Silicon Valley is buzzing about the venture firm Social Capital and its ambitions to shake up the way tech firms are funded. The venture company, Social Capital has just finalized the first step in its radical mission to take tech start-ups, or unicorns, public without an IPO. Here are the 10 things you need to know about Social Capital.
1. The Brains Behind the Move is Chamath Palihapitiya
It is the brainchild of Chamath Palihapitiya who is Sri Lankan born and was one of the early Facebook executives. Palihapitiya has been very vocal about his frustration about the way things are currently in the venture capital industry.
2. Social Capital just raised $600 million
On the 14 September the company raised $600 million using a novel instrument, a SPAC or a special purpose acquisition vehicle, to fund a yet-to-be-decided-on tech start-up. This type of blank-check company is unprecedented within the tech sector but not unknown in other sectors. They are purposely designed to buy private companies and take them public, circumnavigating the IPO process.
3. The Market Cap will be Between $3 billion and $20 billion
The brash CEO has an ambitious aim. He claims that the market cap will be in the range of $3-$20 billion.
4. The Money will be Used to Acquire an Emerging Tech Company.
The $600 million raised funds Social Capital Hedosophia a publicly traded shell company which in turn will be used to acquire a tech start-up. No company has yet been chosen. Social Capital filed their S-1 without knowing who they will invest in.
5. Social Capital Want to Fast Track the Process for the Tech Firms
The IPO process for a tech company is long and cumbersome, typically taking up to 12 months and many hours of the CEOs valuable time and monopolizing the attention and focus which Palihapitiya believes should be on the company. He claims that this approach will cut down the time-line to going public to between 60-90 days.
6. There is Huge Interest in the Social Capital Model
Interest in the model is enormous. Palihapitiya decribes it as “off the charts” and claims that immediately after Social Capital filed the S-1, over 15 of the most notable unicorns were in touch with him to express their interest in being involved.
7. SEC Rules Dictate that No Talks Can Begin until October
SEC rules prevent Social Capital from initiating any formal deal talks until the October 1 has passed. The CEO has described his daring move as the “most over-subscribed IP in history” but we will have to wait until November when formal talks can begin before it can be determined if there’s substance behind the hype.
8. Social Capital CEO Claims to be Fixing a Broken System
The self-confident CEO asserts that the current system is broken and that Social Capital is poised to fix it. It can take Unicorns, or tech start-ups, years to get ready for the process of going public and then approximately 12 months to deliver the returns. In this period the start-up is haemorrhaging its best staff who can neither afford to live in Silicon Valley on their start-up salaries nor can they afford to wait until their equity is realized when the company goes public. Consequently many of the most promising tech start-ups have a major issue with staff retention. Palihapitiya believes that if companies can skip some of the cumbersome IPO preparations and have the option to be acquired instead that many firms will go public decades earlier.
9. There Will Be No IPO Road-show
The tech company will not have to conduct a time consuming road-show to try to capture a broad base of investors who have no knowledge or interest in the company. Instead the core investors are in place and will be made up of small cohort of 10-15 with specific interest and an interest in long-term investment. Also significantly following the acquisition the company will retain more control.
10. Social Capital has Two Years to Strike a Deal.
The process is not without challenges. Palihapitiya and his team will need to find a target company, agree a price that the company and the investors see eye to eye on. He needs to ensure that the company is ready for the additional scrutiny of going public and that conforms to all regulations. However they will avoid dealing with the banks, which often set less than optimal prices and tie the company up in red tape for months. If he has not succeeded in closing a deal within the two year time frame then all the original investment must be returned to the investors.