The transcript from this week’s, MiB: Chamath Palihapitiya on Venture Investing, is below.
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RITHOLTZ: This week on the podcast, man, strap yourself in. This is really one of the old-time greats. Chamath Palihapitiya, Founder of Social Capital, very successful venture capitalist, part-owner of the Golden State Warriors, and all-around insightful investor social critic, and tech wonk.
If you’re interested in anything from technology to social media, to venture investing, startups, entrepreneurship, I don’t know what else to say other than strap yourself in. This is a great one.
With no further ado, my conversation with Chamath Palihapitiya.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Chamath Palihapitiya. He is the Founder of Social Capital, one of the more interesting and successful venture capitalist out in Palo Alto. He is also an Engineer and Team Leader working at places like AOL, Facebook, and Slack. He has been known as the SPAC King for his numerous successful deals in that space. And he is also a 10 percent owner of the Golden State Warriors.
Chamath Palihapitiya, welcome to Bloomberg.
PALIHAPITIYA: Barry, thanks.
RITHOLTZ: I’ve been looking forward to having this conversation for a while. Let’s — normally, I start with people’s backgrounds and we go chronologically, but you have some quotes that I love, and I want to ask you about them and let you run wild with them, “Starting with venture capital properly deployed can solve the biggest problems filling the void left by the shrinking scientific ambitions of governments, foundations, and international organizations. Explain.
PALIHAPITIYA: Well, if you look at what’s happening in California or what’s happening at the federal level of the United States currently, there’s a really interesting thing that’s happened, which is we have effectively single-party rule. You have a, you know, elected leader that’s of one party. You have a Senate that’s of that same party, a House and then, you know, in the case of California, mayors as well, all democratic in this case.
And what’s interesting is it also happens to be a moment in time where the societal problems that we’ve been facing are the worst they’ve ever been. Climate change is worse than it’s ever been. We have a water crisis. We have an impending food crisis, homelessness, crime. And you have to ask yourself, well, if a single party like — you know, when you have a typical normal, you know, political set-up, you have these two opposing forces and you have to find common ground. And each party says the exact thing, which is, well, if we had complete control, this would all be fixed. And it turns out that two examples where you have complete control, in fact, nothing gets fixed, even less gets fixed than what got fixed before. So why is that?
It’s that the toolkit of policy and the toolkit of societies has changed. 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. And the problem with that then, well, then you would say, “Well, great. Well, that’s the solution to all of our problems. If we go in and figure out how to actually, you know, just have more of all of that stuff, everything will be solved.” OK, well, then — then you go in and you decompose that problem to first principles. And what you find is, for example, in places like core scientific research, people care more about citations, and papers, and research, and it’s also highly politicized and infested with all kinds of infighting.
And so, foundations can’t fund the work that they used to. Universities aren’t nearly as good and actually promoting massive breakthroughs. So more and more of this responsibility gets put on for-profit enterprises, but to be very specific, they have to be for profit and they have to be technical.
And when you see it that way, the venture capitalist all of a sudden has this critical role in society that they didn’t have before because they are a translator. They are, you know, in a technical meeting the smartest business person, but in a business meeting the smartest technical person. And they’re able to put these things together to solve problems. And so, that’s what I was trying to get across, which is we need more people building for-profit technical businesses, organizing resources against problems.
RITHOLTZ: So — so let’s stay with the concept of — of venture capital being organized to solve problem and talk a little bit about Social Capital. Tell us about your first couple of venture investments and who were your first limited partners.
PALIHAPITIYA: So, I was a Facebook at the time, and I had been doing a bunch of angel investing. And this is maybe 2008 or ’09, but I was the first solo G.P., I think, in many ways. I was putting some money to work of my own money, small checks, Barry, $10,000, $15,000.
RITHOLTZ: Early seed round, right?
PALIHAPITIYA: Early seed rounds in, you know, 2007 and ’08, basically all the money that I had. And I had to win.
I met a guy named Rick Thompson, an amazing entrepreneur, who started a gaming company. And I jumped in with two feet. I invested my money. I spent a little bit of time there helping him, you know, sort of — I mean, as a — as a part-timer, obviously, because I was working at Facebook at the time. And the company gets bought by Disney for like 750 million bucks and I made a few million bucks. And I thought, “This is it.” I have my — I have my escape velocity.
