to join his team. To recruit co-workers, Palihapitiya promised them the most important project of their lives. Facebook would perish if it didn’t defeat MySpace and other social-media rivals. His team members would be underdogs fighting for a brighter future. To emphasize his point, Palihapitiya sometimes recalled a time he’d won fifty thousand dollars playing poker and then had gone to a BMW dealership. The salesman—eying Palihapitiya’s rumpled clothes and brown skin—refused him a test drive. Palihapitiya walked across the street to Mercedes-Benz, bought a car, and then drove it into the BMW parking lot to taunt the guy who’d rebuffed him. Palihapitiya assured Facebook colleagues that, if they joined him, they were showing up every bully—landing a blow for people who looked different and had unfamiliar pedigrees. Soon, many top employees were clamoring to join Palihapitiya’s group. One told me, “It’s intoxicating to hear someone describe your work like it’s this noble calling.” Within four years, Facebook was closing in on a billion users. Today, four of Facebook’s top executives are alumni of Palihapitiya’s team.
Other Palihapitiya stories go viral because they capture how delectably outrageous he can be. In 2019, when he was trying to persuade investors to support his first spac—for the space-tourism company Virgin Galactic—he met in New York with a group of mutual-fund managers and gave a dazzling speech about helping mankind reach for the heavens. It went unmentioned that Virgin Galactic had burned through nearly a billion dollars, and that in its fifteen-year history it had missed every major deadline that it had set for itself. Instead, Palihapitiya proclaimed that the company would likely earn enormous profits—and change the world.
One listener—an older gentleman, conservatively dressed—began interrupting Palihapitiya to question both his track record and his projections. Palihapitiya let the man spout off for a bit, and then replied, “You’re a complete fucking idiot.”
The older man looked as if someone had just punched him.
“Have you even looked at the prospectus? Did you even fucking Google me before you came in here?”
All the eyes in the room went wide. “How lazy are you?” Palihapitiya said. “I don’t even want your fucking money.”
Silence. Then one of the younger listeners started chuckling. Everyone under the age of fifty began grinning uncontrollably: now they had a Palihapitiya story of their own. “It was brilliant,” an attendee told me. “It was completely calculated. That old guy wasn’t ever gonna invest in space tourism. But the other people in the room—they loved it!”
About half of the investors called Palihapitiya’s office afterward to say that they wanted in on the deal. “People either love Chamath or they hate him, and that’s fantastic, because polarization gets attention,” the attendee said. “Polarization gets you on CNBC, it gets you Twitter followers, it gets you a megaphone. If you believe that Chamath can get an hour on CNBC to explain Virgin Galactic, then you want to buy into this deal, because attention is money.” Having a great story, and knowing how to tell it, can be a quick way to get rich. Which is exactly how capitalism, at certain moments, is supposed to work.
Economics is a science of cycles. There is the business cycle and the inflationary cycle, the rhythms of housing booms and credit busts. This periodicity affords money a whiff of certainty—a sense that wealth and poverty are, like the positions of the planets, subject to a set of objective and universal truths. But even the earliest economists acknowledged that divining financial fortunes requires as much knowledge of unpredictable psychology as of measurable facts. In “Extraordinary Popular Delusions and the Madness of Crowds,” first published in 1841, Charles Mackay examined a series of economic bubbles and showed that many of them had little to do with underlying economic forces; they had often been caused by the actions of buyers and sellers who, like others, “believed the prophecies of crazed fanatics.” A century later, John Maynard Keynes wrote that the marketplace is frequently guided by “animal spirits” that “depend on spontaneous optimism rather than a mathematical expectation.” Financial affairs have an “instability due to the characteristic of human nature.”
Two years ago, the Nobel-laureate economist Robert Shiller wrote a book, “Narrative Economics,” arguing that many of our dearest economic theories are simply stories that we’ve made true through collective belief. History provides numerous examples of rallies or recessions caused in large part by financial storytellers proclaiming that an upswing or a belt-tightening was imminent. Shiller has written, “We have to consider the possibility that sometimes the dominant reason why a recession is severe is related to the prevalence and vividness of certain stories, not the purely economic feedback or multipliers that economists love to model.”
Researchers have pinpointed moments when investors’ imaginations become especially labile: during periods of social uncertainty, or when new technologies emerge, or when it seems that some improbable group has become fantastically rich overnight. At such times, a few financial storytellers often rise to prominence: people you’ve never heard of who fill the media with sensational tales of wealth earned in bold, exciting ways. “There are some people who are much better storytellers than everyone else,” Shiller recently told me. Although investors can find an array of new offerings unnerving—Should I buy bitcoin or a non-fungible token? Will investing in Tesla pay for my kid’s college?—at least some of the innovations are likely to endure.
After the First World War, a group of speculators promised easy stock-market profits through a new fad: the mutual fund. An advertisement from the nineteen-twenties described them as “one investment that is never too high to buy.” In the late fifties, bankers began mailing out a fresh invention—the credit card—with tales of checkout-aisle convenience, envy-inspiring sophistication, and even women’s liberation. “A wife deserves some credit—her own Barclaycard,” one ad declared. In the eighties, after years of stagflation, headlines began appearing about an audacious young financier named Michael Milken who was hawking “junk bonds” to help corporate raiders. Milken would have his firm prepare letters claiming he was “highly confident” that he could sell enough junk bonds for raiders to take over the companies they wished to acquire. The letters, which were often publicized, were so persuasive that targeted companies commonly surrendered.
