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The SPAC Fad Is Ending in a Pile of Bankruptcies and Fire Sales
- aruanavekar 4y ago2021 counts were huge, but low on value https://www.spacinsider.com/data/stats https://www.spacinsider.com/data/stats
- mikeodds 4y agoAnother worthwhile watch from the SPAC king Chamath https://twitter.com/silvermanjacob/status/1595059806200643589 https://twitter.com/silvermanjacob/status/159505980620064358... It seems insane to me these people dump on retail and their followers and continue to stand up in public.
- par 4y agoReally unfortunate that a lot of crypto was just these rich dudes pumping and dumping, and all getting together to perform rug pulls on a bunch of 'retail investors'.
- consumer451 4y ago> 'retail investors'. AKA, bag holders. Towards the end of this last cycle, I even heard a couple of the bag creators use the term openly.
- wefarrell 4y agoIt should have been regulated from the start. We see this happening every time a new financial instrument comes out and the feds are slow to act.
- deleted 4y ago[deleted]
- pavlov 4y agoFor these people it’s always someone else’s fault. Everything would have worked out if nefarious elites hadn’t interfered, or if some of their followers hadn’t been so weak-willed. But next time it’s going to be perfect. The establishment will be foiled and everybody on our side will have diamond hands. So get in now, be early on the next wave, buy now before everyone else discovers this, etc. Rinse, repeat… SPACs, penny stocks, crypto, MLM pyramids, it’s all the same story.
- GauntletWizard 4y agoThe really funny thing is, these guys hang out with and to a large extent are the nefarious elites. But that's sorta unsurprising; It's all based on capture and lock-in and bets on who will win the game of politics. Actual usefulness, financial solvency, and value-creation have limited effect here; Human decency is a direct liability.
- trompetenaccoun 4y agoIt's like in any other space. The majority of participants have no idea what goes on and are played for suckers.
- lotsofpulp 4y agoThe public is free to invest in SP500. I assume people buying into SPACs were/are hoping that a greater fool comes along and they will not be left holding the bag.
- VLM 4y agoIts more like the sector fund argument. If money can move faster than business, weird things happen. On the micro level everyone should invest all their capital in the stock sector that provided the highest returns last decade / year / quarter / day. Nobody never took a class in school that said to list your possible investments and select anything except the highest return, all things being equal. The problem is on the macro level that sector may not be undercapitalized so dumping the entire financial market into whatever won last time, guarantees a bump followed by crash. Carried to an extreme, imagine a stock market so fluid that every penny of capital in our entire civilization flowed all at once every morning at 9am to the company that provided the highest return yesterday, on the assumption that high returns yesterday means high returns tomorrow. It would be epic to watch, but would not be a very functional financial market. Lets say SPACs are a $10B sized market. And they had essentially $0 investment a couple years ago, a very underserved undercapitalized market. The first investor willing to risk it, can pick the best deal in the entire market, and make absolutely insane returns. The problem is the rest of the world financial market sees that insane return percentage and here comes a tsunami of $100T. It's not going to turn out well when that amount of cash impacts a market that's only $10B in size.
- pc_edwin 4y agoInvesting, whether in real estate or day trading, is inherently based on asymmetry, leading to an extremely uneven distribution where it can appear as if the smart money just dumped the bag at the top on retail. My concern with your perspective is that it ultimately leads to the conclusion that the only way to prevent these situations is to prohibit retail investors from participating in certain types of investing. This kind of thinking is what has led to modern America, where individuals are unable to invest in their friend's barbershop unless they meet certain net worth requirements or have worked on Wall Street.
- paxys 4y agoOf course they are. Let's not forget though that these same retail investors were the ones crying for deregulation and asking the government to leave them alone as they invested in crypto and SPACs hoping to get rich quick. I have zero sympathy for anyone in the ecosystem.
- jgalt212 4y agoThere's a sucker born every minute. -- P. T. Barnum
- chrisgd 4y agoDon’t forget to shame A16Z and Chris Dixon as well. Those guys were complete scumbags around the crypto space
- olliej 4y agoI'd like to know what the failure rate for the regular IPO path is as well, and the article doesn't include that comparison. That said the failure reasons (cost of operations exceeding revenue, debt availability, excessively "optimistic" growth predictions, etc) are all things that do show up in the audits and financial documents go with an IPO, with the ability to file fraud claims on the company and execs if the financial documents and prospectus are false. The SPAC model removes the financial reporting requirements and seems to provide significant liability shields not present in the IPO path, so if nothing else it creates an incentive structure for actual fraud to use them.