And at the time at Facebook, they were all these people that were trying to invest in the company. And Zuck basically said to me, “Hey, can you help sort out whose money we should take?” I mean, I was running Facebook platform, I was building Facebook Mobile, I was doing all of these products so — but I was like, “Yeah, sure, I guess.”
And I met the guys at Tiger Global, Chase Coleman specifically, and we built a relationship and then, you know, Tiger ended up investing in the business. And along the way, you know, I said, “Hey, I’m thinking of, you know, investing a little bit of capital on the side.” And he goes, “Well, if you organize a little LLC, you know, I’m happy to kick in a, you know, a few shovels.”
And so, all of a sudden, I had this little group of me and my friends, and I just organized about 11 million bucks, you know, and I was like three or four of it and like, you know, other couple of folks jumped in for 50K there, 500K there, a million there, whatever. And so, while I was a full-time employee at Facebook, I was a part-time investor.
And that’s how I started and so those are my first LPs, wonderful guys, Reid Hoffman, you know, a whole list of kind of like …
RITHOLTZ: Who — who’s the rest of that list because already I am loving this group?
PALIHAPITIYA: The list was pretty impressive. I want to say it was like Peter Thiel, Reid Hoffman, Chase Coleman. I’d have to look at the slides, I can’t …
RITHOLTZ: But it’s a murderous row pretty much.
PALIHAPITIYA: Yeah, Dave Goldberg, you know, Zander Lurie who is the CEO of Momentum A.I., so a bunch of really great entrepreneurs, and CEOs, and investors.
Anyways, I put the money to work and, you know, it was non-obvious that that fund was good. I was learning. And most of the investments I made were way too ambitious, and I was deeply undercapitalized, right? So, you — in 2008 and ’09, in hindsight, it was really dumb to make a bunch of deep tech investments.
Now, some of them have come home to roost, and that fund has now (inaudible), but we got very lucky and it did very well, but it took an enormously long period of time. So, I put the money to work and I learned. I learned, hey, portfolio construction is important. I didn’t get that right. I was way undercapitalized, like, hey, wait a minute, like I needed way more reserves to defend these companies. And I had to think about duration, meaning I can’t solve 20 of your problems in a 10-year fund. I need to solve five of your problems in a 10-year fund if I want to be in the fund business. And, you know, that obviously changed in 2016 and ’17 when I just basically consolidated with my own money.
But so – then I left Facebook in 2011 and I went back to these same folks. And I said, “Guys, let’s go much bigger. I think I know what I’m doing.” And we created — my first fund was 250 or 60 million bucks. I put up 60, and then it was really like, you know, John Doerr, Peter Thiel, Reid Hoffman, Li Ka-shing, you know, just — I ran the table of Jorge Paulo Lemann like incredible people. And a handful of really great institutions, Mayo Clinic, you know, folks that I was really proud to make money for.
And I said, “This is like a great intersection of entrepreneurs and, you know, investors, and philanthropists, and foundations.” And, you know, I’m going to go and try to find great businesses, and that’s how it started.
RITHOLTZ: So, from there, what was the subsequent funds that came out of that because that, you know, funds that run a seven or a 10-year lifespan. And some companies, some VCs will just do Fund 2, Fund 3, Fund 4, you didn’t exactly go in that direction.
PALIHAPITIYA: You know, I can tell you — so like the returns as of this last quarter because I just — I had a — I had a little advisory board meeting, you know, I put about a billion one in the ground. That is worth today just a little under $5 billion.
RITHOLTZ: And this was the 2016?
PALIHAPITIYA: No. So, yeah, this was …
RITHOLTZ: Or 2011?
PALIHAPITIYA: I — I raised about $1 billion over four funds — over five funds, sorry, in the first five years basically, so a $260 million fund, another $260 million, a $500 million, and then I had a small $100 million fund and then a $30 million opportunities fund kind of — so about $1.1 billion.
And, you know, so far, we’ve returned a little — almost a little under 2X of capital, so cash-on-cash, we’ve returned about two some odd billion. The curing value is a little under $5 billion. And I think that, you know, when I look in the next — in the next few years that will turn one more time. So basically, you know, one billion will turn into $10 billion and the returns are, you know, probably — well, right now they’re in the high 20’s nets.