A decade and a half later, Angelo Mozilo, the son of a Bronx butcher, exploited sentimental beliefs about the importance of homeownership to encourage bankers to embrace the collateralized-debt obligation. The idea was that, by lumping together thousands of risky mortgages, subprime loans could be turned into safe investments. Federal policies directed vast amounts of money into the subprime marketplace. For a while, Mozilo’s claim became a self-fulfilling prophecy: financial markets hit record highs, and Mozilo’s firm, Countrywide Financial, was once celebrated with the headline “Meet the 23,000% Stock.”
Irene Finel-Honigman, a financial historian and the author of “A Cultural History of Finance,” told me that new kinds of financial storytelling regularly take off during times of unease, such as after a war or a recession: “You often see a lot of conspiracy theories floating around, and maybe some new kind of technology—like the telegraph or a faster printing press—that makes it easier for stories to spread.” Shiller notes that people like Milken and Mozilo “understand you have to tell a sexy story if you want it to be sticky—they understand it’s good to be a little bit controversial.” Such storytellers often tap into investor resentments, “saying stuff like ‘It’s us underdogs versus the élite’ or ‘I grew up poor but became rich, and you can, too.’ ”
Periods like these often end badly, especially for ordinary investors. Mutual funds of the twenties became so over-leveraged that, once the stock market began declining in 1929, the funds accelerated the worst crash in American history. During the credit-card craze of the sixties, unsolicited cards were mailed to felons, toddlers, and—in at least one case—a dog, initiating a surge of frauds and losses. In the eighties, leveraged buyouts like those made possible by Milken’s junk bonds triggered a series of bankruptcies when corporate raiders defaulted on their debts. A recession followed, and it was partially blamed on junk bonds. Milken, meanwhile, was confronted with ninety-eight counts of racketeering, fraud, insider trading, and other misdeeds. After pleading guilty to a handful of charges, he was sentenced to ten years in prison and paid six hundred million dollars in fines and restitution. Mozilo was labelled “one of the chief villains of the housing crisis” of 2008, and his company was blamed for helping to cause the Great Recession. “It’s the same pattern, again and again,” Finel-Honigman said. “The storytellers become too grandiose, and it all crashes down.”
These waves of storytelling aren’t entirely without merit. In time, the financial instruments championed by unreliable narrators often become fixtures of the economy, as investors develop proper skepticism and regulations emerge. This is how capitalism propels forward: ambitious people create new economic truths with sweet whispers of imagined riches; the public pays for the construction of new financial marketplaces and economic infrastructures, many of which persist even after some of the storytellers have gone to prison and many investors have lost fortunes.
Today, mutual funds are among the safest and most popular investments. Credit cards are part of most Americans’ daily lives. Junk bonds have become a crucial tool of corporate finance, a $1.2-trillion marketplace used by tens of thousands of companies to build new factories and hire new workers. (Milken ended up serving less than two years, and today he is worth $3.7 billion.) Although the implosion of Mozilo’s Countrywide Financial helped hobble the international economy, hundreds of thousands of homeowners still get loans each year thanks to collateralized-debt obligations and subprime mortgages.
Lately, a lot of big-money cheerleading has been focussed on spacs, “meme stocks” like GameStop, and cryptocurrencies. When the stock market was sky-high in January, and the price of GameStop—a floundering video-game retailer—was unaccountably increasing by nearly two thousand per cent, Palihapitiya was tweeting, “Tell me what to buy tomorrow and if you convince me I’ll throw a few 100 k’s at it to start. Ride or die.” As the price of bitcoin rose, he promised, “When $BTC gets to $150k, I will buy The Hamptons and convert it to sleepaway camps for kids, working farms and low-cost housing.”
Such peacocking, Finel-Honigman told me, is fun to watch and potentially useful: “These kinds of scam artists are really important, because, though maybe they go too far, they’re the ones who convince everyone else to start paying attention. They’re Pied Pipers. They notice things other people miss.” Then, as these fanciful tales are replaced with legal fine print, living happily ever after becomes having a 401(k).
This cycle can be hard to recognize when, as now, hype dominates the market. But eventually something happens—regulators issue warnings, or you see an absurd tweet like “Gamestonk!!”—and the façade becomes obvious to all. Some of today’s mass financial hallucinations are already fading; recent magazines have featured covers asking “Can I spac My Stonks With NFTs?” and exposés titled “Inside the $156 Billion spac Bubble.” Soon, Finel-Honigman said, “the party will be over, for a while.” She continued, “Everyone starts ignoring the scam artists and picking through the wreckage to figure out what’s useful, and finance becomes boring again.”
In 2011, Facebook was getting ready to go public, which would soon give Palihapitiya hundreds of millions of dollars. He decided that he was ready for a bigger stage. “I don’t want to be a slave to money,” he later told a reporter. “I want to be a slave to something bigger—an ambition.” Palihapitiya quit the company, spent a month playing poker in Las Vegas, then bought a small share in the Golden State Warriors.
