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How The 'SPAC King' Forever Changed The IPO - YouTube
Channel: Bloomberg Quicktake: Originals
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If Chamath is famous for anything,
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If Chamath is famous for anything,
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If Chamath is famous for anything,
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it's, for lack of a better
word, he's a great **** talker.
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it's, for lack of a better
word, he's a great **** talker.
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There are 150, and they're
all men, that run the world,
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period, full stop.
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He's almost becoming one
of those one-name people,
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at least in financial circles.
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Chamath, Chamath, Chamath.
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Chamath, Chamath, Chamath.
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Chamath, Chamath, Chamath.
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He's brash.
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He's not shy about his opinions.
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Your behaviors, you don't realize it,
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but you are being programmed.
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Goldman Sachs sucks.
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Who cares?
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No smart person goes and works at Goldman.
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Some people would
compare him to Elon Musk,
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which also uses his social media influence
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which also uses his social media influence
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to communicate with investors.
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For some target company, that's the appeal
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because you get the
instant name recognition
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once you're associated with Chamath.
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So he was somebody that I saw as one
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of the biggest boosters
of this crazy bubble
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and also one of its biggest beneficiaries.
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In particular, he was one
of the leaders of the boom
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for special purpose acquisition companies,
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otherwise known as SPACs.
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No one quite knows exactly
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why the market for SPACs exploded,
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but everyone gives
Chamath a lot of credit.
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When I got back from paternity
leave earlier this year,
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I saw that markets seemed
to have gone totally crazy.
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Investors were buying up all
sorts of stocks with no regard
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for the company's earnings or profits
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or any of the sort of traditional things
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that boring investors used to look at.
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Video game retailer GameStop is set
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to continue their head
spinning ascent today.
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And then of course,
there's AMC phenomenon.
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We saw this wild ride for AMC investors
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on this retail trade driven frenzy.
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Everyone was having lot
of fun driving stocks up
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to the moon, as they say,
and I wanted to look
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at a promoter who was
encouraging this boom.
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Startup Grind welcome to Chamath.
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Let's hear it right now.
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And I found a guy by the
name of Chamath Palihapitiya.
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I have lore.
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I've worked in three of like the top five
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internet businesses ever created.
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I didn't have to look very hard.
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He's super popular on Twitter,
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he's got a million and a half followers
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and he's always talking about the stocks
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that he's taking public, how
great these are to invest in.
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We are involved in probably 10
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to 15 billion dollar unicorn companies.
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Palihapitiya likes to tell the story
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of his upbringing because it's
a bit of a rags to riches,
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American dream type story.
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Rich or poor?
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Well, my parents were kind
of ruling class in Sri Lanka
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and then in the civil war,
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we immigrated to Canada
and I grew up on welfare.
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My dad struggled to find a job,
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worked at a photocopy store for awhile.
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When I got my first job,
it was at Burger King.
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I'd take the money and I'd
have to give it to my parents
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and we would buy bus passes.
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He went to the University of Waterloo
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where he studied electrical engineering.
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After college, he did
what a lot of people do
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who are wanting to make some money.
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He went into investment
banking, traded derivatives.
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My first job out of
college, I made $55,000.
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And the reason I liked that job, again,
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it kind of like, it played on
my desire to take risk and,
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you know, quote unquote, gamble.
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But when he didn't get a bonus one year,
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got angry and quit, moved to
California to seek his fortune
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in the first dot-com bubble.
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I want it to be emancipated.
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I wanted to like find my own
path to like, be able to like,
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not have to be a subject of the man.
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He went over to Facebook headquarters
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for what he didn't really
think was a job interview,
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at least as he's told the story.
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He met with one of
Facebook's top executives
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who was kind of put out by this person
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acting like Chamath was
there to be interviewed.
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And at that time, Facebook
was still just starting
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to build off its roots on college
campuses and high schools
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and Chamath convinced
founder Mark Zuckerberg,
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who was then just about 23 years old,
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that what Facebook really
needed was a dedicated team
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to devote it to growth
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and that he was the
person to run the team.
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By the time he left Facebook in 2011,
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the company had almost a billion users
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and Chamath had made a name for himself
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and also started making
angel investments on the side
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with his personal money.
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It took me into my early forties to say,
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"What is gonna change
this sort of lingering,
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burning sensation in my stomach?"
