Investment Process is Really Important, but So are Humans

As both Axios’ Pro Rata and Fortune’s Term Sheet covered on Friday morning, Social Capital has effectively decided to take its ball and go home, ceasing to function as a traditional venture capital firm and morphing into more of a family office for founder Chamath Palihapitiya. It will become a technology holding company, only using the firm’s internal funds to invest (Mr. Palihapitiya explained the move in this post).

Along the way, we cheered Social Capital’s process innovation called Capital as a Service, where the firm made seed investments based on data submitted by a global swath of businesses, rather than based on identifying high potential companies in their network. Not surprisingly, this open system led to a set of companies in their seed fund portfolio whose founders are more diverse than their other investments.

Many of Social Capital’s senior team have left the firm over the last several months, and Mr. Palihapitiya recently went on record saying that he doesn’t care what his LPs think and that if they didn’t think he communicated well enough, that’s their problem.

What should we make of this? Is this a repudiation of some of Social Capital’s more innovative steps? Hardly — Capital as a Service. for example, remains a small slice of a very large set of funds. However, even as Social Capital emphasized new and interesting data-driven approaches to venture investing, it seems that Mr. Palihapitiya drove away key employees and frustrated LPs by not listening or communicating.

Mr. Palihapitiya is clearly an innovator, but he also doesn’t seem to give much attention to cultivating interpersonal relationships with his key stakeholder. If I learned anything from the early part of my career in politics, it is this: how you feel is more important than what you know. So, it’s not surprising to see this strategy blog up in his face, regardless of how successful he is as an investor.

My hope is that people don’t take the wrong lessons from this episode. Here are what I think are the right lessons that we should draw:

Don’t Be a Jerk.

I firmly believe the saying “people don’t leave jobs, they leave managers.” Just because there are some very successful people that also have a reputation for being unpleasant to work with (Steve Jobs and Elon Musk come to mind) doesn’t mean it’s a good idea. This is even truer in the startup space — employees need to buy into the vision of a company in order to commit to the grueling pace and unglamorous work and to stick around.

Over-Communicate.

Keeping an open line of communication with your funders and other key stakeholder is always a good thing, but it is especially important when you think things might get messy. When a project or investment hits choppy waters, as some are certain to do, you want to have your stakeholders on your side.

Those who have communicated in advance about the potential for rough seas on the voyage are likely to get the benefit of the doubt, be seen as having foresight, can project a sense that everyone is in it together, and may even benefit from their stakeholders’ feedback in weathering the storm.

If you’re late to inform key stakeholders that things have hit the fan, you’re probably going to come off as either deceitful, incompetent, or both.

While hopefully, many people have learned these lessons early in their career, I’m a fan of lifelong learning; so, it’s never too late to use these events as a cautionary tale. Alternatively, you can follow Mr. Palihapitiya’s path by becoming an early employee at a unicorn tech company that goes public, become a billionaire, and not listen to what anybody else thinks. The choice is yours!