Big Technology Podcast - What The Heck Happened To SPACs — With Charles Duhigg

Episode Date: April 20, 2022

Charles Duhigg is a Pulitzer-prize-winning reporter and the author of Smarter Faster Better and The Power of Habit. He joins Big Technology Podcast to discuss what's happened with SPACs — special purpose acquisition companies — that seemed ready to revolutionize the IPO process just last year but have now fallen out of favor. Duhigg explains SPACs' rise, their decline, and what the financial world will look like once they settle into place. We also spend the first ten minutes discussing Elon Musk's Twitter bid and whether he's flying a bit too close to the sun. Come chat with about this episode with me here on LinkedIn: https://www.linkedin.com/feed/update/urn:li:activity:6922620355924647936/ You can find Duhigg's story here: https://www.newyorker.com/magazine/2021/06/07/the-pied-piper-of-spacs

LinkedIn Presents Hello and welcome to the big technology podcast, a show for cool-headed, nuance conversation, of the tech world and beyond. About a year ago, the hottest financial instrument. in the world was the SPAC. You might have heard about it. Every company was SPAC and nobody was IPOing anymore. Well, right now, it looks like SPACs are a forgotten instrument. And it's very rare that something goes from being such a object of fascination to such

a afterthought in our financial world. And I think by looking at what's happened to SPACs, we can learn a lot about where our economy is today and where it's going. We have the perfect guest to talk about it today. Charles Dug is here. He's a Pulitzer Prize winning. author of Smarter, Faster, Better about the Science of Productivity and the Power of Habit About the Science of Habit Formation.

He's currently a reporter at The New Yorker. Charles Duhigg, welcome to the show. Thanks for having me. It's great to have you here. The last time, well, the first time we met, actually, we were on set at CNBC and talking about Elon Musk's cyber truck. It was a big Elon Musk story right now in the middle of another Elon Musk story. It does seem like, you know, the business world is just like, you know, you have Elon Musk and you have pauses

and there's more Elon Musk. You know, Matt Levine, who writes the money stuff column, has like an index where he says the best thing you can do for your stock is be as adjacent to Elon Musk as possible. Because if Elon will tweet about your stock or your crypto or whatever you've got going, the value will go up. And I think it's true. And it is very weird.

Like I've looked in history trying to figure out, is there another time that someone who is ostensibly the richest person in the world? I'm not sure Elon is actually the richest person in the world. but ostensibly holds that title is such like a trolling jackass. And the truth of the matter is, like, I don't think so. I mean, it's almost like he creates his own weather system. And so as a result, he can do these things that other people can't do. But we've been living for the last decade in like a kind of weird meteorological time.

And so I am wondering if he's eventually going to come down. to Earth because the things he does are on the face of them ridiculous. But it's entertaining, right? What does coming back to Earth mean for someone like Elon? I mean, I don't know. I don't know, right? Like, it wasn't, I wrote this piece about Elon for Wired. This was before the Model S had really, they had figured out how to make the factory work. And there was a really legitimate question at that moment. I mean, this was like only five years ago, that whether the company was going to bankrupt, right? It was on the brink of bankruptcy. I mean, basically, Elon Musk himself said they were on the brink of bankruptcy. If they didn't fix their manufacturing problems,

and it wasn't clear that a fix was available, that things weren't going to work out. And so the thing about Musk is I think he flies pretty high. And the thing about flying high is it's a great trip, but then when you fall, you tend to plummet pretty quickly. And so it does feel like much like SPACs were, you know, a year or a year and a half ago, it feels like we're in this moment where things are not as certain as some would lead us to believe. And I would not be surprised if a year or two years from now we're having a conversation and everyone's like, wow, you know, like that Elon Musk wipeout was was unexpected and stranger than we thought it was going to be. Because the guy is doing stuff that, like, he's taking on the SEC, right? He's basically thumbing his nose at regulators. He's making these bids for companies that it's totally unclear whether he has the financing lined up.

These are... Oh, it's Twitter. He doesn't have the financing line up. Right, right. I mean, he says things on Twitter that are insane. And so, like, it's not the kind of behavior that you look at and you're like, wow, this is definitely, definitely according to a plan that makes a lot of sense. Yeah, it doesn't seem to make a time. of sense. But the other argument would be, look at it, and we won't do the whole podcast on

Elon, but why not start talking about it? By the way, we're recording on a Monday. The podcast is coming out Wednesday. Who the hell knows? He could have already had this. Everything could have changed by way. Exactly. But like, okay, give the guy credit, though. Like, he did end up taking that car and he's going to produce more than a million vehicles this year. And after not knowing if he could do it. And then, like, his rockets are going to space and landing. I mean, it's amazing. No, I totally give him the credit. I mean, credit where credit is due. like he has done this thing that other people said wasn't possible. And regardless of whether he like is seen as an emblem of success or an emblem of like hubris,

he has changed the automotive industry in a fundamental way, right? The Ford F150 electric version is about to be released relatively soon. And I think you can draw a line from Elon Musk to Ford making its most popular truck electric. So this is not to discount. He made it cool. Yeah, he made it cool. He made it seem feasible. He like, you know, he helped push along battery technology, which is the number one thing that we need in order to make electric vehicles and of all kinds more feasible.