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And so I just went off
to fix these things
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and professionally, the most
important thing is I said,
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"I'm building somebody else's company."
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And I'm sure all of you guys, founders,
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have felt that moment where it's like,
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am I building the thing that I want?
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Or am I building the thing
that somebody else wants?
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After he left Facebook, he tore into them.
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Palihapitiya burns down what he built,
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he's imploding,
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what's the story?
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He said that they were
ripping apart the social fabric
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of how society works.
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The short term
dopamine-driven feedback loops
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that we have created are
destroying how society works.
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In 2011, Chamath left Facebook
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to start his own venture capital fund.
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He called it Social Capital.
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I wanted to make money for people
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that I thought were interesting and good.
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I didn't want to make money
for some other random person,
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some endowment, some pension
fund, some university
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that isn't doing anything
good with the money.
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He had a plan to automate
the investing process
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to remove biases.
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And he did make several
investments into companies
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with those aims, but as
it turned out, best bets,
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the ones that really made
money, were more traditional,
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more similar to what other
firms were doing, like Slack,
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the business chat software, or Amazon,
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which he said was going to rise sharply
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at a time when people thought
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maybe it already was overvalued,
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got into Bitcoin very
early, recommended Tesla.
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In 2018, despite great
returns at Social Capital.
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We're absolutely obliterating the market.
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We're probably like, well,
like the public side vehicle
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is probably like 30 points
of Alpha above the NASDAQ.
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I mean, it's really good.
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The company ran into a lot of trouble.
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High-level executive
clashed with Chamath and left,
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investors complained
about a change in focus
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and Chamath was left with
what was a much smaller firm
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managing mostly his own money.
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This led him to have more time
to devote to a side project
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he'd started a year earlier called a SPAC.
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Tech SPAC-
SPAC-
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SPACs.
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A SPAC is a shell
company that goes public.
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They raise money from public investors
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and the management team
of the shell vehicle
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then have two years to
find an acquisition.
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And during those two years,
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the shell company trades
publicly on the exchange.
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Tell me, from your
perspective, is there a limit-
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Investors give money to a sponsor who says
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that they're going to
use it to buy something
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and for every $10 that
you hand to this sponsor,
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the sponsor gives you one share
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and these shares are
traded on the stock market.
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SPAC got a bad name in the 80s
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when many of the people
running them would raise money
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and then just steal it for themselves.
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They were rehabilitated
by a broker in Long Island
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named David Nussbaum,
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came up with a important
protection for investors,
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which was that they would raise the money
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and then put it in the bank
instead of stealing it.
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When a company goes public
in a traditional IPO,
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they are very limited in what they can say
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about their prospects for the future.
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The underwriter of the IPO,
they project that, say,
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we're gonna make a
billion dollars next year,
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then investors could sue
them if it doesn't come true.
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One of the biggest advantage
for company to go public
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through a SPAC is that they can market
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forward looking projections,
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which really benefits to companies
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that don't have any
revenue at this very point
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that they want to go public.
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So Chamath has really
become like the poster
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of the SPAC boom.
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Given the fact that Virgin Galactic now
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just directly listed on the exchange
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through Social Capital's SPAC,
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do you see this as a model
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that other companies are going to adopt?
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I do, and I hope that this
is a really good litmus test
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and a case study.
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He was the person that kind
of started this whole frenzy
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in 2019 when he took
Virgin Galactic public.
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I think that we found
the absolute best company,
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something that'll thrive in the
public markets, and frankly,
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something that's gonna
capture an enormous amount
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of consumer interest,
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giving the average person a
chance to own a bit of space.
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One of his things is
every time he does a deal,
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he publishes his rationale behind
making this investment
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and people really love it
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and I think as a result,
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it really brought to people's attention
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that this is not your very complicated
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financial engineering,
but it is an instrument
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that your mom and pop
investors could participate.
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Investors were so eager to
get a piece of Chamath's deal
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that even before his SPACs
would announce a target,
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when they were just piles of money,
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people were paying $15 a share.
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So you're essentially
paying $15 for a $10 bill
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with the hopes that Chamath is
gonna buy something so great
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that you'll make up that deficit later.
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To me, at least, much more
interesting to say you failed
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trying something crazy and
huge than something incremental
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and just frankly, you know,
the fourth order derivative
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of something that was done 10 years ago.
