With his deals seeing double-digit declines, the venture capital star encourages fellow investors not to be afraid of making changes.
Chief Investment Officer
March 16, 2021
By Robert Stowe England
Chamath Palihapitiya’s high-flying career as a venture capitalist ran into a bit of turbulence two weeks ago that dealt him a temporary setback he quickly acknowledged.
“I lost $2 billion in two days,” he said, speaking of losses on paper after values of his holdings plunged $1 billion a day each on March 4 and 5.
Palihapitiya’s admission came at the start of the weekly investment talk show The All-In Podcast, which features him and three fellow Silicon Valley venture capitalists and poker enthusiasts: Jason Calacanis, David Sacks, and David Friedberg.
Palihapitiya followed up the next day with a barrage of tweets to his 1.4 million followers recounting his experience and his initial take on how it would impact his approach to taking public emerging technology companies that he chooses because he believes they address economic inequality and fight climate change.
“It’s been a super tough week for me and I’m sure a super tough week for some of you as well,” he tweeted.
“Here is how I’m doing after Friday and what I’ve learned,” he added, posting a chart of returns since inception, year-to-date and week-over-week for the 14 deals in which he has been involved that were structured as either special purpose acquisition companies (SPACs) or private investments in public equity (PIPEs).
Week over week, the 14 investments were down an average of 14%. A closer look at individual deals, however, showed even steeper declines.
Sharp Losses in SPACs
One of the deals was space tourism company Virgin Galactic Holdings Inc., an early SPAC Palihapitiya launched with the Virgin Group’s Richard Branson and which is now listed on New York Stock Exchange as SPCE. Its share price was down a sharp 26.7%.
Palihapitiya, who holds 6.2% ownership in Virgin Galactic in partnership with investor Ian Osborne, sold 6 million shares he owned individually for $213 million on March 5.
Three months ago, Palihapitiya sold 3.8 million shares of Virgin Galactic “to help manage my liquidity as I fund several new projects starting in 2021,” he said in a tweet on Dec. 16.
Another sharp loss hit Opendoor Technologies, a SPAC-turned initial public offering (IPO) with ticker symbol OPEN, which was originally named Social Capital Hedosophia Holdings Corp. II. The company’s shares were down 21.5% week over week.
The steepest decline came for a digital pay-per-mile auto insurance company Metromile Inc., a SPAC that went public on the Nasdaq under ticker symbol MILE. It was down 30.3% week over week.
And then there was the Silicon Valley investor’s recently completed deal with Clover Health Investments, ticker symbol CLOV, that saw a 16.6% week-over-week decline.
Rethinking and Reaffirming
Palihapitiya shared his initial thinking about the sharp selloff in the March 6 tweet binge.
In making his evaluation, the venture capitalist looked to the broader year-to-date returns rather than the week-over-week declines. In that comparison, Palihapitiya had an average 3.6% return through March 5 for his 14 deals, which he compared with the 2.3% return on the S&P 500.
He found it reassuring his performance was 56% above the benchmark. “I’m no huge fan of being up 3.6% but right now I need to find confidence in this,” he said.
Palihapitiya said he then re-examined his portfolio and remodeled all his investments and found nothing to change, other than selling off the $213 million in Virgin Galactic shares he held as an individual. “I’m still proud of it all.”
“I freed up some capital by selling some shares [of] $SPCE so I can keep investing at scale without impact[ing] my pace and strategic view. I hated to do it but my balance sheet shrank by almost $2B this week,” he explained in his tweet.
“I have not sold any shares of any other SPAC I’ve launched,” he added.
Palihapitiya offered some insight into how the event affected his thinking about the challenges volatile markets pose to investment goals and strategies.
“Anyways, the point is that this stuff is hard and I, like you, am not perfect and trying to learn, be resilient and keep fighting,” he wrote.
“Markets, in the near term, are volatile and unforgiving but they ultimately always direct gains to valuable companies doing valuable things,” he concluded.
He then offered some advice to other investors based on his experience that week.
“Find a way to make sure you are comfortable with what you own and if not, don’t be afraid to make changes. Prices are temporary but your peace of mind should not be. If all else fails, remember the Persian adage: ‘This too shall pass.’ Good luck to everyone.”
In the end, however, Palihapitiya did not address the implications of the rising 10-year Treasury yields and the return of the specter of inflation.
Palihapitiya, who has described shares in his SPACs as synthetic bonds because investors can get back their principal, might want to listen to what a veteran of the bond market recently said about market volatility and rising interest rates for 10-year Treasurys.
Yields on 10-year Treasurys are destined to go higher, said Jim Grant, founder and editor of Grant’s Interest Rate Observer, on CNBC’s Squawk Box on March 9. Yields will rise, he explained, as the vast increase in supply of Treasurys created to fund massive deficit spending in Washington overwhelms demand. In response, investors, who have for years received virtually no real rate of return when inflation is factored in, will begin to demand it, Grant argued.
“The whole idea of techno-utopianism is that you don’t have to have an earnings for business. All you have to do is have a vision. This is sustained by artificially low rates,” Grant said. The implication, of course, is that such a vision may face more challenges ahead that could be more trying that the recent turmoil.
Clover Investigations
The recent volatility that drove down the value of Clover Health shares also drew new attention to a controversy that surfaced in February, when Hindenburg Research issued a research report strongly criticizing Clover Health.
The Hindenburg report charged that Palihapitiya “misled investors about critical aspects of Clover’s business in the run-up to the company’s SPAC go-public transaction.”
Hindenburg faulted Clover for not disclosing that its business model and its software, Clover Assistant, are being investigated by the Department of Justice (DOJ) for possible third-party deals, kickbacks, and questionable marketing practices.
Hindenburg found that the DOJ investigation “presents a potential existential risk for a company that derives almost all of its revenue from Medicare, a government payor.”
In 2016, Clover was fined more than $100,000 by the Centers for Medicare & Medicaid Services for misleading marketing practices.
Clover subsequently responded to Hindenburg’s claims in a lengthy post signed by chief executive officer Vivek Garipalli and president Andrew Toy. The two senior executives stated in their post that both Clover and Palihapitiya “were fully aware of the DOJ inquiry.”
Ultimately, after review by counsels of all parties involved, Clover decided the information was not material.
“Clover has not received any civil investigative demands or subpoenas from the Department of Justice. Clover has received a request for information from the Justice Department, to which, as we do with all requests from regulatory bodies, we responded. This was on a voluntary basis,” Garipalli and Toy stated in their post.
Clover also reported it received a notice of an investigation from the Securities and Exchange Commission (SEC), which they said they believe “is based on the short selling report” from Hindenburg.
Palihapitiya did not respond to a request for comment from Chief Investment Officer.