RITHOLTZ: That’s great.
PALIHAPITIYA: And it’ll be in the — probably the low 30’s. That’s when it’s all …
RITHOLTZ: So, as all that comes up, are you just going to roll that over into another fund or …
PALIHAPITIYA: So …
RITHOLTZ: … are you looking to spread this into different spaces because I am aware you are a man of many interests. You’re not just — I — I find the world …
RITHOLTZ: … really fascinating and curious. And — and looking at what you invest in, I can tell you approach the universe the same way.
PALIHAPITIYA: Right. So, along the way, I think in 2016 what I realized was running funds doesn’t accomplish my goal. And it took me some number of years to figure that out. I loved working inside of these companies. I loved trying to make some of these businesses work. I loved taking really big moon shots on technical problems that I wanted to solve.
I didn’t like the constraints of a fund. I didn’t like managing L.P. relations because by that point, you know, as you know, Barry, when you’re in the fund to business, then it’s all about quantity of LPs. And so, the LPs had grown beyond my cohort of people, right, because it’s not as if their money is infinite either.
PALIHAPITIYA: Right? And so, then we have fund of funds and other organizations who are in the business of, you know, being investors in these organizations. And it became very administrative. And a lot of my time was spent fundraising and managing those relationships as opposed to investing or starting companies. And so, that was one big error of judgment that I felt I needed to fix.
The other one was I was looking at myself thinking like, well, am I going to be able to defend the ownership of these best companies? And think about what happens in a fund. If you make an investment and it’s working, you have all this pressure to double down. But when there’s something smaller and more technical where there’s way more asymmetric risk, it’s much harder to convince others that you should continue to invest in that as well.
RITHOLTZ: So, let’s stay with that a second because that’s — there’s some really interesting things. When I hear someone like you say double down, what I’m usually thinking of is, hey, we made a small investment in the seed round and now it’s the A or the B round, and we’re going to have to step-up. And $500,000 is now a $50 million or $2 million becomes $100 million. Is that what you mean by double down versus …
PALIHAPITIYA: No, I mean, the following decision, which is very hard. So, let’s just say — and — and we use explicit examples because it’s easier. So, let’s just say we invested in the crypto business and the software-as-a-service start up on the same day. $10 million in each.
The SaaS business has a much higher probability of short-term progress. I sold, you know, X amount of software, here’s my bookings, here’s my revenue.
RITHOLTZ: High probability of modest success.
PALIHAPITIYA: High probability of modest success. Most people are, you know, enraptured with that.
RITHOLTZ: That’s what — well, that’s what the S&P 500 is for. If you want a high probability amount of success, go by the spiders. But I …
RITHOLTZ: … imagine people come to venture because — hey, I have all my …
RITHOLTZ: … conservative stuffs.
PALIHAPITIYA: No, not true.
RITHOLTZ: I’m looking for you to …
PALIHAPITIYA: Not true.
RITHOLTZ: … hit me the 100X.
PALIHAPITIYA: It’s not true. It …
PALIHAPITIYA: … it may be — listen. So there — there are two conundrums here. The conundrum number one is if you’re a limited partner. If you’re a limited partner right now sitting inside of a foundation or a pension fund and you have to return capital, and you have to get over your hurdle, you need an allocation into venture, but those allocations are minuscule. Nobody is getting, you know, huge allocations into Sequoia, right?
RITHOLTZ: Because the capacity is that’s limited as it is.
PALIHAPITIYA: Nobody — nobody is getting huge allocations in the benchmark. You know, these are $500 million funds, you know. And I — you know, in my example, I was 30 percent of all the capital, so there’s just not a lot of room for other.
PALIHAPITIYA: Number one. And then the more insidious problem is actually the human capital inside the funds themselves. And what I mean by that is not that they’re bad people, they are wonderful people, but they are products of a very specific and very rigid hierarchy. You know, they typically went to a handful of schools.
PALIHAPITIYA: They typically are educated in exactly the same way. They typically, you know, have the exact same kind of risk tolerance as a result of all those things. And so, when the rubber meets the road, this Harvard MBA or the Stanford MBA, they want to treat the venture capital organization as their version of the S&P 500. Very predictable, Steady Eddie. Let me make, you know, a good salary. Don’t rock the boat. So, what happens?