- JumpCrisscross 4y ago> seems to provide significant liability shields not present in the IPO Less liability shield than a lack of information for which to be liable. If I have a magic-bean startup and am asked if it cures cancer, an IPO forces me to say yes or no. A SPAC lets me shrug and wink and launch into a speech on why cancer is bad.
- a4isms 4y agoNot just a direct incentive for fraud, “speculative exaggeration,” and “being economical with the truth,” but an indirect one too. If you have a fairly reasonable business and want to go SPAC, you are competing for investor dollars with all the corrupt shills. You either stretch credulity yourself to raise money, or you won’t raise funds. It’s a market for lemons. https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons
- paganel 4y ago> https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons Looking at the "Critical reception" section on that wiki page, meaning this part: > while the reviewers for Journal of Political Economy rejected it as incorrect, arguing that, if this paper were correct, then no goods could be traded. I can't see how that basic observation is not taken into account anymore. More exactly, 50 years from when that study was published we still have a well functioning used car market in pretty much the majority of the world countries, which would contradict the main point made by said study. Is there anything else that escapes me? Why did people in the economics profession fall for this study? Was it because of the maths?
- afandian 4y agohttps://en.wikipedia.org/wiki/Special-purpose_acquisition_company https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...
- noizejoy 4y agoIt may not be entirely coincidental that a lot of financial carnage is happening just after the large scale printing of money (quantitative easing) stopped, interest rates started rising and borrowing money became no longer almost free (for the wealthy). Arguably numerous “new” financial constructs only worked with free money. Meme stocks, crypto, SPACs and very large VC funding may have needed all that free money to “work”? So maybe we’re just returning to more traditional financial investment patterns? Some or all of those financial constructs probably still have their place on a much reduced scale in more specific contexts. But it’s no longer guaranteed free money. I’m assuming that there are quite a few PhDs and other books in the works that will analyze those connections/dependencies in considerable detail.
- airstrike 4y agoTo add to that list of factors: it's also the end of the decades-long ride in Technology stocks which drove a lot of FOMO sentiment that made that money so easily available... nobody wanted to miss out on the next Facebook, the next Uber, the next Airbnb, the next Theranos--wait The quality of the assets for these moonshot unicorns declined over time (IMHO partially because they were increasingly moving away from pure-bits to bits-and-atoms, making business cases much harder to execute and expensive to fund) and then the macro backdrop soured and here we are Bonus: here's what StableDiffusion drew for "A dream of moonshot unicorns, 4k trending artstation" because why not... https://i.stack.imgur.com/sFxIw.png https://i.stack.imgur.com/sFxIw.png
- datavirtue 4y agoUber and Airbnb have made money?
- amanj41 4y agoAirbnb had an adjusted EBITDA of ~$230m in Q1, so Airbnb has turned a profit once. Not sure about Uber
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- pbreit 4y agoWas there anything inherently bad about the SPAC approach or did it mostly just attract lousy users?
- paulgb 4y agoA combination of lower due diligence requirements and high (effective) fees meant that companies that could go a more traditional IPO path usually preferred that path. The leftovers were mostly the duds. It was kind of a market for lemons: https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons
- VLM 4y agoIt was an initially very profitable but thin market, so returns went hard negative very fast once the market was cleared. So the usual behavior, the first entrants make a ton of money, then the rest of wall street piles in behind them, although the market of "good deals" emptied out really quickly so returns rapidly went from very positive to very negative. Its literally an inflation situation although instead of too much consumer money chasing too few consumer goods, its too much capital chasing too few good deals.
- mikestew 4y agoI think it better to ask, "what is the value-add of a SPAC over traditional IPO?" Because there's an existing channel to take a company public, why all this hinky backdoor runaround? To summarize what sibling comments illustrate, lots of bars get lowered (due diligence, et. al.) for a SPAC. As an individual investor, ask yourself, "why would such a solid company need lower barriers to going public?" And after you answer that question for yourself, you stay the hell away from such things. Because those things are not meant to enrich you.
- zeitgeistcowboy 4y agoIt was faster to do a SPAC than an IPO.
