Notes for TWiST ep.628 — SocialCapital’s Chamath Palihapitiya on the state of the tech industry, politics, diversity, four keys to picking investors, and the changing morality in America at LAUNCH Festival 2016

Chamath Palihapitiya, Social Capital

On this ThisWeekInStartups episode, straight from the recordings of Launch Festival 2016, Chamat Palihapitiya and superhost Jason Calacanis discusses the state of the tech industry, Trump and politics, what to look for in investors and why Apple shouldn’t fight the FBI over data encryption.

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US Presidential Election

  • Donald Trump and Bernie Sanders both completely insane and unelectable
  • They are a product of a shift underway of what’s morally acceptable: there’s a different definition of morality, what’s right and wrong that it was years ago
  • Posting (and lying) on social networks have an effect on people: if they are lying half of the times, they expect other people to be lying half of the times
  • Think of Tinder and the behavior it has created: now there are apps like Grindr or Bang with Friends and it’s acceptable to use them to hook up, it wasn’’t
  • Moral standards are changing and that opens up a lot of opportunities
  • On the bright side, people preferences evolve over time (what you eat — people are choosing to eat healthier, how you dress) and movements towards gender and race equality are growing
  • On the dark side, personalities like Trump have emerged

Trump and why he’s a good thing for America

  • Trump is important for all americans: if he wins the Republican nomination, it will prove the Republican party never really existed for the last 12 years and there are really 3 parties within the Republican party
  • Bernie Sanders pushing Hillary Clinton to the extreme will show there are 3 parties within the democratic party as well
  • The result: now candidates can run as independent, they can run a legitimate agenda and will have to build some kind of coalition to win — people will be more normal and progress will be easier

Mike Bloomberg

  • What Chamat hopes: Trump will win, Hillary won’t crush Sanders and Michael Bloomberg will run and win
  • He will shut Social Capital through the election and all the people that grew Facebook to a billion users, experts in data science and paid ads, will work on getting Mike Bloomberg elected
  • The two party system in the US is a disaster: it’s important cause it would validate a third party alternative, creating more possibilities and the potential for a brighter future

Raising funds in 2016

  • Great companies will always be able to raise
  • Today’s there’s so much more money than in 2008 when Facebook had to raise funds in the midst of the financial crisis and had to take a 50% haircut on their evaluation
  • Slack, Uber, few other great businesses control their destiny: they have an exceptional business model, violent growth, massive gross margin profitability and can spend money as they like and still come out on top
  • Other companies with good business will have their evaluation numbers reflecting their value at a slower pace — they should spend money on what matters, their people and not on silly gadgets or fancy real estate
  • Last cohort, 40% of startups that shouldn’t have funded in the first place, will go by the wayside

A 100+ billion dollar company every 6 years

  • The best founders emerge when times are difficult and money dries up
  • From 1987 onwards, every 6 years a 100 billion dollar company has been started: Cisco, Microsoft, Google, Facebook, Uber… 2016 is the year of another one (Jason:”CafeX!”)
  • The tourists tend to leave and you’re left with the folks who really believe in an idea
  • Starting a business right now is tougher than it was 18 months ago, psychologically

Zenefits

  • They sent an email saying employees should not have sex in the stairwell (Chamath laughs)
  • It was a morally broken company and it will be now fixed by David Sachs who has the backbone and the moral compass to do it
  • He thinks David will fix it and that Zenefits at the core is a good company with a product that makes sense
  • Gusto also has a great product, the door has been opened for innovation in the insurance space

Cheating

  • Chamath likes to compete very hard at everything he does because he believes that everybody else will be playing by the same rules
  • The competion is fair and you’ll see on the field of battle who’s gonna win
  • When you fail, you can identify what didn’t work and improve
  • When you cheat, you just do yourself a disservice (Chamath hates cheaters)

Theranos

  • Two companies with teams for top tier universities were funded by Social Capital and tried to accomplish what Theranos claims to have accomplished but failed
  • His fund has burnt tens of millions of dollars on it and they still no answers — it’s a tough nut to crack
  • If it’s all about compartmentalizing information like Theranos is — it’s very hard to build a good company since nobody really knows what’s up
  • He hopes Theranos is real but they need to have a traditional governance model and radical transparency because you need to know what you don’t know
  • You also have to be transparent to give new potential hires the ability to judge whether they are going to give you their most precious asset, their time and their intellect
  • The company would look more real if they had legitimate investors and legitimate board members who know the science and the financial structure and have a legal obligation
  • By not having them, they are just making it so much harder for themselves opening up the door for questions and investigations
  • He still wants Elizabeth Holmes to win: what she’s doing would represent something exciting and amazing for Silicon Valley as somebody who appears out of nowhere and build something at that scale

Social+Capital

  • They raised 4 founds and they have billions under management
  • They are the second fastest fund (the first after Andressen) to get past the billion dollar mark
  • The quality of their portfolio is the best of any VC in Silicon Valley

Picking a good investor

  • There are 3 things that matter when you pick investors:

