Chamath is Massively Risk On
The engineer turned VC wants more than IRR, he wants to dent the universe, and explain why life is like poke.
TBP, October 14, 2021
There are lots of reasons why some investors become venture capitalists: Money, fame, the lure of technology’s magic. But very few are unabashedly utopian about what venture investing could accomplish if it tried.
Chamath Palihapitiya is. The engineer-turned start-up investor wants to do more than generate an IRR – he believes venture capital “when properly deployed, can solve the world’s biggest problems and fill up the void of what he believes are shrinking scientific ambitions worldwide.”1
He rattles off a long list of problems that need fixing: Climate change, water crisis, an impending food crisis, homelessness, crime. Governments, according to him, have shown they are no longer up to the task: “It’s no longer as much about laws necessarily, but it’s about technology, it’s about code, it’s about very specific inventions of science.”
When it comes to the potential good this technology could accomplish for society, Chamath is all in. Other than a small pool of emergency capital, the technologist and social critic has put 99% of his wealth to work into various moonshots – investments of much higher risk and much longer duration than the typical venture fund tolerates. So much so that nearly all of Social+Capital is now his own cash. This was a conscious choice, to give him the freedom to focus on high-risk, long-duration investments of his own choosing.
“When you’re a successful investor, you’ll get to a fork in the road at a certain level of assets where you have to go on the path, well-traveled or the path less traveled.” The well-traveled path was to become an “AUM Machine” – the fate of many successful venture funds: “Syndicate the risk, let returns decay, build an AUM machine, monetize the fee income, sell a percentage, and then eventually sell the GP to somebody and you’re done.” For many organizations, this conundrum is all but unavoidable. Limited Partners (LPs) that invest in venture firms are typically endowments, foundations or pension funds that are looking for something other than denting the universe – they want a return on capital.
He criticizes the “insidious problem” of human capital inside alternative investing, where everyone comes out of the educational factory the exact same way. There is a “very specific and very rigid hierarchy” where everyone in a firm went to the same handful of schools and were educated in exactly the same way, leading to the exact same kind of risk tolerance:
“The entire financial infrastructure of the world is in part merit and in part historical artifact and in part establishment and prestige: I go to a good school. I play lacrosse. I’m a three-letter athlete, I get into an Ivy, then I go work at a bulge bracket firm. Then maybe I get an MBA at one of these set Ivies. Then I go back to said, bulge bracket firm. Then I go to the buy-side. I work at a blue-chip hedge fund. Maybe I start my own.”
The result, he says is a homogenous mindset and a lack of diversity. “I don’t mean diversity in like skin color and religion and sexual orientation. I mean, diversity in your mind.” The intellectual sameness leads to a very rote playbook and a “mono class” of investors.
Many of Palihapitiya’s views are controversial making him a lightning rod for criticism (his take on stock buybacks is an example). His critique of the structure of investment funds is just another example. He doesn’t seem to mind, going out of his way to troll the haters on Twitter. “People just lose it. It’s so delicious.”
His approach to venture investing helps to explain Palihapitiya’s love of Poker, which he sees as a metaphor for life:
“You start poker with a stack of chips in life. You could be born to the richest man in the world. You could be born in poverty. Your stack is different, right? There’ll always be somebody at the table who can buy in for more than you in life. You then have to make bets. You have to take some shots. Who do I trust? Who do I fall in love with? Who do I work with? Who do I go to school with? Where do I go to school? What job do I take in poker? You make bets, which pot do I play? When do I raise? When do I call? How much do I risk in life? You sometimes make all the right decisions, horrible outcome, sometimes all the wrong decisions, great outcome. Poker is a chance for you to see that past. Take a step back and realize how much of is really in your control and how much of it is not.”
Early in his career, Palihapitiya embraced risky bets – and they have paid off handsomely. At 45-years old, he could kick back and take it easy. That is decidedly not the path he has chosen.
Whatever the next decade of start-up investing brings us, Chamath is all in.
Previously:
MiB: Chamath Palihapitiya on Venture Investing (October 9, 2021)
Transcript: Chamath Palihapitiya
MIB: The Venture Capitalists (July 15, 2019)
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1. Page 126, “The Business of Venture Capital,” by Mahendra Ramsinghani, 2nd edition (2014)