So I'm not saying that what he's doing isn't important. And I'm not saying he doesn't have accomplishments. But I am saying that his behavior is so unusual for someone with the. the clout, the position, and the power that he has right now, that it, it starts bringing all these bells in my mind that, like, you know, this kind of hubris is not often unpunished. And there are a lot of people, despite his accomplishments, who are lined up, who are just salivating for him to have a misstep so that they can come and, and, you know, dance on his corpse a little bit.

Right. So it's going to be fun to watch, right? Like, this is the best part of it. That's why he keeps on coming up in the news. Exactly. I mean, being a business reporter has never been this entertaining. It's wild.

Yeah. Yeah. Yeah. It's crazy. So, but what if a fall for him, like, what does it look like? Like, he gets a fine by the SEC. It's a pretty toothless organization. I mean, he's, for for for, SEC,

he's been saying that SEC stands for blank, Elon's blank. Like, literally, that's what he's saying. Yeah. I haven't done anything to him. I know. I know. It's, um, so yes. But the fact that you are saying it is a toothless organization, there's a lot of

regulators within the SEC who feel very upset that people now feel like we can say it's a toothless organization. So they're going to look for opportunities to prove that they are not a toothless organization. Now, there's a fundamental question here, which is, you know, back when he first basically kind of got in trouble with the SEC because he said he was going to take Tesla private and didn't have any of those, and said he had the funding lined up and he didn't, there was this big debate within the agency and outside of the agency of people saying, look, if your goal as a regulator is to protect shareholders, the number one thing you can't do is remove Elon Musk because that's going to hurt shareholders, right? It's clear that he's running this company that

anyone else who ran this company would not do as good a job. So the SEC is in a difficult position, but here's the thing. You might have a fight with the weakest bully on the playground and the dumbest bully on the playground. But if that bully is the big bully, if they're stronger than you. It doesn't matter how stupid they are. They're still going to put their fist in your face. Absolutely. Picking a fight with the U.S. government is never, it traditionally has not worked out really well, even for people who are smarter and better than Elon Musk, right? And so, so I don't know how the SEC or Gary Ginsler or others, I don't know how they come back and sort of prove that they should not be called the

suck Elon's blank, but I'm absolutely certain that there are regulators who are saying the fact that this guy is taunting us and making these claims, we have a moral obligation to act, to prove to other folks within the marketplace that we are a legitimate regulator, even if that means perhaps damaging the shareholders of Tesla or SpaceX or other companies. Last question about this. Elon is trying to bring Twitter private. said in the beginning that, you know, Matt Levine mentioned that the best thing you can do for your stock is to have Elon part of it. But if Elon brings Twitter private, then you sort of lose that benefit because you don't have the meme stockability. It's not on the public markets. You

can't have the retail investor join in and be part of the swarm. Given that, is there a compelling pitch that Elon can make? Because he only has, what, $3 billion of cash on hand. Is there a compelling pitch that Elon can make to, let's say, private equity or other rich people to say, hey, come be part of me. You know, be part of this with me, you will make your money back. I'm struggling to see it. Not at all. Like, what, he bid, what, 43 billion or something like that? Like, is there anyone on this world who has like an extra billion dollars in the pocket that it says, like, you know, I definitely don't want to buy into Twitter right now, but once Elon owns it, it's going to be a whole new ball game. No, of course not. Like that is, the fact that he said, what was it? It was like,

it was like 44 billion, 200 million, right? He wanted to get 420 in there. The price was, yeah, $54.20. That's it. $54.20. It is not an accident that it ends with $420, which Elon thinks is funny because it's like a code for pot. So, no, I do not see anyone out there who is like, man, I just cannot wait to hand over billions of dollars because I know that Elon is going to take this company that like is the most troubled business market. on Earth maybe? Like Twitter, if you ever want to have fun, just like trying to figure out like why Twitter isn't making money, despite the fact that everyone knows about it, there's no magic pixie dust that Elon can wave on this. So no, I don't, I don't think anyone's going to join him. Now that doesn't stop him from using his own cash, right? He's definitely got enough money if he used to sell some Tesla stock to go buy the thing. But even I don't think he's not going to probably wouldn't have done it at this point. No, yeah. So let's talk about specs because That's what, you know, you wrote this great story about SPACS about a year ago in the New Yorker.

Another colorful character actually is at the central there, Chimoth Polyopatia. So we'll get into, well, why don't we start with that? How does Chimoth and Elon compare? So, um, and yeah, and who is Chimoth? So Chimoth is this really interesting guy. And I think, I think he's interesting because he's an archetypes for a certain type of person who's successful right now in Silicon Valley. And throughout history, right?

