So­cial Cap­i­tal co­founder and CEO Chamath Pal­i­hapi­tiya is re­think­ing the VC fund­ing process.

Fast Company - - Contents - BYAINSLEYHARRIS

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 the 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 gutin­stinct 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-aser­vice, 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 cut­tingedge 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 straight­shooter 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 glass­walled cen­tral con­fer­ence room as Ash­ley Car­roll, the part­ner re­spon­si­ble for CAAS, be­gins her man­age­ment com­mit­tee up­date. CAAS, which once con­sisted of stitched­to­gether 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 spe­cialpur­pose 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 part­ners Ash­ley Car­roll and Ray Ko are de­vel­op­ing data tools and sys­tems that re­place the gut-in­stinct ap­proach that in­forms most early-stage in­vest­ing.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.