Friday Letter: SPACs and the role of Chamath Palihapitiya

With special purpose acquisition companies (SPACs) all the rage right now, it’s a good time to revisit and re-examine the impact of Chamath Palihapitiya on venture capital.

A couple of years ago, Palihapitiya was not getting very good headlines for himself and for Social Capital, the early-stage venture firm he founded in 2011 and which aimed to provide social good and financial gain with its investing. Its initial LP base consisted of philanthropists and foundations.

To recap some of the highlights (and lowlights): Palihapitiya recruited Mamoon Hamid from US Venture Partners in 2011, and the firm grew quickly, raising $600 million for its third fund four years later.

But in 2017, he started to take the firm in a different direction. Later that year, he formed Social Capital Hedosophia Holdings, a blank check company formed to acquire large private tech companies and in the process it raised $600 million by offering 60 million units at $10. At the time, Palihapitiya told the Financial Times that the holding company was aimed at targeting unicorn companies with valuations of between $3 billion-$20 billion.

Meanwhile, Hamid, who led Social Capital’s investment in Slack, moved to Kleiner Perkins. Others also left, including Mike Ghaffary, who eventually ended up at Canvas Ventures. Partners Arjun Sethi and Ted Maidenberg formed Tribe Capital, which includes a couple of other Social Capital personnel.

Palihapitiya was blamed for the unraveling of the team. At the time, we heard he was not too present in the office. He also went through a divorce with his then wife and Social Capital partner Brigette Lau.

In 2018, Bloomberg reported how investors were unhappy with the direction Social Capital was headed in and described the firm in turmoil.

I can’t imagine many LPs are happy with Palihapitiya today either, as they find themselves on the outside looking in at SPACs.

Palihapitiya has practically become a poster child for SPACs, the hot topic du jour. Actually, it’s the hot topic of the year. Everybody in town is talking about them and how they can participate in the SPAC craze. For the LP community, they’re wondering why their GPs are using firm resources to raise and manage SPACs without benefiting the LPs.

Meanwhile, FirstMark Capital, Ribbit Capital and Lux Capital have already formed their SPACs, or announced plans to.

Last month, Palihapitiya filed for three SPACs to take private companies and flip them onto the public markets. Last week, he identified his latest target in Clover Health, a Medicare insurance start-up backed by Alphabet.

With talk of SPACs dominated the headlines, Palihapitiya’s name has garnered a lot more positive attention. And it was just two years ago he was blamed for what was expected to be the demise of Social Capital.

It’s a good lesson hear that sometimes original thinkers are criticized for how they go about enacting change rather then earning credit for being forward thinking.

Am I giving Palihapitiya more due than he deserves? Tell me what you think. Are SPACs a hot craze that will burn out by the end of the year or do you see them continuing to provide a good liquidity option? And what do you venture-focused LPs think of them?

Let me know. I’m always happy to hear from you. You can reach me at agoldfisher@buyoutsinsider.com and I’m open to voice and video calls, of course.