So Chimoth is this guy. His family is from Sri Lanka. They escaped and became refugees in Canada. He grew up in Canada. He went to college to study electrical engineering in Canada. And then he followed his girlfriend to California. And he got a job at Facebook, which at that point, it wasn't clear that like Facebook was going to be Facebook, right? It was just one of many companies that was now in California. So it was a brand new company, relatively young. And he's given this kind of unsexy assignment, which is to grow audience. Because At that point, Facebook is basically growing by leaps and bounds. It doesn't seem hard to grow audience. There was no such thing as like growth scaling at that point, right? There wasn't even something people thought about. But Jamoth comes in and he's kind of larger than life. He's this charismatic figure. He's able to get a bunch of engineers to work on this project with him.

And he kind of invents like the hard, hard, high pressure signing up people to join a viral service, right? before anyone knew that was possible. One of the things he did is he created Facebook pages for people who had not yet signed up for Facebook, like millions and millions of these, so that when you would Google yourself, your Facebook page would come up, but you hadn't actually claimed it yet. So then people would claim it, and of course, like, once you start doing that, you start getting more and more membership. And he really did supercharge the number of people who were on Facebook and made Facebook,

you know, sort of the dominant social media company of that age. And so he makes some good money on that, makes enough money that he's got, you know, tens of millions of dollars, enough that he can buy a small percentage of the Golden State Warriors. He leaves Facebook. He starts this private equity and investment group called Social Capital and basically hire some really smart people and then makes them so crazy that all of them leave because they basically hate working with Chimov. He's just, he's a narcissist, right? He's an egomaniac. And he loves being at the center of things. And he does all these things that, again, in retrospect, are kind of clever, but you understand

why people don't want to hang out with him, which is like, you know, he himself is a person of color, and he creates an index to say which venture capital organizations are the most inclusive. And to figure out which are most inclusive, they basically just go on LinkedIn and look at pictures of people and, like, look for the brown people to say how many, each, how many minorities are working at each firm. And then he publishes his list of the most inclusive. inclusive venture capital companies in Silicon Valley. And of course, his firm, social capital,

is at the top of the list, right? He's number one. And everyone at this time is like, this is ridiculous. Like, you're basically perpetuating a fraud. In fact, the Wall Street Journal writes an article about Chimov saying he's the venture capitalist, other venture capitalists love to hate. But again, it works. From that point on, whenever anyone, any journalist writes about diversity in venture capital or diversity in Silicon Valley, they end up mentioning Chimoth, right? Even articles about like, you know, how women are treated within the venture capital world, which is, of course, a hot topic. Chimoth ends up getting quoted in that. He has a larger than makes sense persona within this industry. But eventually he, he like pisses off

all of his partners who think that Chimoth is just doing things to help Chimoth, not to help the companies that they're investing in. A lot of them leave in sort of disgruntled ways. He announces that he's going to take social capital, his investment firm, and kind of like just make it a family office. But in truth, it's because basically he had been abandoned by all the people who were helping him run the place. And so he starts looking at his assets. He recognizes he needs another, the press is bad about Chabot at this point, right? Like all the blogs are covering the blow up at social capital. He looks at the assets he's got. And they had done this thing about a year earlier where they had launched a SPAC, before anyone.

knew what a SPAC was. They had gone out and they had said, we're going to raise a big pool of capital for a publicly traded company. We're going to take an empty shell company through an IPO and raise a bunch of capital. And then we're going to go buy a real company, a privately traded company, with this shell. And so that privately traded company will sort of through the back door become publicly traded. They'll be able to be a public company without having to go through the normal rigamarole of an IPO. And that's a spec. And that's a spec. And by the way, we're going to give ourselves 20% of the company as like a reward for doing this. And he does that with Virgin Galactic.

And it ends up being a huge, huge short-term success, right? Virgin Galactic, much like Chimoth, it's run by Richard Branson. It's this like perpetually troubled company that has literally never made a deadline that it's set for itself. It's never, still, I think this is true, has never put a paying person into space. It's a space tourism company. They still have never put a paying customer into space 15 years after the company was founded. There's, I'll let you continue, but there's this one great line in the story that I have to quote that you have.

Someone said, Jamath working with Richard Branson. He said, it's like watching someone try to have sex with their reflection. Yes, that's exactly right. He was actually even a little bit more crass for the rest of the quote. I only use the beginning of it. They got into. What's the, actually. The specific of it.