Before long, he was showing up on CNBC—where he extolled the virtues of cryptocurrencies—and appearing in articles with such headlines as “The League of Extraordinarily Rich Gentlemen.” Reporters learned that he could reliably dispense colorful quotes: “To all the people that worked for me and whose money I took, you’re fucking welcome”; “I’m going to buy @GoldmanSachs and rename it Chamathman Sachs”; “In moments of uncertainty, when courage and strength are required, you find out who the true corporatist scumbags are.” He later assured one journalist that, in a few years, “nobody’s going to listen” to Warren Buffett, because the world would need someone else to “take the baton and do it as well to this younger generation in the language they understand.” He was the obvious candidate.
Palihapitiya’s work at Facebook seems to have convinced him, earlier than most financiers, that social media offered a fast path to prominence. But the medium had to be harnessed in specific ways: it required ever-changing narratives, unexpected intimacies, and controversial declarations that spurred emotional reactions. “The simple and the most important thing I have to be is authentic,” he told me. “There’s not a thousand people reading my tweet before it goes out.” Palihapitiya nevertheless offers a curated authenticity: photographs of his six-pack abs on Instagram; lamentations that he offloaded bitcoin too early. His social-media feeds make people feel that they are glimpsing behind the curtain, but the posts are never so candid that they risk turning people off. He told me, “I’m a person that makes a ton of mistakes. I’m a person that sometimes tweets a picture of his abs. It means nothing, and it means everything. It means that I am like everybody else.” Yes and no: some of Palihapitiya’s “mistakes” are relatable, but others involve him spending millions of dollars. In any case, his brash approach was also adopted by other Silicon Valley influencers, including Elon Musk, and also by politicians. “Chamath was Trump before Trump,” a former colleague of his told me.
After Palihapitiya left Facebook, he and a few partners founded an investment firm called Social Capital. It raised more than a billion dollars and scored early successes with investments in fast-growing startups, including Slack and Yammer. But, as the company matured, what seemed to excite Palihapitiya most was his heightened influence. “He went to this one hedge-fund conference and talked onstage about why one of our investments”—the file-sharing service Box—“was a great buy,” a former Social Capital colleague told me. “When he came back, he had his phone out, showing us Twitter and all these blogs, and he was so pumped at how much he had moved the stock price.” In a matter of weeks, Box’s stock leaped by more than a third, to twenty-nine dollars a share, a price that it has never reached again. (It is now at about twenty-three dollars.)
Palihapitiya had another media success in 2015, when Social Capital helped publish a list that ranked top venture-capital firms by “gender and ethnic diversity.” Palihapitiya placed his own company at the top, but the methodology turned out to be haphazard: firms were initially assessed, in part, by looking at their LinkedIn pages and tallying minorities based on names and photographs. In an essay revealing the results, titled “Bros Funding Bros: What’s Wrong with Venture Capital,” Palihapitiya complained that “the VC community is an increasingly predictable and lookalike bunch that just seems to follow each other around from one trivial idea to another.” The ruckus caused by the list prompted the Wall Street Journal to describe Palihapitiya as “the venture capitalist whom venture capitalists love to hate.” Nevertheless, another colleague of Palihapitiya’s told me that, “from that point on, every time there was an article about female founders, or diversity in tech, Chamath was mentioned—it was great P.R.”
Palihapitiya knew that crude hype wasn’t appropriate for every audience. On CNBC, he adopted the calm and serious language of high finance. On podcasts, he waxed sincere, confessing that, by working with two therapists, he had “realized how emotionally broken I was, and incapable of really connecting with people.” Twitter was for extreme boosterism and the occasional “Fuuuuuuuuccckkkkk!!!!!” During numerous one-on-one conversations that I had with Palihapitiya, all of which were conducted remotely, he was often contradictory. At one point, after volunteering that his social-media posts were calculated, he said, “To be honest with you, I get a sense that you’re trying to insinuate that I’m calculating in a way that I’m not.” But he was certain that every choice he had made was part of a cohesive story. At Social Capital, Palihapitiya’s confidence had an enticing effect. “He’s talking about climate change while he’s wearing a three-hundred-thousand-dollar watch and flying around on a private jet,” one of the former employees said. “You know it’s ridiculous, but he makes you want to believe it can be true.”
Still, over time, Palihapitiya’s partners began to feel that his media appearances were taking precedence over Social Capital’s needs. The company was posting impressive returns, but Palihapitiya, they said, was missing meetings and ignoring e-mails. When he was in the office, he hijacked discussions to talk about social-media strategies or to offer monologues on income inequality. “There was a lot of erratic behavior,” a former Social Capital executive told me. “He was always making big pronouncements about his visions for the future, which didn’t really have anything to do with the deals we were trying to close.” Colleagues encouraged him to step back from day-to-day operations, but he resisted. Another former Social Capital executive said, “Chamath wanted to optimize for what served him best, instead of the companies we invested in or the team we built.” A close friend of Palihapitiya’s told me, “He’s the kind of guy who can convince himself that whatever he’s telling you right now is absolutely true, which can be intoxicating. But that also means there’s less oxygen for people who see things differently.”
