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Is Social Capital trying to end-run banks by creating IPO 2.0?

A filing from the investment firm could allow startups to go public without Goldman Sachs or Morgan Stanley.

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Coming soon to tech: Instant IPO!
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The investment firm Social Capital filed an S-1 form today to create what appears to be a financial vehicle that could allow startups to go public without the help of banks.

The Social Capital Hedosophia Holdings Corp. — which will raise $500 million by selling 50 million shares to undetermined investors — calls itself a “blank check company.” Working with Credit Suisse, it has been “formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses.”

The new company said it has not identified any “business combination target,” but that it would be in the tech industry.

Most of all, Social Capital Hedosophia also has an intriguing group of managers, including Social Capital founder Chamath Palihapitiya as CEO and chairman, investor Ian Osborne as president, and longtime tech execs Tony Bates as vice chairman and Phil Deutch as COO.

In addition, former Twitter COO (and really nice guy) Adam Bain has reappeared from the pleasant ether in which he thrives to be a board member.

All, apparently, to help companies reticent to go public do so.

According to the prospectus:

Despite playing major roles in the global economy and achieving significant financial scale, there has been a range of factors over the last several years that have led many technology companies, to remain private. U.S. technology IPOs have decreased from an average of approximately 40 IPOs per year from 2010 to 2015 to approximately 30 IPOs per year during 2015 and 2016.

Vast capital availability in the private markets, first from traditional venture capital, and now from multiple types of investors, including hedge funds, mutual funds, sovereign wealth funds and corporates, has enabled companies to stay private longer. Historically the decision to access public markets through an IPO has tended to be driven by a desire for growth capital and a venue for efficient pre-IPO shareholder liquidity; however, it is now a strategic business decision as the evolution in private markets now allows for sufficient access to growth capital. Furthermore, the private market has matured to establish well-developed secondary markets that are capable of providing liquidity to founders, employees and investors.

The traditional technology company IPO process, which has been largely unchanged for decades, has also acted as a driving force to deter private company management teams and their pre-IPO stakeholders from pursuing IPOs. We believe management distraction, a sub-optimal price discovery mechanism and the resultant longer-term aftermarket impact have discouraged private technology companies from pursuing IPOs. This tends to be true even for businesses that are otherwise operationally ready and of appropriate size to access the public markets.

Translation: Going public is a pain in the neck. And other tech bros are the answer to those annoying banker bros!

Presumably, such financial vehicles would attract investors whose companies they target — the document refers to “unicorn” startups, which I would assume might include those such as Dropbox and Spotify — who are long-term players rather than the in-and-out ones that companies abhor in a typical IPO. And, this group of super-funders could then create as many of these companies has they wanted.


An acquisition by a blank check company with a management team that is well-known to, and respected by, technology company founders, their current third-party investors and their management teams, we believe, can provide a more transparent and efficient mechanism to bring a private technology company to the public markets.

We intend to focus our target sourcing efforts on assessing companies that we believe would benefit significantly from being publicly-traded. Further, we believe that we are providing an interesting alternative investment opportunity that capitalizes on key trends impacting the capital markets for technology companies.

No comment from Social Capital, as is wont in these filing situations, but it’s certainly an interesting new way to do an end run on big investment banks like Goldman Sachs and Morgan Stanley. Credit Suisse, which is typically third or fourth choice in IPO bake-offs in tech, is also an obvious choice to rope in to do that, because banking relationships last well past an IPO.

Such an idea of changing the path to the IPO market is not new in Silicon Valley, and many companies have tried to go public in new ways to avoid the typical process, which many entrepreneurs often find onerous and distracting. The recent Snap IPO, for example, has resulted in a bit of a crater, with the company now saddled with nervous investors and an intense focus on its stock price.

Apparently, Social Capital thinks it can do better, which is no surprise, since it has also been trying to kick another facet of the funding market — venture capital — in the shins (and other more sensitive parts).

The venture company has been expanding its offerings, including adding a growth arm that will be aimed at investing in later-stage companies, and it could even do buyouts. Social Capital declined to comment on fundraising activities, but such investing would require a large amount of capital. It also recently hired Marc Mezvinsky as its vice chairman, part of a wider effort to morph itself well beyond its venture roots.

It has also been developing a software-based product-market-fit platform called 8-ball to do the quantitative part of due diligence for possible investments.

But, as part of a longer-term master plan, it has been exploring a wide range of other financial products to support its companies across their life cycle.

“Venture is good, but venture firms are not really well built to make successful companies,” said Palihapitiya in an interview in May. “We want to look less like an investment firm and more like a company with capital as a service.”

Now the outspoken investor — you can hear him on this Recode Decode podcast talking about the “rich douchebags” of tech; he will be coming back for another round soon — seems to have another trick up his sleeve.

Until then, you can parse all the particulars of what Chamath — I feel he is close to one-name Beyoncé status — is up to here:


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