Crypto stuff gets underfunded until it’s obvious. You know, hard tech and — and, you know, life sciences get underfunded until it’s obvious. SaaS gets overfunded until it’s obvious. And that’s the whipsaw that you face now.
Now, there are a handful of organizations that have fought against that and have done it brilliantly. So, when you look, for example, like Founders Fund, I’ll pick an example. Incredible set of investors who are iconoclasts to the one. Atypical in every dimension. There’s not a single drop of real pedigree amongst them, except they are all incredible entrepreneurs.
If you look at Coastal Ventures, same situation. Incredibly atypical in their intellectual makeup, and the way they think, and what they value. And to a one, they’re generally great entrepreneurs, so you see this recurring theme. So, you know, for me, what I’ve tried to do is recalibrate my time around that realization.
I have a fixed amount of capital. If I surround myself with these good — they’re good people, it will lead me astray because I will get risk off. And the whole goal of this business, as you exactly well put it, is to be 100 percent massively risk on. And so, that’s how I live my life. I have a small allocation of capital in case all of this goes to zero, but otherwise 99 percent of my net worth and wealth is massive risk on.
RITHOLTZ: That’s quite, quite fascinating. I — I keep wanting to go to some of my questions, but you keep saying things that make me have to respond. I’m still kind of struck by your LPs, meaning management. And what I mean by that is someone runs a successful fund. There’s a very limited amount of slots for money to come in.
I just imagine it’s like here’s the deal. I have a slot for 100 for you. I’ll send you the annual updates, we’ll have an annual meeting, and I don’t want to hear from you the rest of the year.
PALIHAPITIYA: You can’t take — it’s not …
RITHOLTZ: It’s the approach. It doesn’t work that way?
PALIHAPITIYA: … it’s not that — well, it’s not that easy even for the best organizations. You know, when you’re dealing with these large pools of capital, they are large bureaucracies. And in fairness to these bureaucracies, there’s — there’s really important guardrails of risk management, right, and legal and operational due diligence that they have to do because again, it’s the fireman’s pension, it’s the teachers’ pension, it’s the …
PALIHAPITIYA: … you know, it’s the foundation. It’s the — they’re all doing good work, right? So, it’s not like, you know, they have a right to be cavalier, but it creates an infrastructure of folks that approach their job in a very specific way that, for me, didn’t make sense.
For others, I think it does make a ton of sense because, you know, they — look, there’s a tradeoff. Today, that tradeoff, by the way, has rewarded them more than me. And what is the tradeoff?
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 path less traveled is what I’ve taken. You’re alone …
RITHOLTZ: Meaning …by yourself, more risk …
PALIHAPITIYA: you’re by yourself … all your own money, all risk gone. The path well-traveled says syndicate the risk, let the — let the returns decay, build an AUM machine, monetize the fee income, sell a percentage to dial or to whomever, and then eventually sell the G.P. to somebody and you’re done.
And, you know, if you have enough capital at some point, you’re like, well, what do I need any more money? This is a safer route to take.
PALIHAPITIYA: I am of this different view, which is I want very specific kinds of progress that will not happen unless I am a tip of the spear on a bunch of things that I want to change. And I’m using my money as a mechanism of showing the change that I want to see in the world with the idea that if free markets are ultimately efficient, other money will follow. And it will unlock and create change. SPACs are a perfect example.
RITHOLTZ: We’re going to talk about SPACs in a little bit. I’m fascinated by the path less traveled. And I — I’m kind of reminded of an old joke a friend used to say, what’s the difference between having $1 billion or having $2 billion? And the answer is really nothing.
RITHOLTZ: Right, there’s not — what is the difference?
RITHOLTZ: So — so once you wrap your head around that, why build an AUM machine? Why take a G.P. and do all the things you don’t want to do just so you can sell it in the road?
PALIHAPITIYA: Well, look, I mean — I think there’s something very valiant in building a company of any kind. I don’t care what it is because you end up hiring people, you end up creating your own little economy. You know, by hiring good people and paying them, you’re giving them a path. You’re giving them, you know, some amount of purpose in their lives. So, you know, any form of company building, I think, is heroic, the person that uses to build a company.
I don’t care what it is. It could be a garbage business, an AUM business. You know, they’re all to me where I look at the founders of those things like you, and you’re in a class of hero for me.