By 2018, there were rumors that Palihapitiya’s love life was threatening the firm’s stability. He had married the woman he followed to California, and she, after a successful technology career, had helped him found Social Capital, working there as a partner. They had three children. Then Palihapitiya was spotted in Europe with Nathalie Dompé, an Italian pharmaceutical heiress and an executive at her family’s firm. “It was very awkward, because everyone knew what was going on,” one of the former Social Capital employees said. Palihapitiya’s wife began telling friends that she had cancer. Shortly afterward, Palihapitiya filed for divorce. (She survived her medical crisis, and has since founded another venture-capital firm.)
As of mid-2018, two of Palihapitiya’s founding partners at Social Capital and several other high-profile hires—including a former chief executive of Skype, Tony Bates—had left or had announced that they were leaving. The company had expanded to about seventy employees and had raised billions of dollars, but investors, spooked by negative rumors, began indicating that they weren’t inclined to give Palihapitiya more money. Tech Web sites started reporting on Social Capital’s dysfunction. The online forums that had made Palihapitiya a star were turning against him. He went on the offensive, telling reporters that his co-founders had been arrogant. As for his employees, he told one journalist, “They probably felt maybe not listened to as much as they should have been by me. Tough.”
In September, 2018, after yachting around Sardinia and Corsica, Palihapitiya posted a missive on Medium titled “The Reports of Our Death Have Been Greatly Exaggerated. . . . ” Nonetheless, many employees at Social Capital soon left or were let go. “He imploded Social Capital because he was getting bad headlines,” a person who was terminated told me. “I don’t think he put a second thought into the careers of the seventy people who had left other jobs to work with him. I don’t think he cares about other people. He’s a narcissist. He’s so good at telling stories that he can justify anything to himself.”
Palihapitiya went on a podcast hosted by the journalist Kara Swisher. “Just like Michael Jordan had a decision to retire and go play baseball, I chose to retire,” he explained. “This is my decision. I am not your slave. I just want to be clear. My skin color, two hundred years ago, may have gotten you confused, but I am not your slave.” When Swisher asked him how he had dealt with the anger of those he had abandoned, Palihapitiya adopted a cocky nonchalance: “I went to Italy, spent the summer there. Had a fabulous, fabulous time.”
By 2019, Palihapitiya was living with Dompé and expecting a child. He was a billionaire and could still command media attention. “It’s my company, and I had the right to make that choice,” he told me. “I don’t really spend a lot of time trying to re-underwrite those kinds of things, because it’s not really productive.” In one of our Zoom conversations, Palihapitiya—framed by glass doors overlooking a garden—said that he had no regrets about these past decisions. “For me, safety is change,” he said. Of Social Capital’s cast-off employees, he said, “For the most part, everybody has found a really great landing spot.” Of his divorce: “Our marriage may have ended, but it wasn’t a failure. It was a grand-slam home run.” They’d had “an incredible twenty-year run—and I’m really proud of it.” He conceded that he has critics, but told me that they are largely motivated by “their own insecurity.” At one point, he said, “I’m trying to give you a simple narrative, which is my own.”
The bad publicity attending Social Capital’s demise, however, seemed to convince even Palihapitiya that his story needed sprucing up. He took a fresh look at assets that the company still possessed. Among other things, he had raised some six hundred million dollars from investors for a spac, but he had never chosen a company to merge with. At the time, a spac was a relatively obscure tool. It had been invented in 1993, by David Miller, a lawyer, and his friend David Nussbaum, a banker, as an alternative to the traditional I.P.O., but the idea had not really caught on. Palihapitiya decided that, if he put his name and his energy behind spacs, they could become more popular—a lot more.
Many people in Silicon Valley had long complained that the traditional I.P.O. model took too long and involved too many regulations. Moreover, bankers and hedge funds extracted too much of an I.P.O.’s profits, leaving little for common investors and the startups themselves. “I fundamentally believe we’ve robbed most people of returns,” Palihapitiya told me, adding that private-equity funds had locked out regular investors from buying into fast-growing companies. The Securities and Exchange Commission’s paternalistic rules had made it nearly impossible for anyone except millionaires to get rich from tech startups. As Palihapitiya saw it, a spac enabled anyone to invest in high-risk, high-reward companies. He branded his spac project as I.P.O. 2.0, and dubbed his first investment pool I.P.O.A. The implicit promise was that soon enough he’d get to I.P.O.Z.
At the heart of a spac is a tension over who ought to be allowed to tell financial stories to the public. Many types of investment companies—such as private-equity funds, which have yielded enormous riches in recent decades—are generally prohibited, by government regulation, from soliciting money from everyday investors who earn less than two hundred thousand dollars a year or whose net worth, excluding their home, is below a million dollars. Traditional I.P.O.s have other constrictions: firms that are going public cannot publish forecasts of anticipated profits until key documents have been filed with the S.E.C.; the law also encourages an I.P.O. “quiet period,” which can last for months, and during which executives are dissuaded from speaking in public about the future.