But don't want to get. kicked off app. Right. But much like Chimoth, the reason why this works is because space, a Virgin Galactic, is kind of this amazing story. And so lots of people buy into it. Lots of people want to be part of it. And this kind of gets to what Chimoth is all about. Chimoth succeeds nowadays or succeeded at this period a year ago because he's an amazing storyteller. Like he tells stories about capitalism. He tells stories about like taking risks and investing in things that are certainly going to change the world. He's an amazing. storyteller and people love stories. And there are periods of capitalism where being a storyteller

is the most important skill someone can have because the public is so hungry for stories. They eat it all up. This happened with credit cards. This happened with mutual funds. This happened with junk bonds. This happened with mortgages. If you go back to each of these financial instruments that evolved in the last century, what you see is you see a wonderful storyteller or a group of storytellers who convinces the rest of the world to see things in a new way. Now, of course, the outcome is usually things blow up, right? Mutual funds blew up in the Great Depression. Credit cards were like one of the worst, worst investments when they first emerged in the 1970s. Mortgage back to bond. Mortgage back securities obviously led to the 2008.

You know, the junk bonds blew up and Mike Milken ended up going to jail. But what happens is that there are certain times these periods in history, where you need storytellers to make people believe in a new financial instrument, and then the infrastructure for that instrument gets built, and then eventually everything blows up. But the infrastructure remains, and so the instrument becomes something boring and normal and useful going forward once the storytellers have either gone to jail or fallen into disrepute.

And this is maybe the first step of what's happened with Chimoth, because with this Virgin Galactic, you tell me if this is right or wrong, But with Virgin Galactic, he actually did popularize, you know, the bringing forward of this spec movement. Absolutely. Let's see. You say, in 2020, 248 SPACs went public, raising more than $83 billion. So they, so, and yeah, so it seems like with Chamatha is this great storyteller. Look, he's great on TV.

He's great in podcasts. You know, the all-in podcast that he's part of is consistently in the towards the top of the technology charts. And, you know, so by doing this, he did help tell this story that brought so many others in. So can you talk a little bit about the wave of enthusiasm that emerges around Chamath for the SPAC movement and sort of what the public markets were like when that happened? So there's this pervasive, I think it's a myth in Silicon Valley, but it's pretty widely believed that IPOs kind of suck as a way of taking your company public. And the theory about why they suck is because they're super time-consuming. You have to spend a lot of time with lawyers and regulators and writing these documents. They're super expensive.

You end up giving a lot of money to the bankers who take you public, but also you usually price your stock too low. And so the people who buy your stock on the first day make a lot of money, but you're missing out on millions that you should have raised otherwise. That when you're in an IPO, traditionally you're in the silent period, So you can't really talk about your company, and for a lot of companies that don't have profits yet, talking about their company is how they make investors believe that it's a good bet. So basically, there's a whole group of people in Silicon Valley who hate IPOs.

They think it's a scam. Right. There's an argument also that they shut off to the common person. Yes, the common person can't buy into the first day of the IPO. And that companies have delayed going public. They've turned to private equity. The private market has kind of replaced the public markets as a, as a, a place to get all of your financing and that the common investor cannot play in the private

market, right? They're actually excluded by law. You have to have a certain net worth in order to become a private equity investor, a qualified investor isn't. So basically there is this theory. Now, let me just say, I've talked to a ton of academics and researchers who have studied this. All of them basically say those are myths. Like if you put a direct listing next to a SPAC, next to an IPO, they all basically cost the same amount, and they all basically take the same amount of time and work. It's just that the perceptions are very, very different. But setting that aside, whether it's true or it's a myth, Silicon Valley believes IPOs are broken. So they want a new way to go public because taking your company public is essential, right? It's a liquidity

event for your investors. They get to cash out. It's a way to raise money that's less expensive. There's usually kind of a liquidity premium so that you can raise more money more easily. And most of all, like, you know, CEOs have to go public. Like, otherwise, I can't go back to their Harvard Business School reunion and without people respecting them. Is that what it is? I went to Harvard Business School. So let me just say, yes, that's exactly how it is.

I see. So everyone wants to, there is this pressure to go public, but the IPO is seen as being broken. And so SPACs come along as basically a way of people saying, this is an easier way to do an IPO. Again, researchers disagree. But the thing that SPAC's sponsors, the people who are creating SPACs say is they say, because it's not an IPO, you can still talk about your company. You can still make forward-looking projections. You can basically act like the same CEO you've been for the last five years without having to worry about the SEC jumping on your back and making your life terrible. Again, the SEC actually disagrees with this. SEC has

released guidance saying that's not right, but for a long time, people believed it. And that created this opportunity for guys like Chimoth to come in, because what Chimoth would do is he would say, okay, I'm going to take a company like Virgin Galactic Public, and it's going to be through a SPAC, not through an IPO. And so as a result, it's going to be cheaper and more nimble and more efficient, which everyone in Silicon Valley and everyone who's on the stock market loves. But second of all, he says, and you know what, when I'm going public, all those other companies that are doing IPOs, they can't tell you about how Rosie the future is. They can't make forward-looking projections. But I'm doing a SPAC so I can. So I'm going to tell you these

crazy stories about the fact that Virgin Galactic is going to become the most profitable company ever, despite 15 years of amazing losses. They're going to become the most profitable company ever in like nine months. And basically, whether he's allowed to do that or not, that's what he does. And it's SPACs are so new that nobody's like suing him yet. No regulators are telling him that he's breaking the law or regulations. And it works, right? Because he spins this amazing tale. And there's all these retail investors, all these normal investors, all these people who live in Des Moines, Iowa, who say, man, Chamath was just on CNBC.

