The public markets aren’t nearly broken enough

Have you heard? Going public causes “brain damage”. That’s according to Chamath Palihapitiya, a venture capitalist who has launched a $600m ‘blank cheque’ vehicle to help private technology companies avoid the torture of an initial public offering. As per Andrew Ross Sorkin of The New York Times:

Mr. Palihapitiya’s answer is to eliminate the I.P.O. process and its year and a half of “distractions trying to craft a bogus narrative,” as he described it, to entice investors. Instead, through his publicly traded vehicle, a unicorn company — shorthand for a $1 billion-plus private technology company — could reverse merge into it, instantly becoming public.

A Silicon Valley investor complaining about having to craft “a bogus narrative” might be the most honest thing to have happened in 2017, but Palihapitiya’s dream of a world where technology entrepreneurs don’t have to pitch their ventures to the wider investing world is not just a self-serving one, it’s an expensive one. He and the other founders own 20 per cent of Social Capital Hedosophia Holdings, named after the venture firms of the respective founders.

The supposed idea here is that the arduous process of going public is the primary deterrent to businesses raising money from the stock market. But, as our colleague Robin Wigglesworth points out, there’s an obvious contradiction: Palihapitiya has just gone public and raised $600m, double what Blue Apron managed in June.

And what’s more, he’s managed to do it with an impressive set of disclosures in the Risk Factors. Notably:

— “We have not adopted a policy that expressly prohibits our directors, officers, security holders or affiliates from having a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. In fact, we may enter into a business combination with a target business that is affiliated with our sponsor, our directors or officers, although we do not intend to do so.”

— “We may seek acquisition opportunities with an early stage company, a financially unstable business or an entity lacking an established record of revenue or earnings.”

— “Our executive officers and directors are not required to commit any specified amount of time to our affairs, and, accordingly, will have conflicts of interest in allocating management time among various business activities, including identifying potential business combinations and monitoring the related due diligence.”

— “All of our executive officers and certain of our directors have fiduciary and contractual duties to either Social Capital or Hedosophia and to certain companies in which either of them has invested. As a result, our officers and certain of our directors will have a duty to offer acquisition opportunities to certain related funds before we can pursue such opportunities.”

— “We may attempt to complete our initial business combination with a private company about which little information is available, which may result in a business combination with a company that is not as profitable as we suspected, if at all.”

If the public markets are broken, it’s clearly not in the sense that it’s too hard to sell into them.

Related link:
Brash investor tries to blow up the IPO as his partners quit — Wired

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