Chamath Palihapitiya: We Need To Get Rid of Homophily in Venture Capital
by John Michael Eden on Startup Grind
“Venture capitalists invest in superfluous companies that never change the world largely because they’re usually funding entrepreneurs that look, talk and think like they do.”
Social scientists use the term homophily to describe the tendency of human individuals to gravitate — in a wide range of settings — toward people who look, talk, and think like they do. Homophily means “love of the same.” So does that mean homophily drives decisions in the venture world? Well, the data is pretty clear that if you’re black or Latino, you’ll have a hard getting funded on Sand Hill Road — regardless of the importance or promise of your startup’s mission.
In a way, homophily is a kind of affirmative action for the privileged. And that’s a huge problem, because it means that the people who control billions of investment capital are making investment decisions based on tribal notions of who fits their stereotype of a bankable entrepreneur.
We Need to Focus on the Quality of Ideas
When technology companies are born, they are usually animated by a central idea. This idea usually gains expression in the company’s foundational product or service. For example, with the benefit of hindsight, you could say that Facebook was created by the idea that identity and human connection are two sides of the same coin.
Unfortunately, we aren’t focusing on the quality of these central ideas anymore. We’re too busy indulging bright-shiny-object syndrome to realize that an on-demand acorn delivery service for orphan squirrels isn’t a very good use of venture capital.
Creativity’s Handmaiden is Rigorous Experimentation
One of my own passions is mobile development, and my experience in mobile gaming taught me that creativity always is a central ingredient in the product development process. During his talk, Chamath argued that “creativity” can actually thwart innovation when it is not tied to empirical testing. Appeals to creativity, after all, can be manipulative way of avoiding accountability for engineering and design choices.
For example, if a lead designer says “we must build it this way, because that’s what my unassailable vision requires,” the rest of the team is — ironically — shut out of the creative process. The lead designer has effectively silenced everyone else on the team. Different creative ideas as well as hard-data are both ignored in favor of allowing one person’s intuition to guide the entire product development cycle.
Social Responsibility must Inform Investment Choices
Chamath arrives at this conclusion in two different ways. The first is a moral commitment to the idea that everyone deserves equality and well-being. In other words, there is no prerequisite a human must fulfill before he or she is morally entitled to a safe, healthy and meaningful life. We matter simply because we exist. So, it’s probably not a good idea to invest in Snapchat-for-Elephants when you can put capital to work in a computational biology company working on rare cancers.
The second is the practical realization that venture returns are not that great under the homophily-driven model currently in vogue. Think about that for a minute: 65% of all venture financings fail to deliver even a 1x return. With metrics like this, VCs should be eager to evolve. Of course, radical change is quite difficult without an existential threat looming over one’s head. Chamath believes that LPs may actually start putting their money elsewhere once they realize that VCs are not seizing the opportunity to really change the world. And if he’s right, this is precisely the kind of existential threat venture capital may need.
Chamath Palihapitiya is the Founder and Managing Partner of The Social+Capital Partnership — a venture capital fund based in Palo Alto, CA. Before Social Capital, Chamath was the longest tenured member of Facebook’s senior executive team and helped drive its ascension to one of the most important companies in the world. He is currently the owner of the NBA’s Golden State Warriors, was born in Sri Lanka, and grew up in Canada.