And he said that this company is going to send tourists into space. This is the future. I want to buy a piece of that. And so they buy into it. And the stock goes through the roof. Right? Yeah. And sorry, go ahead.

I'll just say, so Virgin Galactic. goes up to $55.91 and $91 on June 25th. From $10 a share, right? Yes. Okay. And this is a good cliffhanger because it's now trading around eight. And I'm going to pause here. We're going to take a break.

And then when we come back, we're going to talk about what the F happened for something to go so high up and then all the way down. So standby. We'll be back here right after this on the big technology podcast. Hey everyone. Let me tell you about The Hustle Daily Show, a podcast filled with business, tech news, and original stories to keep you in the loop on what's trending. More than 2 million professionals read The Hustle's daily email for its irreverent and informative takes on business and tech news. Now, they have a daily podcast called The Hustle Daily Show, where their team of writers break down the biggest business headlines in 15 minutes or less

and explain why you should care about them. So, search for The Hustle Daily Show and your favorite podcast app, like the one you're using right now. And we're back here on Big Technology Podcast with Charles Duick. He's a Pulitzer Prize winning reporter, author of Smarter, Faster, Better about the science and productivity and the power of habit about the science of habit formation. He's currently a reporter at The New Yorker, where he wrote a great story about Chimoth and Spax. It's called Pied Piper of Spax. I really encourage you to go check it out.

I'll drop it in the show notes. Before the break, we were talking about how Virgin Galactic had gone up to $55. by June 2021. Now it's trading at 8. It's been as low as in the $7 range. It doesn't look good. And it's amazing that this financial vehicle that Chimoth helped popularize, again, like it wasn't just Virgin Galactic.

It seemed like every company was going. SoFi is another example of the company that, you know, went public via spec and then shot up and is now. By Chimov, right? Chimoth was behind. Chimoth helped it. Yes, exactly. Chimoth has named them IPO A and IPO B and IPOC.

Yes. Yeah. So, Charles, what, what happened? I mean, it's so shocking to me that something that was so hot became so, I don't know, uninteresting to people and so cold so quickly. Well, so two things happen. Number one, so Chimoth goes out and he tells us, let's take a Virgin Galactic as an example. Chimoth goes out and he tells this amazing story, right?

Virgin Galactic is going to change the world. It's going to start sending people in the space as tourists, et cetera. And the stock goes through the roof. The stock, like, explodes, 5X on the stock. and other people are watching this and they're like, you know what, I could start a SPAC too because it turns out if you're in like a financial professional, it costs less than a million bucks to set up a SPAC.

Sometimes it costs only like $100,000 to set up a SPAC. There was a great line in your story about how people knew more folks with SPACs than had contracted COVID during this time. Oh, absolutely. All over Wall Street. You talk to anyone like who's an investor and you're like, how many SPACs do you know? And they're like, oh, I got like seven or eight folks doing SPACs.

It's just like, how many people have gotten COVID? And they're like, well, I think my aunt's friend got COVID, right? Like, you want a tale of two countries? Like, it's right there. But so everyone starts creating these SPACs. And of course, because like retail investors are oftentimes not as sophisticated as they should be, CNBC is talking about how amazing SPACs are, how it's the new way of raising wealth in America, how people are getting rich on it.

So many of the SPACs do great. They raise billions of billions of dollars. Now, here's the problem. Again, back to Virgin Galactic. So Chimoth tells a story about Virgin Galactic becoming profitable within nine months and, you know, making billions of dollars within just a couple of years. And of course, once it goes public, Virgin Galactic misses every single benchmark, every single deadline that Chimoth had said that the company was going to hit. Because Virgin Galactic is a terrible company.

You cannot take, like, you can't invent space tourism. as a real industry in nine months after it's been failing for 15 years. Just think about how ridiculous it is to say I'm creating space tourism as an industry, right? And then on top of it to say like, and in fact, I'm going to do it overnight. It's just going to happen and we're going to start earning billions of dollars. It doesn't make any sense. Not only that, but Virgin Galactic has a terrible, terrible track record. And so a bunch of people who had bought into this SPAC, smart money sees it go way up,

the price go way up and they sell immediately, including Chimoth. Chimoth liquidates all of his Virgin Galactic holdings. The full holding? The full holding. So first he liquidates his personal holding, then eventually he ends up liquidating his corporate holding. I don't know how many shares he owns at this point, but it's not a lot. He was the chairman of Virgin Galactic, and he resigned as chairman and when the price started going down. So Chimoth and all the smart money, they jump out of Virgin Galactic and all these SPACs as soon as they can. But there's all these retail investors, right? The people who are like, man, I heard Chamoth on CNBC say that space tourism was going

