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“The lesson is, we all need to expose ourselves to the winds of change”
Andrew S. Grove, Only the Paranoid Survive

Only the Paranoid Survive…

If you’re a student of technology companies, you’ve heard this adage many times. That, ultimately, you must disrupt yourself. Because if you don’t, the winds of change will set upon you and you will be rendered obsolete. It has been true for a multitude of technology companies big and small, and technologies important and not. The lesson from all of this is that you must always question where the world is going, place small bets about what the future could look like but then have the courage to follow through on some of these bets when the data says so.

Over the past seven years, I have seen firsthand that we’ve built a strong brand at Social Capital — known for investing in great companies including Slack, Groq, and Saildrone. In many ways, there is a credible claim to make that we’ve created a top decile brand in venture — in my opinion, one of three in the last 15 years to have done so (a16z and YC being the others). Along the way, we have also had the courage to incubate solutions to some very hard problems like diabetes (Glooko), low-cost telecommunications (LotusFlare) and city planning (Urban Footprint) — with success there as well.

But I have always felt that this wasn’t enough. Specifically, I couldn’t stop questioning whether the model of venture capital was fundamentally too reactive. And, as such, broken:

  • Waiting for “differentiated dealflow” is increasingly antiquated in a world of YC and AngelList — it seems like every great company is now widely known in real-time and creates an auction as soon as practicable for every fundraise — a growing advantage to the entrepreneur and a decaying advantage to venture capitalists.
  • Sitting idly on boards hoping they IPO seems increasingly ineffective with competitors chasing every idea — more work than ever needs to be done at an operational level to help companies become successful in the face of enormous amounts of capital funding innumerable competitors.
  • Being anecdotal in running a company is becoming destructive in a world of machine learning, data science and AI where the right answers are more knowable than ever before.

All of this led to a realization that we must disrupt ourselves if we are supposed to stay relevant. We need to move towards a more proactive form of capitalism. If we don’t, I worry that competitors that we don’t even think are competitors today will come out of the woodwork and disrupt us in the business of helping entrepreneurs. Some speculation about what this might look like:

  • Every large Internet company could enable startups to get capital from their balance sheet in return for building on top of their platform(s).
  • Data analytics companies could create a “learning cloud” where any company could benefit from the mistakes and learnings from other companies by sharing their operational data.
  • Capital markets will capitulate to lack of returns in other areas and enter venture capital with a vengeance, flooding it with cheap money creating innumerable numbers of competitors for any idea — we already see this indirectly when you look at average deal sizes and average fund sizes.

With that in mind, over the past 18 months, we’ve been making several small bets at Social Capital including Capital-as-a-Service, 8-ball, Anther and IPOA to help us figure out what a future of “proactive capitalism” could look like.

  • Can we build tools to help our team make better investments?
  • Can we build software, machine learning, and data science based models to help our companies operate better and be more successful?
  • Can we use new kinds of capital to help accelerate winners?

As it turns out, these bets are starting to work. The implications may not be clear yet to the rest of the industry, but they are very clear if we are to question and shape the future of Social Capital.

To have the impact we seek, we now need to double down on some of these bets — because the product-market fit and data is increasingly there. At one point I thought the best way to do that might have been through following the old playbook of gathering AUM — raise as much money as possible in as many ways as possible and invest across the capital cycle of both equity and debt. But not only will this path distract from a product-centric approach it can cause culture drift towards an organization that is not sufficiently technical — accelerating the risk of disruption vs minimizing it.

Said differently, I have realized that even when capital is widely available to us, it won’t protect our franchise in the long term from the threats described above. Scaling through technology is the only path and building valuable products is our only protection. This path will be initially harder but the result should be a more resilient organization with repeatable value to offer our ultimate customers — the entrepreneurs who are trying to improve the world.

More to the point, it means becoming a more product-oriented culture and an organization that is even more mission driven and technical. This was a critical realization to come to as the solution could have been very different. AUM vs impact. Funds vs tools and software. Luck (aka beta) vs skill (aka alpha). Instead, I now think it’s time to see if a model of proactive capitalism accelerated by technology can compete with and eventually overtake the existing model of reactive capitalism.

To make these changes, we must actually do fewer things, but do them better. Be more focused, more audacious and invest more than ever in engineering, product, data science and portfolio operations to give entrepreneurs the tools and services that can help them win — in a repeatable and predictable way. It doesn’t mean we stop the traditional model — in fact, we will continue to invest through our private funds and public funds but it does mean that we must amplify how we plan for the future and set the stage for the new model to overtake the old model — especially as the data says so.

Over the next few months, you will see us accelerate some of these new efforts and push them to the forefront. This change may be hard but necessary. Fortunately, we have a legacy of some very profitable and successful venture funds that allow us to do this. Ultimately, this work will also align ourselves more deeply with entrepreneurs and give us a chance to be paranoid enough to not just survive but thrive.

I hope you read this with excitement and anticipation for what this means — personally, I’ve not been more excited. We will share more details in the coming weeks and months…


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