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In 2019, there was about $12
billion raise in new SPACs
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and so far this year, just five months in,
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we've seen a hundred
billion raised globally.
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Now it seems like practically
every underemployed rich guy
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with some name recognition
has his own SPAC.
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There's SPACs advised by retired athletes
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like Alex Rodriguez or Shaquille O'Neal
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and SPACs advised by washed up politicians
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like Paul Ryan or John Delaney.
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There's even one SPAC that has
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both NBA legend David Robinson
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and former Senate majority
leader Bill Frist working on it.
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Palihapitiya has raised six SPACs so far,
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more than $4 billion.
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His vision is to raise 26 SPACs.
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He names his SPACs alphabetically.
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So IPO A, and he's now raised up to IPO F.
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I researched each of the companies
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that Palihapitiya had taken public.
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One that really caught my
attention was Clover Health.
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We are really excited, after
months of diligence and work,
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to announce a merger between
IPO C and Clover Health
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to take Clover Health public.
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He talked up this company
like it was a tech company
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that was about to change healthcare.
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Clover's already growing
two to three times faster
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than their next nine nearest competitors.
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What that's created is a business
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that last year alone did
almost $460 million of revenue.
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And in 2023, we'll do
$1.7 billion of revenue.
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Chamath always tweets a one-page thesis
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about why you should buy
whatever stock he's pitching.
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And in the one for Clover,
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he said the company
had 41,000 members now,
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but would have 273,000 next year.
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So I decided to dig in a little bit.
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Clover had actually been
around for almost a decade
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when the merger with
Chamath's SPAC was announced
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and it's lost money the whole time.
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It's missed its growth targets.
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It was clear that this was really
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a smallish insurance company
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that almost exclusively sold
Medicare advantage plans
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to older people in New Jersey.
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They were losing a couple
hundred million dollars a year.
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The company is saying that
it's put all that behind it
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because it's developed a new technology
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that's the culmination
of all its research
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and this technology is
called Clover Assistant.
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The Clover Assistant is a web application
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and a physician uses it every visit
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that they have with one of our members.
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Clover says that this technology
will enable all doctors
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to offer better care.
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But I spoke to several
former employees of Clover
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and they said that the rollout was rockier
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than the company had presented it.
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And they said that many
doctors who are signed up
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to use this technology don't
actually use it themselves.
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And when you look at
Clover's financial results,
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the type of stuff that
you'd be forced to rely on
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in a traditional IPO, instead of a SPAC,
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you see that every quarter,
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the company is spending
more money than it makes.
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For a while, it seemed
like everything he touched
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turned to gold
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and if you had bought blindly
into all of his deals,
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you would have made a lot of money.
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But sentiment changed.
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In February, a short
seller published a report
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that shocked Clover investors.
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It was from a group called
Hindenburg Research
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and it's really run by a
guy named Nate Anderson
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out of his apartment in Manhattan.
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Anderson called out Chamath
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and he said that Chamath
had misled investors,
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Clover wasn't really a tech
company, and that in fact,
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doctors didn't like using its software.
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Anderson's report proved
to be pretty well timed.
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The market for SPACs
peaked around February
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and from February to March,
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the average SPAC dropped about 17%
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and Palihapitiya's SPACs,
which had climbed higher,
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also dropped further.
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In Virgin Galactic, his first SPAC,
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he sold $300 million worth of stock,
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more than enough to cover what he put in
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and on Clover Health,
about doubled his money,
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despite the stock dropping quite a bit
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since he announced the deal.
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I think that SPACs are
very much here to stay.
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Back in the, you know, using
the language of inequality,
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it evens the playing field.
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It democratizes access
to high-growth companies.
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Since that initial slide,
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some of Chamath's SPACs
have recovered a bit,
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but most investors who
bought in earlier in the year
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when the bubble was inflating
are still way underwater.
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Chamath didn't respond to a request
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to be interviewed for this video.
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The appeal of Chamath was
that if he put his name
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on something, it might triple.
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Now, it's unclear whether
he's gonna be able
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to keep raising them or to
keep acquiring companies
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at the pace that he had.
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If a bank like JP Morgan
underwrites one bad IPO,
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it doesn't affect their brand so much
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because they've got so many
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that they've done over the years,
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but Palihapitiya's brand, his
identity was sort of built
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on this idea that he can't miss.
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And now that he has missed,
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it's not clear if he'll
be able to keep this up.
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