Social Capital’s Chamath Palihapitiya Wants To Fix Capitalism
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Silicon Valley billionaire Chamath Palihapitiya, dressed in slim-fit ripped jeans and a caramel-smooth leather jacket, drops four pills out of a small ziplock bag: aspirin, cod liver oil, Lipitor, and vitamin D. The pills are his daily wellness cocktail, created in consultation with California’s very best doctors. But the doctors are not collaborators. Rather, they’re inputs in an A/B test of Palihapitiya’s design. He visits his doctors independently and then pits them against one another; when they disagree, the 41-year-old gets them on the phone to debate. With one gulp of water, he knocks back the full dose.
Palihapitiya, cofounder and CEO of venture capital firm Social Capital, has catapulted himself from a childhood on welfare to Gulfstream-level wealth by learning to take nothing for granted—especially not conventional wisdom or expert advice. Not coincidentally, he is also, colleagues and friends say, one of the most aggressively quantitative thinkers they have ever met. Palihapitiya made his first billion dollars by proving, as Facebook’s VP of growth during the pivotal years leading up to the IPO, that the social network could attract new users far faster than anyone else believed possible. Now, he’s refashioning his seven-year-old venture capital firm with similar ambition, intent on making his next set of billions by revolutionizing how Silicon Valley picks (and nurtures) winning ideas. If Social Capital can get its investing formula right, Palihapitiya envisions a system in which companies can deliver nothing less than peace and prosperity for all.
“None of us are going to fix governance; it may just be beyond repair,” he says as we zip north on U.S. 101 in his Tesla Model X, headed from Social Capital’s Palo Alto headquarters to a nearby event. “But you can fix capitalism. And the reason you can fix capitalism: It is inherently numerical, and as a result, it is inherently objective. It can be done objectively.”
Step one is rebuilding venture capital, capitalism’s money engine. While much of the rest of finance has become rigorously analytical, early-stage investing remains fueled by privileged networks and gut-instinct decision-making. In Palihapitiya’s view, that approach reinforces biases that disadvantage founders who exist outside of Silicon Valley’s (white, male) norms. It also handicaps startups addressing some of the thorniest issues in industries like education, healthcare, and space, which are often perceived as too risky. Palihapitiya has no such restraint. “The gnarlier, the better,” he says of the problems he wants to see companies try to tackle. “The more nuanced, the longer term, the more in the muck, the better.”
To enable this mission, Palihapitiya has spent the past year shifting the methods of Social Capital. Last spring, he unveiled the centerpiece of that effort: Capital-as-a-Service, or CAAS, a software tool that automates early-stage investment decisions, effectively allowing Social Capital to back founders, sight unseen. He also put more resources behind Discover, an incubator program for prelaunch startups doing cutting-edge science and technology. Both experiments break down institutional barriers for unconventional entrepreneurs. Both also fly in the face of tenets that other VCs hold sacred—like, say, the paramount importance of a founding team’s academic pedigree.
In addition, Palihapitiya has declared his intention to usher a startup into the public markets through a special-purpose acquisition company, or SPAC. His theory is that even bootstrapped tech companies need to go public to compete for talent with the likes of Apple and Google. With a SPAC, Social Capital can make a cumbersome, expensive process, which takes at least a year, relatively fast and cheap. Layer in the firm’s rumored growth equity fund, which would focus on later-stage companies, and Palihapitiya could soon be able to serve nearly any type of business at any stage of maturity with an arsenal of around $3.5 billion. It’s the VC equivalent of going all in. (Palihapitiya brings the same approach to poker: After quitting Facebook at age 34, he spent a month living at the Mandarin Oriental Las Vegas and playing cash games; he made more than $2 million.)
Palihapitiya is doing all this at a moment when Silicon Valley is in the throes of a major reckoning. VCs, once hailed as philosopher kings, are now sharing the blame for many of the problems (bullying, sexual harassment, and more) roiling company after company. “Before, we were these iconoclastic people who didn’t fit in anywhere else,” Palihapitiya says of the Valley and its geeky origins. Now, there is pressure to succeed, and money to lose. (Even the Golden State Warriors, in which he has a minority stake, have gone from NBA underdogs to established champions.) “When that happens,” Palihapitiya says, “you have this weird shift in values where wealth and status are the end goals.” He sees them as tools.
Palihapitiya coasts into CNBC’s Squawk Box studio, overlooking New York’s Times Square, just minutes before his scheduled guest-anchor slot one morning in December. As the on-air countdown begins, he settles into his seat. The TV-friendly corollary of Palihapitiya’s analytical intensity is his ability to spout strong opinions with straight-shooter flair. Over the next two hours, he gamely offers views on bitcoin (“Schmuck insurance”), Tesla (“We are massively long the [company’s] convertible bonds”), and the NFL (“I can’t watch these guys beating each other up”), to the delight of his hosts and 117,000 Twitter followers.