These rules were designed to protect unsophisticated investors from being exploited by hucksters, but many entrepreneurs and venture capitalists say that they have undermined American capitalism. Jeff Epstein, an operating partner at Bessemer Venture Partners, who runs a spac of his own, said, “We’ve just lived through one of the greatest wealth-accumulation periods in history, and a lot of the public has been blocked from participating.”
A spac is born when someone known as a sponsor creates a shell company, with no assets or underlying business, then sells that empty firm to the public, usually for about ten dollars a share. The sponsor then typically has two years to identify a real company—a privately held firm with assets and, ideally, customers—and merge it with the spac. By combining an empty public company with a real private company, the result is a publicly traded real company. The process is sometimes known as “going public through the back door.”
After Palihapitiya devised his I.P.O. 2.0 concept, he went on CNBC, podcasts, and social media to proclaim that spacs were a way to preserve American resilience. “We don’t have capital markets that can support young, high-growing, fast companies in a way that really builds for the future of America,” he told one podcast host. “We need thousands of companies to go public.” Palihapitiya argued that spacs allowed companies to go public faster, and at a lower cost, than traditional I.P.O.s. spacs also gave investors access to Palihapitiya’s savvy and connections. He told the podcast host, “I’m using sort of, you know, my accumulated quote-unquote ‘social capital’ and credibility to say, ‘Let me explain to you why you want to own this thing.’ ” But the most important advantage of spacs, he said, was that they let executives tell the public about anticipated profits and expected breakthroughs. In an interview posted on YouTube, Palihapitiya complained, “In a traditional I.P.O., you can’t show a forecast, and you can’t talk about the future of how you want to do things.” The host was wearing a shirt that read “Put your money where chamath is.” On another occasion, Palihapitiya explained, “Because the spac is a merger of companies, you’re all of a sudden allowed to talk about the future.”
Financial regulators and academics dispute many of Palihapitiya’s claims about spacs, including the notion that they are always faster or less expensive than a traditional I.P.O. Michael Ohlrogge, a professor at the N.Y.U. School of Law who studies financial markets, said of spacs, “Claims of regulatory sidestepping are, in general, greatly overstated.” Even if your company is going public through a spac, it’s still against the law to, say, lie about your financial situation. In April, a senior official at the S.E.C., John Coates, warned that claims that spacs are exempt from regulations are “overstated at best, and potentially seriously misleading at worst.”
Though spacs do open the door to non-élite investors, they have their own inequalities. Most notably, the sponsors are paid lavishly—much better than they would be compensated in a traditional I.P.O. Sponsors often receive twenty per cent of a spac’s stock, simply for bringing it into existence. Such paydays can be worth hundreds of millions of dollars. In a recent influential study, Ohlrogge and some colleagues wrote that the “costs built into the spac structure are subtle, opaque, and far higher than has been previously recognized” and are mostly paid, unknowingly, by the individual shareholders whom Palihapitiya and others have claimed to be championing. Thanks in part to the twenty-per-cent giveaway to the sponsor, “although spacs raise $10 per share from investors in their IPOs, by the time the median spac merges with a target, it holds just $6.67 in cash for each outstanding share.” One of Ohlrogge’s co-authors, the Stanford law professor Michael Klausner, told me, “The real reason spacs are so popular right now, I think, is mostly because sponsors are making so much money off them.” A banker who has worked on a number of spacs agrees: “There’s a lot of money to be made in convincing people to believe in something new.”
The clock on I.P.O.A, Palihapitiya’s spac, was ticking. If he didn’t find a company to merge with, he would have to return to investors the money that he had raised. Palihapitiya had invited a few Silicon Valley unicorns to explore merging with I.P.O.A, but nothing came of it.
Then he alighted on Virgin Galactic, which had been founded, in 2004, by Richard Branson, the celebrity entrepreneur, with an aim of building rocket ships to ferry tourists into space. The company was a marketing sensation: more than six hundred people had reserved seats, making deposits totalling eighty million dollars. But in almost every other respect it was a disaster. In 2007, three workers were killed when a rocket motor exploded. Seven years later, a pilot died during a test flight. Virgin Galactic had spent hundreds of millions of dollars without sending a single tourist into space.
To finance the company, Branson had persuaded the Saudi Arabian government to invest a billion dollars. But in 2018 the Saudi crown prince, Mohammed bin Salman, was implicated in the murder and dismemberment of the Washington Post journalist Jamal Khashoggi. It would be unethical—and a public-relations disaster—to accept Saudi funds. Branson urgently needed a new source of capital. That’s when Palihapitiya’s company proposed a spac merger.
Palihapitiya and Branson hit it off. “These guys are born salesmen,” a tech-industry banker who is familiar with both men told me. “It’s like watching someone trying to have sex with their reflection.” They rapidly came to an agreement: Virgin Galactic would receive hundreds of millions of dollars from I.P.O.A, as well as a hundred million dollars of Palihapitiya’s personal funds; Palihapitiya would own nearly seventeen per cent of Virgin Galactic.