Everybody may not be with the same, you know, sometimes now founders, unfortunately, sometimes can get vilified for being an entrepreneur. But in general, I think they’re heroic. But again, that’s not what I was trying to do.
My returns in society, I wanted to be expressed by a different kind of change and a different kind of purpose, which was a practical problem solved. You know, I want reforestation to be, you know, done differently. I want a gene editing solution to be so cheap and so fast the available we can eradicate, you know, the 32,000 inherited Mendelian diseases. You know, I want to figure out how to get, you know, sub $100 solar on everybody’s roof and to build a massive distributed energy utility in America. It turns out I’m doing all those things.
Now, I can do that with my capital and that’s really great. That capital may go to zero …
RITHOLTZ: But you’re saying …
PALIHAPITIYA: … but it may not …
RITHOLTZ: … you couldn’t do that if you had these institutional endowments and other …
PALIHAPITIYA: Maybe not.
RITHOLTZ: … large more conservative investors who are more concerned about IRR than moving the needle.
PALIHAPITIYA: Short-term IRR because, you know, again they have a job to do. They have pension obligations to make. They have, you know, other things that they’re funding. They have the lifestyle they want to pay for. They have their own annual reviews and bonuses and things. So, you know, it’s not to debate the validity of it, it just exists, and I’m not willing to sign up for that because duration.
And, by the way, you can see that certain funds have realized that that durational limitation doesn’t work in tech anymore, right, so now you’re seeing these 15-year funds, right? Some of these climate funds are really long-dated so that they can take huge long risk with very sticky money.
I think that’s moving in the right direction. You know, what I raise a — you know, a 20-year fund …
RITHOLTZ: You’re how old, 45? Forty-five.
PALIHAPITIYA: Yes. No.
RITHOLTZ: All right, so you could do a …
RITHOLTZ: … 20-year funds if you want …
RITHOLTZ: … to move the needle.
PALIHAPITIYA: Yeah. But a 10-year fund, that will never do. But never say never, but I — I — I — you know, it’d be — it’d be a very, very high bar.
RITHOLTZ: Quite fascinating. Let’s talk a little bit about Social Capital social media. And being a lightning rod, I kind of get the sense that you like mixing things up and getting people upset by saying things that are contrary to commonly accepted beliefs.
PALIHAPITIYA: Well, I mean, look, here’s what I’ll say. I really like saying what’s on my mind. I think it’s really important. It’s sort of one of the advantages of being — being free, right, and living in a free society. And so, I really take that to heart and I love that. And, you know, in a lot of ways sometimes I do get a, you know, some — some giggles out of like trolling some folks on Twitter, which is fun.
RITHOLTZ: So, let’s talk about trolling. You mentioned you’re one-quarter, 3.6 percent compared to the S&P, which was only up 2.3 percent. And you said, “Hey, I’m doing 56 percent better than the index,” which is technically true …
RITHOLTZ: … but the enumerates on Twitter lost their mind. Tell us, was that an example …
PALIHAPITIYA: So …
RITHOLTZ: … of trolling or what were you doing?
PALIHAPITIYA: … absolutely, absolutely. I got such a kick out of that. It was …
RITHOLTZ: People just lose it.
PALIHAPITIYA: It’s so delicious. You know, I — I — I think what’s important is that a lot of those things are probably saying more about them than they are about me, and their own in securities, and whatever they’re dealing with. I think there are a lot of people, in fairness to them, that are trying really hard and treading water. And I think one thing in FinTwit that you’ll see a lot is folks that are out there, you know, in the arena as Roosevelt used to say “with the dust on his face,” guys like me can be viewed as polarizing. And it’s not because of what we do or our success, but it’s the actual act of doing because that’s what other people are constrained by. And I think that tilts folks’ times.
RITHOLTZ: So — so let me turn this away from them to you for a second and pardon me if I’m projecting at all. So, the — the 20-something, 30-something, Chamath, who’s an engineering, and a team leader, and is a confidante of Zuck, that’s a different person than the 45-year-olds venture capital and someone looking to make a dent in the world.
RITHOLTZ: Have you found you had a sort of change your ammo based on who you are, and where you sit, and how that’s changed your outlook, and job, and …
RITHOLTZ: … reputation. How has that morphed over the years?
