Chamath Palihapitiya Sounds Alarm On Interest Rates And VC Fantasyland

Social Capital Founder Chamath Palihapitiya has made waves with his sharp criticism of both venture capitalists and the Federal Reserve's recent interest rate hikes. In his annual letter to investors, Palihapitiya commented on how the market has been impacted by the rising interest rates, calling last year "akin to getting cold water thrown in our faces." 

But it was his accusation that venture capitalists are living in a "fantasy world" that has caught the attention of many in the industry.

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Palihapitiya gained fame during the pandemic by sponsoring special purpose acquisition companies(SPACs), which were successful initially but faced a major downturn last year because of the Fed’s rate hikes. 

SPACs Slowing

Palihapitiya’s latest SPAC launches failed to find acquisition targets, forcing him to return $1.5 billion to investors. He’s also been embroiled in legal battles over insider stock sales. Despite these setbacks, Palihapitiya remains a prominent voice in the investment world and his insights are closely watched.

During the pandemic, SPACs took the financial world by storm as “free money flooded the economy,” as Palihapitiya put it. These investment vehicles allowed sponsors to raise funds from investors using a publicly traded shell company, which they then used to acquire a private business and bring it public. This resulted in a de-SPAC event where the target company takes over the previously publicly listed shell company. And the cherry on top — the management team received a generous slice of equity as a reward. But the party came to a screeching halt when unprofitable tech companies sent the market into a tailspin, taking SPACs down with them. 

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Many of the companies that Palihapitiya brought to market via SPACs have seen their market capitalizations shrink over the past 16 months. Virgin Galactic Holdings Inc, for example, is down nearly 75% since Jan. 1, 2022. Despite the Nasdaq Composite being up nearly 16% year to date, Palihapitiya believes that the selloff in all corners of the technology space, from biotech to cryptocurrencies, was far more severe than many had anticipated. He also believes that the Fed may need to raise interest rates further to decisively defeat inflation.

Palihapitiya had previously blamed Fed Chair Jerome Powell for investment bubbles that built up in the market during a decade of record-low interest rates, and he urged venture capitalists to "face reality" in his letter.

 With the fall of startup-focused lender Silicon Valley Bank testing many venture capital groups and their portfolio companies, Palihapitiya advised founders that "profits and cash flows matter again" in the new financial regime where there is no longer a reward for "growth at all cost."

VC Slowing, Equity Crowdfunding Growing

While venture capital and other markets might be slowing, equity crowdfunding has been on a tear recently. In March, for example, equity crowdfunding saw 119% growth month over month. Platforms like StartEngine are seeing growth while other markets are pulling back. For example, StartEngine is currently open for investment and already raised over $13 million. 

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