- consumer451 4y agoFrom my POV, it was basically a way to invest in early stage companies. Much like one could as an accredited investor via an early stage fund. It was extremely high risk, with a very long investment horizon. The problem seemed to be that this was not widely what people took away from SPACs. Also, all the insider stuff was very scammy. I still think it was a good thing that fell into "we can't have nice things" because of all the assholes.
- fairity 4y agoFor those curious in learning more about how SPAC's work and the associated costs & returns for various stakeholders, I found this paper to be pretty comprehensive: https://site.warrington.ufl.edu/ritter/files/SPACs.pdf https://site.warrington.ufl.edu/ritter/files/SPACs.pdf
- joncp 4y agohttps://archive.is/ZfZkN https://archive.is/ZfZkN
- farhanhubble 4y agoWait! You can list a company without conducting any real business?
- pranshum 4y agoIt feels like so much of the IPO class of 21-22 was just a 0 interest rate phenomenon. I did this analysis of fintech IPOs last year. So many of them are down by 80% and growth is slowing. https://yarn.pranshum.com/ipos_int https://yarn.pranshum.com/ipos_int
- dpflan 4y agoNice write up, would be nice to have full company names in addition to tickers.
- abduhl 4y agoIsn’t this kind of the story of the stock market writ large though? I don’t recall the exact number but some researcher found that like 95% of the net gains in the market are attributable to less than 5% of companies.
- dragontamer 4y agoIPOs at least have to file their business model + documents (balance sheet, cash flow, and profit/losses) before taking investor money. SPACs effectively raise money before they even find a business model. There is no balance sheet, there is no cash flow, there are no profits (or losses). --------- So while yes, your discussion about "bubbly IPOs" is warranted, its also kind of off topic with regards to SPACs. SPACs are just another level of risk far beyond IPO. I feel like a comprehensive discussion would compare IPOs in 2022 vs SPACs in 2022, and see how the two methodologies compared.
- muppetman 4y agoWhy doesn't anyone discuss the giant Elephant in the room - the need to have a product/service people actually want to buy? No doubt SPACs and other financial tricks don't help matters, but if people are really wanting to buy your widget then surely that's going to go long way to stopping you from going broke? I mean, am I insane? Is that not the fundamental root problem here?
- oldgradstudent 4y ago> Why doesn't anyone discuss the giant Elephant in the room - the need to have a product/service people actually want to buy? At a price they are willing to pay. There are plenty of companies using all their VC money on subsidizing products few are willing to pay the full price for.
- mysterydip 4y agoWhat's the end game, then? If something isn't sustainable to sell at a price people are willing to pay, is the goal to create a monopoly so people have to pay a higher price? Or to somehow bring cost down over time? Something else?
- hgsgm 4y agoThe goal is to sell the stock to fad-chasing retail buyers who don't do due diligence.
- oldgradstudent 4y agoSelling to retail is a long con. Once you manage to get VC money, there are endless way to loot it. The stupider the VC, the easier it is. You can pay yourself, you can sell stock on the secondary market, you can do non-arm's-length deals, and so on. Adam Neumann became a billionaire without selling to retail investors.
- BeFlatXIII 4y ago
- paxys 4y agoThe SPAC boom was a huge success...for the people involved in setting them up. Company employees and retail investors were the ones left holding the bag, as intended.
- deepsquirrelnet 4y agoNot too long ago, myself and many other long time employees left our startup after a SPAC announcement. As an individual contributor, I kind of felt insulted that I was expected to not really get what was happening. Upper management put on a celebration and equated it to an IPO. If they had come out and said, “we are out of money and options, so this is what we’re doing”, I might have been more inclined to stay. It sometimes amazes me the kind of obtuse missteps so called “business people” will make. They effectively drained all their experienced engineers in one fell swoop. Expect that the people you want to keep are paying attention, and you’re not going to pull a fast one on them. Seems pretty simple to me.
- unixhero 4y agoIs 3D printing ever successful?
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- throwaway5959 4y agoI’m curious if anyone at OpenDoor still thinks their RSUs are going to be worth anything and how many people have left.
- sixQuarks 4y agoBack during the first dot-com boom in the late 90s, these were called reverse mergers, and usually involved penny stocks. Before the internet came along, most were deals in the gold mining space. One of these reverse mergers acquired one of my sites. The whole company had 4 employees, no revenue and had a market cap of over $200 million which was huge at the time.
- drumhead 4y agoThis time it's different.....it never is.