PALIHAPITIYA: I think the — the best way to say it, Barry, is that in the — in the absence of a very few people, most of us bring into adulthood a ton of baggage. And a lot of folks are dealing with baggage from how they grew up. And I am sort of Exhibit A of that. You know, you leave a country because of a civil war. You know, you settle in a different country where in Canada — in this case, where, you know, you come as refugees. You know, you live above a laundromat. You take — you know, used to hand-me-down clothes. You live on welfare. You know, your dad has, you know, issues with alcohol, depression, employment. Those are not unique to me, those are unique to so many people in the — in the United States and in Canada.
What happens though is that then it creates these very subtle loops of self-sabotage. So, when you’re young, you can overcome that by sheer brute force. And when I was young, I was, you know, more mathematical than other people, more technical than other people, just more clever than other people in the jobs that I did so I could overcome my tendency to give myself a hard time and make my life more difficult than it needed to be.
Then you slowly become — then I slowly started to become successful. And for whatever reason, the biggest thing was I said I got to go and fix those holes because that baggage is becoming way too heavy for me.
RITHOLTZ: How did you come to that realization? Because most people — present company included — meandered through life oblivious, leaving a wake of death and destruction behind them and …
PALIHAPITIYA: Through distress.
PALIHAPITIYA: Through distress.
RITHOLTZ: What was the distress that led you to that insight?
PALIHAPITIYA: I had a six-month period where my father died, so he was — he died at 72. But — and at the time, you know, I was already very successful, and so I had all this money, but my dad had been a lifelong diabetic, no credible path to a kidney transplant. He had a cardiac arrest. He was end — he was an end-stage renal failure, and he died October.
And then six months later, May, my best friend died. We were all on vacation together in Mexico when he died. And so, it was just this gut punch, this one-two gut punch, one person who is this very complicated figure in my life and another person who is my bigger brother and very much my protector. And without these two, I was a little listless, to be honest. And that’s when I said, “I have to figure out what’s going on and get to the bottom of this.”
And I don’t know to this day why because the other — you know, the other modality, when you’re — like if you ask anybody, you look at a really performing — you know, anybody who’s really good at anything who grew up in a really shitty environment, sorry.
RITHOLTZ: You could say that. We’ll — we’ll just beep it.
PALIHAPITIYA: The reaction is to suppress and compartmentalize. That is the most powerful coping mechanism you have. And for whatever reason in my mid-30’s, I finally stopped trying to do that as much. And then I found people in my life who became these outlets that just started pulling stuff out of me. You know, this sounds really soft, but it goes to when you look at the future or when you look at your — like when I look at my heroes, one of the things that I see is the common through line is that they have all become exceptionally comfortable with themselves. They’re not necessarily palatable to other people. It means — you know it means nothing.
But they …
RITHOLTZ: That’s great.
PALIHAPITIYA: … they have done that work, and that’s what allows them to be highly functional. And when you look at folks like Buffett or you look at folks like Mike Bloomberg, how are you functional, and competent, and so on point through so many decades and changes is because they know who they are. They’re not asking you to like who they are, they like who they are.
And so, I embraced that process, and so it’s a journey. So, I am seven years into a journey. And these last seven years have been very powerful because of that. I feel like I’ve been unshackled. But those were — those were — those were handcuffs that I had made for myself.
RITHOLTZ: But that’s still pretty young to be that enlightened and self-aware. Those of us who have found that — and — and a lot of people eventually find that, but it’s not at 37, it’s usually a little later in life. So first, kudos to you for — for picking that up so early. But second, do you look around and see other peers and other colleagues, and say, “That guy would be great if or that one would be fantastic if only he was a little more self-aware of the — the …
PALIHAPITIYA: It’s less — it’s judgmental than not because that — that is like if — the if-only part, no, but I have now become hyper-attuned to the things that used to hold me back when it manifests in other people. And I see it everywhere.
PALIHAPITIYA: But I have a lot of empathy for that now. So as whereas before, I think I would have been much more judgmental. I’m a lot calmer about it, and I — and I — and I am more empathetic. And where it helps very practically speaking is I’m still, you know, big shareholders in many companies. And the people that get the benefit of that training for whatever it’s worth to them are all my CEOs.