to be awesome. And they're watching this. And eventually some of them get wise and say like, you know what? This is ridiculous. Like, I don't know anyone who's going to go into space for their next summer vacation. And so the stock price comes back to where it ought to be, which is not very high because they don't actually have a business model that makes any. sense yet. Right. And it seems like all the diligence that would typically be done through

an IPO. Like you, if you, if you had a company that was strong enough in the fundamentals to go through an IPO, you were probably going through an IPO at this time. But all the diligence ends up, you know, kind of coming out in the wash, a couple of like, well, maybe a couple months after these things go public. And you look at SOFi. SoFi is at $7.13. Now it's down 54% on the year. I mean, it's miserable. And here, here's some other stats that I found when I was doing some research. So SPAC activity in the first quarter of 2022 was its lowest since the early early 2020 with only 57 listings through April 14th. And so you remember the stat that I read earlier in 2020, 248 SPACs went public. So we're way, way down. And then companies that have

gone public via SPAC have underperformed the S&P 500 by 80% since 2018. That's exactly right. And there's And, like, there's two things worth of remembering about this. The first is one of the reasons they've underperformed by 80% is because the guy who creates a SPAC, the guy likes Chamoth, he gives himself 20% of the company for free, right? Right. So, like, anytime you, like, buy a car and you only get 80% of that car and 20% of it goes to, like, your idiot, you know, brother-in-law, it's probably not a great deal for you to buy that car because you're taking a 20% haircut on the first day. But the second important thing is to remember that when SPACs go public, they make a promise to all these people that they've invested that they're going to go find a private company to acquire. And there's still hundreds of SPACs that have not found a private company to acquire yet. So there's all these SPACs out there that have these giant pools of money.

And they're going out and they're talking to private companies. I mean, I have friends who hear this all the time. They're like, look, we'll take, you want to go public? Like, let us acquire you through the SPAC. We'll let you go public. And the private companies are doing one and two things. either they're saying, number one, like, this doesn't make any sense. We're not ready to be public. Or number two, they're saying, actually, I got five other SPACs competing with me.

So you need to come down on your pricing. You need to give me a sweetheart deal. And as we all know, if you give the founder of a company a sweetheart deal and the sponsors of the SPACs are getting a sweetheart deal, there's not a lot of sweetheart left for the common investor. So these things are all, that's why they're down 80%. Yeah. And a company that I used to work for, BuzzFeed actually went public via a SPAC. went out at $10. It's now at $4.68. Right. It's at the media industry also.

I've asked Jonah Paredi to come on the show, so maybe we can get him on and talk about it. I would be very curious to see what Jonah has to say about that. It's a, it's, how to, how, I assume you had some, some equity in BuzzFeed. I did. Yeah. I had, I had some options. And when I left the company in 2020, I called the finance department. And I was like, all right, let's talk about these options. Because I had actually worked at an ad tech company in sales. And I walked away from some options. And I lost out on a lot of money. The company, like, had 100 or 200 employees and ended up selling for like $310 million, which isn't a great deal, but like there would have been money there. So I was like,

I'll never make that mistake again. And then I went to BuzzFeed and I was like to spoke to the finance department. I was like, I like to buy my options. Let's talk it through. And they actually told me like, listen, if you bought now, you're underwater. And I just kind of let the deadline go and never bought the options. And it ended up being a good thing because I would have had to pay all the tax on like the valuation. And then I would have lost money on, you know, the SPAC itself. There were all these issues in terms of, like, you know, the employees actually being able to sell that the software wasn't working or whatever it was. There's a, and actually BuzzFee is a great example because Jonah, as I understand it,

chose that partner, that SPAC to work with because they let Jonah maintain control, not because it was the best financial deal, not because it was the one that was most guaranteed to succeed for investors and employees, but because it was most guaranteed to let Jonah stay in charge. Again, we would have to ask him to make sure that's true. I got to ask him. But that's what I heard. But you're right. If there's so many competing, then you'll be able, if you're the founder, to choose these sweetheart deals. And that's the problem is that, like, you know, capitalism is supposed to work because it basically sets greed against greed.