Palihapitiya then had to persuade the mutual funds, the Wall Street chieftains, and the individual shareholders who had written checks for the spac to approve the deal. He prepared a series of flashy presentations explaining that Virgin Galactic’s technologies wouldn’t just put tourists into space; they would one day make it possible for people to travel from Los Angeles to Japan in two hours, on hypersonic jets. The company would build and operate sleek “spaceports.” Companies would pay millions to advertise to Virgin Galactic’s clients. One slide from Palihapitiya’s presentation noted that it costs about half a million dollars to rent a yacht for a week—meaning that a hundred thousand dollars for a spaceflight was a bargain.
When Palihapitiya spoke to me about Virgin Galactic, he avoided blithe talk of profits. Instead, he portrayed investing in the company as noble, likening it to supporting the Apollo program in 1969. And he emphasized that the company faced real challenges: “When you make these big leaps technologically, you fund something that’s very complicated.”
But, when Palihapitiya was making his case to investors, he let loose with wildly optimistic projections. In the first nine months of 2019, Virgin Galactic had collected only $3.3 million in revenues and had lost a hundred and thirty-eight million dollars. Yet Palihapitiya’s spac predicted that, shortly after closing the merger, the company would start sending people into space, and that annual profits would hit a quarter billion dollars by 2023.
It was during this period that Palihapitiya told the skeptical investor that he didn’t want his fucking money. In the end, many other investors wanted to be part of the Virgin Galactic deal—feeling certain that, at the very least, Palihapitiya’s self-confidence would garner tons of free press. They were right. As the deal approached finalization, CNBC gave Palihapitiya a series of slots on its most popular programs, where he boasted that Virgin Galactic was set to do “something absolutely fantastic in human technology.” The company had a sprawling list of rich tourists begging to go into space, he said, and hypersonic travel would “directly disrupt” the airline industry. Ultimately, the vast majority of I.P.O.A’s investors backed the merger.
On October 28, 2019, Virgin Galactic débuted on the New York Stock Exchange, opening at $12.34 a share. Within four months, it had climbed to forty-two dollars. A year later, it reached sixty-three. Soon, the company was worth more than six billion dollars, buoyed by the same kind of social-media chatter that drove up the stock prices of GameStop, Tesla, and BlackBerry. Still, thus far, Virgin Galactic has failed to achieve essentially every projection set forth in Palihapitiya’s merger proposal. For example, the forecast for 2020 revenues was thirty-one million dollars, but the company collected only two hundred and thirty-eight thousand dollars that year. It is still unclear when, if ever, it will send customers into space.
The stock’s success added hundreds of millions of dollars to Palihapitiya’s net worth, and soon he was talking up I.P.O.B, I.P.O.C, I.P.O.D, I.P.O.E, and I.P.O.F. He publicly hinted that he might merge those spacs with such sexy-sounding companies as Equinox gyms and Opendoor—an “on-demand and fully-digital experience to buy and sell a home.” His success with spacs made other financial professionals wonder if they could pull off the same trick. In 2020, two hundred and forty-eight spacs went public, raising more than eighty-three billion dollars. There have been more than three hundred spacs so far this year—about three every business day.
An array of celebrities, including Shaquille O’Neal, Colin Kaepernick, and Jay-Z, have become publicly associated with certain spacs, generating easy publicity for the latest launch. Perhaps sensing the inherent ridiculousness of their roles, celebrities have generally stayed quiet about their participation beyond stating, in regulatory filings, things like “Mr. O’Neal has a keen eye for investing in successful ventures.” An executive sponsoring a celebrity spac told me that “selling anything, whether it’s a company or a stock, is about telling a story that makes people want to buy. Celebrities get attention and they’re seen as heroic, which makes telling the story easier.” In February, the Times business columnist Andrew Ross Sorkin wrote that several financiers had told him they knew more people who had spacs than had contracted covid.
Palihapitiya has formed six spacs thus far, yielding him and his firm more than a billion dollars. “The returns that we’ve generated—you can’t B.S. those,” he told me. In March, he sold the entirety of his personal stake in Virgin Galactic, worth some two hundred and thirteen million dollars. He might have needed the cash: a few months earlier, he’d reportedly acquired a seventy-five-million-dollar private jet.
Shareholders have not done as well. If an everyday investor had bought one share of stock in each of his spacs on the first day the stock traded, three of those investments would have lost money. The entire bundle would today be worth thirty-one per cent more than the investor had initially paid. A comparable investment in the S. & P. 500 over the same period would have returned similar profits, but would have involved much less volatility and risk. Shares in Virgin Galactic have dropped more than fifty-five per cent since February—a decline presumably precipitated in part by Palihapitiya’s sell-off.
Many other spacs have done much worse. Some public shareholders, lured by impossibly rosy financial projections, have lost enormous amounts of money investing in companies that otherwise would likely have never been sold to the public. Last year, soon after the electric-truck maker Nikola went public through a spac, it was reported that the S.E.C. and the Department of Justice were looking into fraud allegations against the startup, which likely would have surfaced earlier in a traditional I.P.O. (Nikola has denied any wrongdoing.) According to a recent study, spacs that have completed a merger since 2020 have, on average, lost thirty-nine per cent of their value. Another study, looking at various time periods, found that fewer than a third of spacs end up making money for investors. The S.E.C. has become so concerned that it recently warned investors “not to make investment decisions related to spacs based solely on celebrity involvement.”