1) Make they sure they are good pickers

  • Ask them if they have a high growth portfolio (or use tools like MatterMark and Cb Iinsight): you want to be in a portfolio with other winners, surrounded with other exceptional leaders so as they learn things, they can pass them off to you
  • It’s better to be the eleventh guy on the Warriors than to be the first guy on the ‘76ers
  • 7 out of 10 companies in the Social Capital fund are high-growth companies
  • They are number 1 in the whole industry ie they are good pickers (even if it the vetting process takes longer)
  • When it’s not a good fit, they try to give as much feedback as possible to make it a good fit

2) What’s the percentage of that portfolio companies that gets from series A to C

  • Sequoia has the single best percentage of getting As financed to Bs, Spark is second, Social Capital is third
  • Sequoia has a great brand: when they pick you, other people will invest giving you the benefit of the doubt
  • Greylock is the best at getting Bs to Cs, Social Capital is the second best, everybody else follows and Sequoia is right below industry average
  • A good fund helps you get to the next tier of capital: pick investors based on their ability to get to the next tier of funding, not just to As or Bs

3) The people you are working with are people you like and you can relate with values-wise

  • The worst thing you can do is to create success for a person you morally disagree with and you do that by picking wrong investors

The opportunity for Social Capital

  • Putting all things together Social Capital is doing well but it wasn’t enough for them
  • They wanted to be more like a company than a venture fund, something like Berkshire or Google Alphabet
  • There’s an opportunity of building a master brand in technology, with a huge capital base and a big vision around building things that create change in ways they think are important
  • They want to advance humanity by solving the world’s hardest problems, energy, healthcare, education, gender inequality and try to find and fund businesses that do that

Diversity in the VC business

  • The gap between the investor class and the entrepreneurial class has never been wider
  • Entrepreneurs are younger by nature, more socially liberal, more progressive, they believe in gender and race equality, sexual orientation
  • The investor class is the opposite
  • He paraphrases a quote from one of the patriarch of the Rothschild banking family: “I don’t care who’s sitting on the crown throne: who controls the british money supply, controls the british empire”
  • It is more true today than it was back then
  • We owe it to ourselves to close the gap and to make sure the money supply gets to the guys doing good who need it

People he likes to work with

  • He just wants to be around people who have gone through the same struggles he has gone through — he was a little overweight, he was called paki and had to deal with it for years
  • He empathizes with those people and he wants them to be those who win so other like them will feel better about winning
  • He wants to redistribute success among people who didn’t have access to it so others will be inspired and believe success is possible, no matter where you come from

Why women are better at early stage investing

  • Men at early stages run around with this bravado dick measuring contest trying to be pickers
  • There’s not really such a thing as “good picking”, if you consider the last 3 greatest companies funded: Google, Facebook, Uber
  • They have been even allocated across the top VC firms at the time: Sequoia, Kleiner Perkins, Accel, Greylock
  • There is no edge, just even distribution of outcomes
  • Early staging investing is all about empathizing with the entrepreneur, understanding their character and not missing (Jason: “Don’t miss is my motto“)
  • Men have the ego that most time prevents them from going deeper to the personality
  • Chamat’s wife, Brigette Lau has been 100% right in judging people’s character
  • Chamath: “We need to find deeply sensitive people in early stages investing”

The eightball

  • They are the best firm (growth-wise and getting startups from As to Cs) because they actually help
  • They use the same techniques used at FB and Instagram, abstracted those into a series of open source tools now available to you for free
  • Public companies have GAP financials: generally acceptable accounting principles and you use them to report numbers: profit, loss, revenue — set of rules the industry uses to make sure you are comparing apples to apples across companies
  • They created the same thing for non-financial metrics: for product health, user engagement, all they care about in the early stages that can help think through product market fit and to help make decision
  • They used these rules so much internally they wanted to open their tool to the public
  • The secret sauce is not the tool, but how you use it to make better decisions
  • In the next months you’ll be able to benchmark the data and see how you stack against 60 of their best companies
  • It makes you better informed, by presenting the information better you have more chances to raise funding

Apple vs FBI

  • He’s siding with the FBI
  • Apple has already the ability to root your phone
  • There is a legal request, you give them the data and move on

Self driving cars

  • By 2020 there will be large blocks of cities that are level 4 autonomous vehicle only
  • No bicycles, no pedestrians, just autonomous cars — less random events to account for that would make transportation by self-driving cars feasible
  • The problem is dramatically simplified

Virtual reality

  • It’s a huge red herring
  • It’s a display layer, highly fragmentized across devices

Uber

  • It’s taking less and less time for companies to get to a 100 billion dollars evaluation — but it will take less time to lose it all
  • Uber is an example: it took them less than 8 years to get past the 100 billion dollars evaluation, it could take them even less to lose it all (versus say Berkshire Hathaway who took 40 years to get there and it will take longer — 40 years — to go back to zero)
  • If in the future people will move by self-autonomous cars, Uber may have to compete with other players like cities running their own self-driving cars as public transportation

Y Combinator

  • It’s necessary but not sufficient
  • It must attract outsiders willing to build great companies (Drew Houston, Brian Chesky) instead of people choosing between an Harvard MBA and going to YC
  • They have invested in few to none companies from YC, nothing was good enough

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