The median return of 2022's SPAC mergers: -82%
pranshum.yarn.tech
pranshum.yarn.tech
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.
Then he went all-in on SPACs... Which ended up being the ultimate Ponzi.
[1] https://www.cnbc.com/2018/10/10/start-up-economy-is-a-ponzi-...
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
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.
"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."
https://www.ethicssage.com/2022/01/fake-it-until-you-make-it...
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.
"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."
https://www.ethicssage.com/2022/01/fake-it-until-you-make-it...
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.
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?
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.
But as you point out, I don't think deception per se is really the defining feature of the Ponzi.
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.
You're paying attention to the technical definition. "It's just an investment vehicle!"
He's paying attention to the real-world outcome. Insiders made money by offloading bad investments onto retail suckers.
I think there's value in using precise language, so I reget this usage, but it's common whether I like it or not.
Later investors = SPAC pawns putting up money for a bad investment that doesn't require the normal regulatory scrutiny that an IPO requires.
If not Ponzi, seems very Ponzi-like.
> 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.
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.
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.
Using imprecise wording should be discouraged and it reflects poorly on people who do so.
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).
Now he even regrets his impact on social networks due to unintended consequences … https://en.wikipedia.org/wiki/Chamath_Palihapitiyawprov=sfti...
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.
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.
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.
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.
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.)
That always made me laugh. Crazy then and crazy now.
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
> 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.”
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.
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.
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.
It's hard to get money to be productive. It's hard to get a financial system to do anything other than gamble, pump and dump, scam, and make bubbles.
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.
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.
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.
Case and point, Warren Buffet.
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.
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.
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.
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.
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).
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.
"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.
[1] https://archive.nytimes.com/dealbook.nytimes.com/2008/01/06/...
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 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.
If there exist two pathways:
1. Regulated, standardized
2. Less regulated alternative
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.
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.
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.
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.
SPACs, it would seem, are not an exception.
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.
Based on the definition, is it proper to call it a "merger"? It seems more like what SPACs do is "acquire".
Technically there is a merger that does happen, but... it really is a technicality.
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.
If it was a viable business, just do an IPO.
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.
Keep your BS detectors on at all times.
The money didn’t disappear and those shares created were never worth anything.
$1 bet. Roll a dice.
If you get 1,2 you get zero Otherwise $1.3
Median return is 30% plus prinicpal.
neither is the return from putting $1 across all of SPY
https://www.investopedia.com/ask/answers/05/sp500calculation...
But I didn't try that hard, I'm sure the documentation must exist somewhere.