As spac losses have mounted, some sponsors have been forced to agree to less lucrative payouts for themselves in order to secure merger deals. Some of Palihapitiya’s sponsorship arrangements have attracted particular scorn. Bloomberg Businessweek recently reported, of one Palihapitiya spac, that “the way the deal was structured made it almost impossible for him to lose.” In February, a firm named Hindenburg Research, which often bets against stocks, accused Palihapitiya of misleading investors about ongoing regulatory issues with Clover Health—an insurance company that merged with I.P.O.C earlier this year. Palihapitiya defended himself on Twitter: “Yesterday’s report was rife with personal attacks, thin facts, and bluster that has been rebuked by the company.” But this time his narrative failed to stick: the company’s stock has declined more than forty-five per cent since the tweet. All told, Clover’s shareholders have lost nearly a billion dollars. Palihapitiya and his partners, however, are still doing fine. Their profits from I.P.O.C are estimated to be about a hundred million dollars.
Despite the backlash, one federal official told me, spacs—like mutual funds, credit cards, and junk bonds—“are here to stay.” As spacs become more familiar, and better regulated, they will be an important tool for a certain kind of company that hopes to go public but lacks the track record or the profits that a traditional I.P.O. demands. More than a dozen electric-vehicle makers and suppliers have gone public by merging with a spac, or are working toward a merger. Some of those companies would likely go out of business if they couldn’t sell shares to the public; building electric vehicles is enormously expensive, and automotive startups need reliable sources of capital. But it would be nearly impossible for many of them to mount a traditional I.P.O., given the companies’ riskiness and the fact that most won’t show profits for years. Klausner, the Stanford professor, said, “Our economy depends on finding ways to match risk-taking companies with risk-taking investors.”
Firms often can’t go public because of complicated tax situations, or because they’re too cutting-edge to be easily understood, or because their industry is out of favor, or because they operate in legal gray areas, such as marijuana distribution. For companies without easy access to private funding, a spac can fill a gap—say, matching enthusiastic weed investors with industrial Maui Wowie growers, and offering the necessary due diligence and infrastructure that such a transaction requires. Last year, the online-sports-wagering company DraftKings—which probably would have had difficulty executing a traditional I.P.O., given the regulatory issues surrounding its business—went public via a spac, and its stock has more than doubled. Right now, Klausner said, spacs are a “minefield.” Even so, “we need alternatives to I.P.O.s, and once the public learns how to price and understand the risks, and there’s more transparency about costs and who is making ludicrous projections and who is being responsible, this will be a normal part of business.”
That transition will likely involve forcing sponsors to accept smaller payments and making the costs borne by shareholders more transparent. The public will become savvier about promises of riches and novelty. In an e-mail, Klausner wrote, “I would be in favor of a spac in which the sponsor’s compensation is lower and tightly tied to shareholder returns. There have been a few spacs in recent months that are starting to approach this sort of improved structure.”
Before too long, one investment banker told me, the current spac bubble will pop, and investors may lose lots of money. The marketplace will likely then rebuild in a more sensible, sustainable way. That’s what happened with junk bonds. Palihapitiya, meanwhile, has indicated that he’s searching for new spac opportunities. “I don’t know if Chamath’s spacs are going to look smart or horrible when the reckoning comes,” the banker said. “But we needed that kind of blind arrogance and raw nerve to convince people to give this a chance. Without that, who’s going to take a risk on something like this?”
Palihapitiya insists that he does not tell stories; rather, he says, he reveals truth discovered through careful deliberation, hard work, and unbiased reasoning. He told me, “I think why people want to work with me is because I do a reasonable job, and it’s gotten better over time, of being able to dial down bias, dial up facts and intuition.” Countering the notion that he offered simplistic pitches to the public, he argued that complex explanations are distracting: “The problem that I think happens sometimes is, when you’re trying to make important decisions, a lot of the times people make them exceedingly complicated, and it’s almost to get other people’s validation. In my experience, when I’ve gotten things really, really right, it was very simple.” He disagrees with the notion that spacs are optimistic narratives built on shaky evidence, or a way for a new Milken or Mozilo to earn quick fortunes. He views spacs as “an on-ramp to the capital markets”—a hack that allows everyday people access to wealth long reserved for the already rich.
Palihapitiya said that “a spac, for me, is a tool” for furthering his deeper goal: fighting income inequality. “I am focussed on a mission,” he said. “Evening the starting line.” He sees the world as deeply unfair, and believes that his success has put him in a position to fix problems like poverty and climate change. “I want to put my hands into owning businesses that can shape these huge parts of society that are broken,” he said, adding, “A spac is one way to do it.” He said that he has been concentrating on these larger goals since he left Facebook: “You know, I could have checked out, I could have been on a beach, I could have been wasting time, I could have been working on stupid problems, and I’m pretty proud of myself for not having done that.” Virgin Galactic, for instance, may drive down the cost of travel, and thereby “democratize a lot of things.”