It's supposed to value the financial outcome as this goal. And as soon as a market gets out of whack, because people are good storytellers, because there's too much supply or too much demand, then all of a sudden these perverse incentives can come in to play. And that's where the little guy ends up getting screwed usually. Yeah. Do you think this was a function of just like low interest? interest rates. Some people were just dying. I mean, for me, to put my money into a SPAC where someone's like, I might acquire a company you like, trust me, it would take a huge leap of faith to do that. So do you think this was just like a product of zero interest rate policy where people like found it difficult to make their money elsewhere and they decided, okay, let's do this. I think part of it was people chasing yield, right? Because like interest rates are low. The stock market, the stock market, it's it's hard to beat 10% return in the stock market. But the other part of it is just, frankly, the people with power understanding that this was a suckers game that they could win and using their platforms, using their popularity, using Twitter to basically

hoodwink the little guy into funding their profits, right? Like, Chimoth would get on Twitter and he would say these crazy things about Virgin Galactic. And so if you're someone who reads Wall Street bets and looks to Twitter for advice on stocks and you see this guy who you admire cheerleading some company, why not go by that company? Particularly when he says it's literally a rocket that's going to go to the moon. You go and you buy the thing. And what you don't know is Chimov's going to pull his shares out as soon as he can. As soon as the stock price gets high. How is this different from most other financial movements? You wrote, and I think you've touched on this in the past. You saw this guy,

Robert Schiller talking about narrative economics, and this is from your story. Narrative economics argues that many of our dearest economic theories are simply stories that we've made true through a correct collective belief. I can think a lot of those, NFTs, Bitcoins, SPACs, but like also the, you know, totally accepted parts of our economy now. So is it that just like this, this took the path of many traditional financial instruments and was just found wanting once it was exposed in the public and now has fallen apart? Well, first of all, it hasn't fallen apart.

I think that SPACs will be a tool going forward. Okay, I wanted to ask you about it. And I think this is pretty consistent that if you look at the things that we use all the time now, credit cards, for instance. So credit cards were much like SPACs when they first appeared. Like there was this credit card craze in the 1970s where they would send credit cards unsolicited to prisoners, to infants. In one case, they send it to a dog.

And people, of course, would take these credit cards and go run up huge bills and then walk away from them, right? Credit card companies made a lot of money on these, and the people who had bought into those stocks or the banks who were behind them lost a lot of money. And then what happened was, and basically the reason why is because the credit card sellers were really very good storytellers. They could tell you the story about why a credit card made sense, why giving it to someone who hadn't asked for it was like a really rational idea. And then it all falls apart. And then what happens is that credit cards become normal and boring. People don't analyze credit cards based on these

fanciful stories anymore, they start analyzing them based on nuts and bolts, numbers, you know, sort of this logic that we usually bring to financial analysis. So what Robert Schiller and others would say is there are periods when narrative economics are more persuasive than others, right? There are vast periods of history where showing up and telling some extravagant story gets you labeled a snake oil salesman and you're kicked out of the marketplace. and everyone turns to like the boring guys and bow ties with ink-stained fingers who are working on actual actuarial tables and we say those are the storytellers we want to listen to we're entering a period like that right now right when like inflation gets high when shit gets real all of a sudden nobody wants to listen to the storytellers they want to start listening to the boring serious guy in the back of the room but then there are other periods where it just feels like it feels like anything is possible.

Like someone you've never heard of before is suddenly an overnight billionaire. And you're like, look, if that guy's getting a billion dollars and he doesn't seem that I'm smarter than me, why can't I get a billion dollars? And so they start chasing not only yield because there's fewer other options to invest in. They also start chasing the dream

because capitalism is built on the dream. And it works for a little while. Everyone invests. We build this big economic infrastructure for something like a SPAC or a mutual fund or credit cards or junk bonds. And then it all blows up. But when it blows up, what's left behind is the infrastructure. The infrastructure that was funded essentially by retail investors.

And someone boring comes along and they say, you know what? I can use this infrastructure to just bake my bread to like do normal day-to-day work. And suddenly you have something like credit cards that everyone uses or you have, I think, five or six years from now, SPAC. which will be a legitimate option for some types of companies rather than an IPO. Yeah, I guess like, I know you have to leave soon. So let me just put it this way. Like we have, I've heard these stories also about crypto that like eventually like the,

you know, the froth will fall away and we'll have legitimate stuff. But like why is it necessary that that happens? Like, you know, obviously like the established, it's like the crypto.com commercial in the Super Bowl and everybody says, oh, this will never work and then it does. And of course, that's what happens with everything established. But sometimes the things that people say will never work actually don't work. So why are you convinced that SPACs will actually stick around? Because they do seem the way that you've been speaking about them, like an inferior product to an IPO.

They're going to stick around the same reason crypto is going to, the same reason crypto is going to stick around. Because it's the right solution for some situations, right? Like there are some companies that cannot IPO for various reasons. They can't IPO because they don't have enough of a track record, but they deserve to be a public company. They're going to be more successful as a public company. They're in some out-of-favor industry like, you know, marijuana or gambling, something that, like, basically, institutional investors don't want to get behind. And so you can't sell the book before the IPO. But they have great revenues.