When the show wraps, Palihapitiya says his goodbyes, dodges a Yahoo Finance reporter, and darts into his idling SUV. Away from the neon buzz of the Squawk Box set, he looks drained. “I didn’t eat yesterday. Frankly, I just felt terrible,” he says. The day prior, a headline-grabbing quote from a talk he had given at Stanford was plastered across the internet: “Former Facebook exec says social media is ripping apart society.” For most of the night, instead of resting up for his television appearance, he had been fielding a stream of calls and texts. Palihapitiya’s relationship to Facebook, the primary source of his wealth, is complex. Even after his departure, new hires would watch a video version of his orientation talk (“Don’t fuck this up,” he implored them). He also remains close with COO Sheryl Sandberg. On Squawk Box, he had tried to take the glare off Facebook by highlighting the trouble with internet business models more broadly, he explains as we drive across Midtown. But he didn’t exactly apologize either. “I didn’t want to backtrack. Because the point is true. I think we’re all slaves to this shit,” he says.
Many tech insiders may share Palihapitiya’s view of Silicon Valley’s failings, but few have been as vocal. Venture investors, in particular, ascribe to the idea that publicly criticizing one’s peers violates certain rules of professional propriety; Palihapitiya, however, has made techie trash talk into something of an art form. During a 2013 talk, he implied that many of his former colleagues at AOL, where he had run AOL Instant Messenger, were “really shit.” A year later, his mockery of a Salesforce philanthropic program at a San Francisco conference prompted investor Ron Conway to stand up and bellow, MacBook raised in anger, “You don’t know what you are talking about!” (Conway declined to comment.) More recently, he called IBM’s Watson technology “a joke.”
When Social Capital was new, Palihapitiya’s antics helped put the firm on the map and turned the Sri Lanka–born billionaire into an unlikely folk hero. Now, Social Capital is chasing institutional dollars. Palihapitiya is well aware that the managers of the world’s biggest pension funds may view his public candor as a liability. “I wasn’t blessed with the natural ability to rein myself in,” he admits. “At the same time, I was given a fearlessness in being myself. I’ll tell you what I think, and I’ll deal with the slings and arrows. But, I can still do it in a better way. That’s what I’m learning now.”
In October 2014, Palihapitiya’s father passed away from complications from diabetes. Seven months later, his close friend Dave Goldberg, CEO of SurveyMonkey and Sandberg’s husband, collapsed and died while they were vacationing together in Mexico with a group of friends. It marked a turning point in Palihapitiya’s personal transformation. His friendship with Goldberg, which had lasted 15 years and spanned many a poker game, was a case of opposites attract. “He was a gent,” Palihapitiya says. “He was also everything that I’m not: patient, available, calm.”
Palihapitiya had grown up in Ottawa, after emigrating from Sri Lanka with his family at age 6. When his father fell into depression and started drinking, the younger Palihapitiya learned to take care of himself; by his teen years, he was earning a paycheck at Burger King and dealing blackjack in the school cafeteria. “I was angry,” he says. “Angry, insecure, frustrated, bursty, acting out to make up for whatever.” He credits therapy and Buddhism for helping him cope. For his 40th birthday last year, he got a partial tattoo sleeve, depicting lotus flowers and a fire dragon emerging from water.
At the same time, Palihapitiya was coming to recognize problems within his own firm—and, more broadly, in early-stage investing. He had founded Social Capital alongside two VC veterans, Mamoon Hamid and Ted Maidenberg. Both left Social Capital abruptly last summer, with Hamid departing for Kleiner Perkins Caufield & Byers (John Doerr, the venerable firm’s leader, had previously tried to acquire Social Capital). “We looked very traditional. And every decision we made was very traditional,” Palihapitiya tells me. “And more importantly, the culture we made was not that great.” He cites his cofounders’ tendency to behave arrogantly around entrepreneurs. (Hamid and Maidenberg declined to comment.) “It took me a long time, quite honestly, to find the courage to unwind it.”
In the months since, Palihapitiya has embraced his freedom to experiment, and he’s been pushing his team to do the same. On a Monday morning toward the end of 2017, he takes a seat in Social Capital’s glass-walled central conference room as Ashley Carroll, the partner responsible for CAAS, begins her management committee update. CAAS, which once consisted of stitched-together Excel templates, is now a software tool capable of replacing venture capital’s highly manual deal-flow process. Instead of emailing a pitch deck to Social Capital in the hopes of scoring a follow-up meeting, founders simply upload their raw operational data (and their financials, if they have revenue). Carroll and her team then receive an automated email that charts the data and prompts a quick investment decision.