None of Palihapitiya’s spacs have devoted significant money to fighting income inequality, and some of his most profitable investments, such as bitcoin—and some of his purchases, such as the private jet—have devastating environmental costs. His friends, however, say that his stated ambitions are genuine. Neal Katyal, an acting Solicitor General in the Obama Administration, who recently helped prosecute Derek Chauvin for murdering George Floyd, is a close friend of Palihapitiya’s and a Social Capital board member. “I think that feeling of not being properly valued, because of how he grew up, is so essential to his identity,” Katyal said. “We’ve spent a lot of time talking about how there are geniuses in Africa who never get to go to great schools, and how he wants to change that. I think he’s a true genius, and one of the few people committed to questioning everything, to transforming the system instead of just doing well for himself.” Palihapitiya has admirers in the media as well. “I shouldn’t like Chamath, but I do,” Kara Swisher said. “He’s a blowhard, but that’s not a crime. And he’s not a malevolent fuck, like so many of them.”
Palihapitiya, who is now reportedly worth multiple billions of dollars thanks to his spacs, bitcoin holdings, and other investments, told me that he has “given a lot of money away,” and is planning future philanthropy “in the half a billion dollars of aggregate commitment.” This may well be true, but the only major donation attributed to him thus far is a twenty-five-million-dollar gift to the University of Waterloo. He declined to name other contributions. “In the Buddhist faith, which—I’m Buddhist—you do these things because they’re part of your moral culture,” he told me. “You don’t do it for labels and press releases.” (This modesty is not altogether confining: a few months ago, Palihapitiya triggered a flood of headlines by hinting that he was running for governor of California, then triggered yet more by announcing that he’d changed his mind.)
Even Palihapitiya’s friends admit to being confused by some of his actions. “There’s this self-destructive piece of him that seems bound up in what he does so well,” one of them told me. Many of his public confrontations come across as juvenile. Recently, someone tweeted that he was not excited about seeing Palihapitiya speak at a forthcoming cryptocurrency conference. Palihapitiya tweeted back, “You’re a joke,” followed by “I owned Bitcoin when you were still living in Mommy’s basement.” He cancelled the appearance. His friend told me, “It’s like he can’t stop from going dark sometimes.” Palihapitiya is not alone in this regard: Elon Musk, Donald Trump, and others who have profited from adopting bellicose stances online clearly have trouble knowing when to stop.
Some of Palihapitiya’s friends suggested to me that his impulse to overshare may have roots in a desire to control narratives that none of us can easily direct. Katyal told me, “This whole idea of growing up brown and poor where the schooling system doesn’t recognize your talents and abilities, where racism manifests in teachers not paying as much attention to you, classmates thinking you’re just this one-dimensional geek, that you’ll never really be creative—that’s real. Chamath has this relentless need to prove himself, to just blow the system apart. He wants to be transformative, and, honestly, it’s inspiring. That should be what we want Silicon Valley to be.”
A Chinese-American former Facebook employee told me that, if he ever started a company, the first person he’d approach for funding was Palihapitiya. “My Chinese friends in the Valley feel the same way,” the employee said. “Other venture capitalists are white guys in khakis. Chamath understands what it’s like to be an outsider, to be dismissed because you’re an immigrant or how you look. And he’s honest and loyal and fights for you even when he doesn’t have to.” The tech industry is indeed filled with white guys who went to Ivy League schools, and who say ridiculous things online and buy planes and post selfies of their muscles. Palihapitiya has adopted a kind of braggadocio once reserved for the already powerful, and such boldness can be galvanizing.
There is one other tale that is often repeated about Palihapitiya. For many years, he was close friends with Dave Goldberg, a widely beloved technology executive who was married to Sheryl Sandberg, of Facebook. Goldberg had mentored dozens of technology executives before he died, suddenly, while on vacation in Mexico, in 2015. A large swath of Silicon Valley’s élite attended his memorial, where men were asked to forgo neckwear, “in keeping with Dave’s lifelong hatred of ties.” Palihapitiya paid his respects in a gray suit, a purple shirt, and a black tie. “Dave would have absolutely loved that,” a friend of both men told me. “Chamath’s outrageousness makes the world more fun.”
It is true that Palihapitiya “sometimes tells crazy stories, and he always makes himself the hero,” the friend said. “But don’t we all do that? Don’t we all want to find some way of believing that we’re heroic?” The American economy has thrived because we have agreed to collectively believe in a common set of stories, many of which aggrandize innovation, celebrate extreme optimism, and lionize the strengths and weaknesses that Palihapitiya embodies. This willing suspension of disbelief has spurred our economic growth. Now that set of stories includes spacs, thanks to Palihapitiya.
In the short run, it’s likely that some spacs will end in bloodbaths, and that many investors—and perhaps Palihapitiya himself—will lose billions of dollars and wind up looking much less impressive than they do today. It’s nearly inevitable that we will revisit this period and wonder, Why were we so credulous? How did we imagine we’d get rich with such little real work? But by then spacs will have become commonplace and unexceptional, their sharp edges sanded by regulators and sober bankers.
Palihapitiya’s friend asked me, “When someone tells a new story, and then they make it come true—they invent something, or they help some company get funded, or they make us change how we see things—aren’t we better off?” He added, “I think we’re lucky some storyteller was willing to do that work and take that risk.” ♦
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