They deserve to be a publicly traded company. They're going to succeed better as a public-traded company. A SPAC is a route to public markets that some companies will need to rely on because they don't fit the mold of what an IPO should be. And we should have different routes to public markets, right? We should have different kinds of currency out there. If the entire world could only use the dollar, it'd be disastrous. So we've got hundreds of different currencies, and now we have digital currencies. That doesn't mean that I'm going to go buy something at Whole Foods using crypto.

That's ridiculous. But it does mean that if I want to move money across a border, maybe crypto is the way to do it. Or if I want to park some wealth in something that is speculative, maybe crypto is the right answer. Or maybe the blockchain becomes this way of disintermediating the financial middlemen for a lot of transactions. Things emerge because there's a real need for them. What happens, though, is that sometimes people become overenthusiastic. And their overenthusiasm is encouraged by storytellers who stand to profit off that overenthusiasm. And then it blows up.

But that doesn't mean that the underlying need wasn't there. it just means that it might have been applied to situations where it wasn't appropriate. Right. And now the SEC is putting in some laws into place that are going to restrict some of the freewheeling parts of the SPACs, which actually could actually help move it towards something more standardized. Absolutely. And you're going to see going forward, there's a certain kind of company that will use a SPAC instead of an IPO. And that'll be fine.

Okay, let's do one last minute. I want to get your predictions on what happens to Chimoth first. I mean, look, Chimov's got plenty. of money, he like, he recedes from like view, right? I mean, he's someone who's addicted to attention. So I'm sure he'll do things much like Elon, but less successfully than Elon, to try and get attention. And, and maybe he goes over a line in the sand to something where he ends up getting like, you know, slapped by regulators, maybe even arrested. That's what happened to Mike Milken is it basically Mike Milken like kind of thought that he was a god and so he started acting

like one and was brought down the size. I don't think I don't think that's Chimov. I think Chimoth I think Jemoth kind of knows that he's he's a storyteller and he doesn't mistake himself for for what he isn't. But I think he's someone who like a lot of figures like he had this moment in the sun and he sort of recedes from view and he tries to stay relevant. He tries to say outrageous things on Twitter to get attention to go on CNBC, but he has damaged his own brand by being a sponsor of a bunch of SPACs that did not work. And people saying, like, look, if you put money in this thing, like, you'd better know who the sucker at the table is because otherwise it's you. Somebody is going to get screwed in this deal. And so he burnt his reputation kind of building these things,

but he got paid, you know, hundreds of millions, maybe even a billion dollars to do it. And you can you can set a lot of registration. Yeah, you can set a lot of reputation on fire for that much cash. Yeah. Lastly, your prediction with Elon and Twitter. I have no idea. I think it just fades. I don't know. Who knows? It's Elon, right? Like, I can tell you what would happen in a rational situation, but I can't tell you what's going to happen here because everything that's happening is irrational. But I do think that there is something important to recognize about Elon Musk, which is he really, really likes attention. When I was working on the Chamath story, a lot of people compared Chamath to Trump. When I was working on the Elon Musk story, a lot of

people compared Elon to Trump. And I think the reason why it seemed familiar, like people made the comparisons, was because these are all people who seem irrationally addicted to other people's attention. And so if you recognize that, then the question becomes the only way to predict their behavior is to predict what will get them attention. And if talking about Twitter and buying Twitter gets Elon attention, he's going to continue talking about it. And if it starts seeing like it's not going to get him attention, particularly the kind of attention he wants, he's just going to stop and he'll find something new.

So I guess he'll keep talking about. I guess. I guess we'll find out. So one thing I found as a Twitter reporter is people on Twitter love stories about Twitter. That is true. That is true. Also, it's worth pointing out, people on Twitter is a very, very small percentage of the

nation in the world, it just happens to be the people that we bump into every single day. So we think it's large, but it's really not that big. But the cultural influence is big. You see it on TV. You see it in newspapers. You see it everywhere. I would actually argue, like, if you live in, like, Des Moines, I don't think the cultural impact of Twitter is that big.

I think it's just that the people we bump into are the people who are putting things on TV and writing things in newspapers. And in Des Moines, they're watching TV and reading news. But they're watching, they're watching different TV and reading different newspapers. If you're watching Fox News in Des Moines, you're going to see Tucker Carlson's responding to tweets of the day. Yeah. Yeah, no, I agree. I sound that they're ignorant of Twitter.

It's just that they're not using it as like this like information source the way that the rest of us all. And this is why Facebook is the company with some real staying. Right, right, exactly. Charles Dug, thank you so much for coming on. Great chatting with you. Thanks for having me. My pleasure. The books are smarter, faster, better, power of habit, and the story, which you can find in the show notes, the Pied Piper of Spacks. It'll be an interesting story. Not going to go away anytime soon. Great to have you on, Charles. Thank you to Nate Gwattney for doing the editing. Thank you, LinkedIn, for having me as part of the podcast network. And thanks to all of you, the listeners, really appreciate it coming back week after week. We'll be back next Wednesday for another show with a tech insider or outside agitator. Until then, take it. Thank you.