RITHOLTZ: All the founders.
PALIHAPITIYA: All the founders.
PALIHAPITIYA: They get it. And — and I think on the edges, on the margins, I think some of them really appreciate it. I don’t know, I don’t ask them, but not …
RITHOLTZ: Everybody is that Zen when real money is involved. Is that — well, well, it’s going to be what it’s going to be. I could share my wisdom or not.
PALIHAPITIYA: Money is the biggest distraction you can create for yourself if you want to do something useful.
RITHOLTZ: Isn’t that fascinating?
PALIHAPITIYA: Go and read the obituary of Steve Jobs that his sister wrote in “The New York Times,” and I’ve said this a couple times and I’ll just repeat it because it’s so powerful. “When he’s on his deathbed, he’s not saying I invented the iPhone. He has his family around, and — and he’s saying, ‘oh, wow’ repeatedly. ‘Oh, wow, oh, wow, oh, wow.’”
My interpretation of that is that he is talking about something that is so much more important than money and accomplishments. It’s a journey, it’s an evolution, it’s basically feeling like you’ve had these great beautiful relationships, right, and accounting — a real life accounting of your progress. And I want to be on that journey so that 50 years from now, 60 years from now, 70 years from now, you know, touch wood as — as far away as it takes, I want to be able to do that. And so, it allows me to not care one scintilla.
Like I said, I have a little bit of money that I put away to protect myself, but I don’t need the house I live in, I don’t need the plane I have. I don’t need any of that crap. I use it to make my life efficient, but I don’t need any of it. It doesn’t define me. I don’t let how other people view me and let it impact me, and that’s really powerful.
RITHOLTZ: So, let’s stay with the concept of money as getting in the way of accomplishing things or doing things …
PALIHAPITIYA: Of good decisions.
RITHOLTZ: … of decision-making, right. I’m fond of saying money is a tool, and all — a hammer could be used to build a house or to break a window. Its tools can be used (inaudible) used, but I want to talk about this within the context of what you’ve described as activist capitalism. And then we’ll — we’ll get into crypto shortly after that. Tell us what is activist capitalism.
PALIHAPITIYA: If you want to make enormous amounts of returns, you have to go where there is the most risk. So meaning, if — if you — if I said to you, “Hey, Barry, can you become a trillionaire investing in bonds?” You would say, “Chamath, not in a trillion years.” Right? There is zero risk in that market. The returns are meager.
But if I said to you, “Barry, could you make $1 trillion in crypto?” You would say, “Absolutely.” I don’t know how, but it’s possible.
But now think of what it really means. It doesn’t mean that you’re taking massive huge bets of capital. In fact, you could make enormous returns, you know — I mean, I have, I’ve made billions of dollars in crypto investing millions of dollars, so you don’t need to have billions of dollars. What did you need? You needed to have an extremely different point of view. And in many ways, that point of view isolates you, and so you become a little bit of an activist. You have to believe something that everybody else doesn’t, that in that moment is a little bit counter cultural or counterintuitive and you have to hold the line. That’s what activist capitalism is. It’s the ability to have these non-consensus ideas and perspectives, and hold on for dear life.
RITHOLTZ: So, let me push back on that a touch only by saying you’re located in Palo Alto. All the other venture capitalists out in California are mostly there on Sand Hill Road and — and around it. Wouldn’t the more contrarian perspective be, “Let me get out of California and go somewhere else where I’m not part of the same crowd looking at the same deals.”
PALIHAPITIYA: I think that’s — I think where you live is irrelevant. You know, I live where I live because I like it and I like my backyard. And, you know, I have a, you know, nice house and …
RITHOLTZ: Climate is great.
PALIHAPITIYA: … my friends are around.
PALIHAPITIYA: Climate is great. My friends are around. That’s why I live where I live.
The ideas that I find in our backyard oftentimes are really countercultural to what the orthodox perspective is in that moment. I don’t need to move to Austin or Miami to find that. I can find that where I live. It comes down to, are you willing to buck the establishment and how the establishment measures you to be an activist?
RITHOLTZ: So, let’s stay with that, and there’s another quote of — of yours that I have to bring up, “Crypto destroys capitalism and that’s better for the world.” Explain that because that’s quite a nuance perspective.
