A Petri Dish for Fraud

A Fraud Bubble

The Wall Street Journal takes a look at the the enormous amount of money going into creating "unicorns", and it looks to me like another game of financial musical chairs where either the smaller investor or the taxpayer ends up on the hook:

Investors are defying a share-price slump for newly public companies to make hundreds of billions of dollars available to startups, a cash pile that promises to inject a torrent of money into early-stage firms in 2022 and beyond.

Special-purpose acquisition companies, which take startups public through mergers, raised about $12 billion in each of October and November, roughly doubling their clip from each of the previous three months, Dealogic data show. So far in December, three SPACs a day are being created. While that is below the first quarter’s record pace, it brings the total amount held by the hundreds of SPACs seeking private companies to take public in the next two years to roughly $160 billion.

The cash committed to venture-capital firms and private-equity firms focused on rapidly growing companies but not yet spent also is ballooning. So-called dry powder hit about $440 billion for venture capitalists and roughly $310 billion for growth-focused PE firms earlier this month, according to Preqin.

Despite billions of dollars in lost market value for publicly listed startups, the cash hoards represent buoyant demand from investors with interest rates near zero and stock indexes at or near records. They show how SPACs and private markets have been more resilient than many analysts expected, particularly with regulators ratcheting up scrutiny of so-called blank-check companies. Many analysts also expect interest rates to climb in the years ahead, potentially making moonshot bets on early-stage companies less attractive.

There is a word for this, and it rhymes with a name for a character from the situation comedy Happy Days, Fonzi, but begins with a "P".

The folks doing the funding bid up the notional share price before they go public, cash out at the IPO, and laugh while the shares fall after that.

………

Outside of SPACs, cash is piling into startups at unprecedented rates from venture-capital firms and hedge funds such as Tiger Global Management LLC that traditionally were more focused on public companies. Nearly 340 new unicorn startups—or about one each day—have privately raised money at valuations north of $1 billion this year, more than triple the total from last year, PitchBook data show.

………

The fundraising frenzy is continuing even though sentiment toward newly public startups has cooled. An exchange-traded fund that tracks companies that went public through SPACs is down about 25% for the year. Meanwhile, an ETF of companies that recently did traditional initial public offerings has slumped roughly 15% in the past three months.

Of course they did.  They are peddling snake oil.

This will continue until one day when it can no longer continue, and then we will have a crash, and a bailout of the big fish, and the rest of us will take it on the chin.