Once it emerges from beta, CAAS will be available to any founder, anywhere. So far, Carroll tells her colleagues at the table, the program has received applications from more than 3,000 startups and invested in 30, with an average check size of $70,000. Half the funded CEOs are non-white and 40% are women. (Compare that to Silicon Valley at large, where less than 5% of venture deals in 2016 involved women-led startups.) Palihapitiya jumps in: “Are we going to get to our goal of 100 [investments] by the end of this year?”
Carroll explains that her team has been more focused on building CAAS than reviewing applications. To speed up investing, she says, they’d have to “significantly lower the bar.” Palihapitiya pushes back. “What is ‘significantly’? Like, what is the difference between the 30th and the 31st company? Is it a significant difference?” he asks. “You’ve got to learn, so why don’t we learn what shitty looks like?”
Exchanges like this no longer faze Ray Ko, seated across the table from Carroll. He worked with Palihapitiya at Facebook and now serves as Social Capital’s head of platform. In the firm’s early days, he embedded himself with portfolio companies for months at a time, helping them harness their data and learn which metrics to optimize around. Eventually, he and his team developed a tool called 8-ball, which allows entrepreneurs to analyze growth in a standardized way—and Social Capital to benchmark the companies.
If Palihapitiya has his way, Social Capital’s proprietary data tools could one day optimize all of the firm’s bets. “Some people in the investor world deify being right,” Ko says. “ ’Oh, John Doerr, he invested in Amazon and Google, he was right.’ You can hear in the way [Chamath] talks—it’s not about being right. He’s always about, ‘Here’s a bet I made, here’s why I did it, here’s what I learned from it, here’s what I did later.’ ”
Social Capital’s unicorn-hunting special-purpose acquisition company, called Hedosophia Holdings Corp., similarly functions as a calculated bet. Hedosophia (“pleasure” meets “wisdom” in Greek) filed for IPO in August, raised more than $690 million on the New York Stock Exchange, and is now in search of an acquisition target worth more than $1 billion. Hedosophia can’t solve all the burdens associated with being a public company, but, by covering the up-front costs, it might persuade a unicorn sitting on the sidelines to give its employees a chance to cash out. The standard IPO process “is pretty inefficient by design,” Palihapitiya says. Exactly the type of problem that he loves to solve.
It’s the end of the day, and Palihapitiya has to get home to host his weekly poker game. But before he does, he pulls up to the Hiller Aviation Museum, near the San Francisco airport, for a reception showcasing Social Capital’s incubator program, Discover. Because the seven teams are still in stealth mode, it’s a small affair designed to introduce the founders to a select group of investors and scientists. When we arrive, Social Capital vice chairman Marc Mezvinsky (aka Mr. Chelsea Clinton) is already working the room.
Palihapitiya has particular affection for the companies in Discover (clean water! remote internet connectivity! walkable cities!). But they also confound the quantitative techniques that he has honed as a gambler, derivatives trader, and growth expert. Social Capital’s core strength, from a financial returns perspective, lies in identifying enterprise software and consumer internet companies with promising fundamentals. Savvy early bets like Slack and Yammer, for example, are incrementally improving white-collar work, not saving the planet. How will a firm that specializes in metrics such as “engagement” address murkier goals of “peace” and “prosperity”?
“Honest answer? We don’t have a fucking clue,” Palihapitiya says. “We can get navel-gazing for days and weeks and years and decades. Or [we] can take a first step, as embarrassing as that may seem.” By 2045, he wants to have created 10 million jobs (real jobs, not gigs) through Social Capital investments. In the short term, though, he says he has no problem sometimes letting his “reptilian, moneymaking brain” take the lead.
Palihapitiya listens carefully as the Discover founders present, before heading home to greet his poker-group guests. The list of regular attendees includes Uber investor Bill Gurley, Yammer founder David Sacks, and some players from the Warriors. Plus Elon Musk. “He doesn’t play, he just sits there and drinks wine,” Palihapitiya says. For those that buy in, he adds, “it’s a pretty serious game. They’re out for blood.”
The next morning, we meet for coffee back at Social Capital headquarters. Palihapitiya, nursing a latte and dressed in a Dolce & Gabbana sweater with a crown across the chest, says he turned in around midnight, while others played into the wee hours. Normally, he says, he is far more competitive. “One of the things I have known my entire life is that I have an innate capability for making money.”
He ticks off the list: Facebook. Bitcoin. The Warriors. “When I left Facebook, I left an enormous amount of equity on the table. I thought, I don’t want to be a slave to money. I want to be a slave to something bigger: an ambition, a goal.” Philanthropy, in his view, is a “busted idea.” But he saw potential in trying to fashion financial services into an instrument of change. “I wanted to take a huge bet on myself. If we win, I win the most. But the reason I do that is because if we lose, I lose the most.” The stakes are the highest of his career. That’s exactly how Palihapitiya likes it.
Social Capital is No. 19 on the 2018 World’s Most Innovative Companies list. Check out all 50 companies here.