VC firm uses IPO capital to invest in tech start-ups
A "blank cheque" venture capital company is using share capital to invest in private tech firms. Social Capital Hedosophia Holdings, which raised $600m for its recent IPO, plans to use the raised funding to invest in tech start-ups. The investments will grant the start-ups some of the benefits of being a public company, like access to capital, without having to go through the IPO process themselves. It also means portfolio companies will not have to meet financial expectation of short-term orientated shareholders. Social Capital's backers include Tony Bates, former CEO of Skype, and Adam Bain, former COO of Twitter.
 

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Chamath Palihapitiya, a "Midas touch" investor, has raised $600 million in the initial public offering for his new firm, Social Capital Hedosophia Holdings.

Its shares, priced at $10 under the ticker IPOA.U, were up on the New York Stock Exchange on Thursday.

The firm will use its IPO money to fund other well-performing private tech startups.

Chamath Palihapitiya, founder of the venture-capital firm Social Capital, is setting himself up to become the Warren Buffett of tech investing. To that end, he has launched a new "blank-check" company in partnership with the London-based VC firm Hedosophia, aptly named Social Capital Hedosophia Holdings Corp.

On Wednesday, Social Capital Hedosophia announced it had raised $600 million in its initial public offering, an increase from the $500 million the company originally filed for at the beginning of September. The shares were listed on the New York Stock Exchange on Wednesday at $10 and were up 3.5% in the first half of Thursday.

Despite the high price tag, Social Capital Hedosophia doesn't have any products or customers, and it doesn't own anything yet. The company plans to buy stakes in private tech companies — from minority stakes to controlling interests to full ownership.

The idea is to give these tech companies the benefits of being a publicly traded company — like easier access to capital — with fewer drawbacks, like the "distraction" of doing the actual IPO and the bother of the quarterly, short-term view of investors, Social Capital Hedosophia explained in the documents it filed with the Securities and Exchange Commission.

This tactic also gives public investors access to the wealth created by well-performing private tech companies. Right now, most of that wealth is going to a small pool of investors, mainly the VCs and private-equity firms that get invited to the investment table.

Social Capital Hedosophia estimates that as of May, there were about 150 tech startups valued at over $1 billion, compared with about 200 public technology companies with a market cap of $1 billion. In years past, those 150 startups would have become public companies. Today, they can hold out as private ones indefinitely because there's so much money available to fund their growth from private investors.

Such blank-check public companies, which raise money first and then figure out how to invest it, are in vogue, according to The Wall Street Journal's Maureen Farrell. Twenty-two such funds have been launched on US exchanges so far this year, raising $6.9 billion, Farrell reports, citing Dealogic data.

That's not necessarily to say Palihapitiya's will succeed in picking tech companies that will make its investors wealthy. But it is being backed by a who's who in the Valley circles — Tony Bates, a Social Capital partner who's best known as the former CEO of Skype, is on the holding company's board.

Also on the board is Adam Bain, the well-liked former chief operating officer of Twitter who has been relishing in time off from a full-time job since he left in November. Bain has been advising startups and doing some other investments and board work, such as joining that of the sneaker company Goat last summer. There has been a lot of speculation about which company will finally talk Bain out of his retirement and back into an exec role.

But Palihapitiya will be the CEO of Social Capital Hedosophia. He's well known as one of the original executives of Facebook and an owner and board member of the Golden State Warriors. As an investor, he has backed companies like Box, Palantir, Pure Storage, Slack, and Yammer.