PALIHAPITIYA: We’re replacing what capitalism is. There are small pockets of how it will work in the future. I think venture capital is an embodiment of that. But the overwhelming amount of capitalism today is inefficient and it’s supported by decision-making and constructs that are artificial. So, let me be specific.
Today, 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, some with three letter athlete. I get into an Ivy. I go through Ivy, then I go work at a bulge bracket firm, then maybe I go and get an MBA at one of these said Ivys, 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. I know all of my buddies, my buddies of the same things.
And eventually what happens is there’s not enough diversity. And I don’t mean diversity in like skin color, and religion, land sexual orientation. I mean, diversity in your mind, you know, which is you have been playing by a very real playbook. And if everybody else that’s also at the top echelons of a pecking order playing by that same playbook, you all become a mono class. You’re predictable.
RITHOLTZ: The same factory is producing the same …
PALIHAPITIYA: Same thing. You could be …
RITHOLTZ: … same output.
PALIHAPITIYA: … you could be brown, yellow, black, white. You could be …
RITHOLTZ: You went through the system, you’re going to be the same.
PALIHAPITIYA: … small, short. You could be male, female. It doesn’t matter. You went through same things. You are rewarded by the same mechanisms. You are taught Pavlovian — like a Pavlovian dog, to behave in one way.
And then you arm people with money and say, “Go do what you think is right and — and view the market’s force into the world.”
RITHOLTZ: And they’re all going to do the same thing.
PALIHAPITIYA: They’re all going to do the same thing. That’s why capitalism isn’t working. It’s not working for enough people because we have a mono class of people that control the money.
RITHOLTZ: So, what’s the solution to that?
PALIHAPITIYA: So, when you look at de-fi, and when you look a bitcoin, and when you look at Ethereum, and Solana, and all of these projects, there are three principles that rip that industry, and entitlement, and establishment apart. Number one is that it’s completely decentralized. So instead of having these centers of power, you have loose affiliations.
Why is that so disruptive? It’s because you can’t go and get a gold star from working at XYZ organization, right? There’s no more hierarchy. There’s no ladder to climb.
RITHOLTZ: No middle man charging a fee in between everybody.
PALIHAPITIYA: No different. There’s no place where you can say, “I work at XYZ, so I am, as a result, smarter than you.”
PALIHAPITIYA: Right? If you work at a bulge bracket firm, you look at people that haven’t worked there has lesser than you. That’s what people do. But in a world of decentralization where there’s all these projects and, you know, there’s — there are no companies anymore, you have completely different ways in which organizations get built. You have completely different ways in which regulations have to adapt because you can’t control these projects. And as a result of all of these things, you have very different outcomes. And the outcomes are now you have diversity.
All kinds of crazy random people thinking all kinds of crazy random things are now acting through these tools to rebuild capitalism the way they want. I want, you know, checking accounts to work this way. I want mortgages to work that way. I want credit scoring to work the other way. I want insurance to work this way.
By the way, it’s not finance, I want art to work in the other way. That’s how NFTs are, right? I want music to work in this way. I want social networks to work in the other way.
There are thousands and thousands of these projects being built that are completely decentralized, completely democratic, you know, completely API-fied (ph). It’s hugely disruptive for capitalism because it introduces massive heterogeneity, right, massive diversity in the people that control the allocation of the money, number one.
And then number two, the reason why it’s super disruptive is all of this either damage or progress, depending on which side of the ledger you want to …
PALIHAPITIYA: … can get started with a few thousand — $10,000, $100,000, and so now you don’t need $500 million. You don’t need to go to four growth funds to raise $0.5 billion because you’re $1,000 — your — you know, your $1,000 investment can literally become $0.5 billion.
So now you democratize who can play the game. You can democratize the capital allocation, so now there’s a diversity of ideas. There’s a diversity of people putting money to work. It’s a Brave New World.
RITHOLTZ: What’s the third bullet point you had — you had referenced? You said …
PALIHAPITIYA: So, it’s democratization, it’s decentralization, and then it’s what I call decomposability, meaning, the beautiful thing about this Brave New World as well is without companies and without — without, you know, hierarchy, there is enormous amounts of cooperation. And the basic way to think about this Brave New World of crypto is using legos. I have an idea, I build something with all the legos that have come before me.
But there’s only one rule, Barry. If you use the legos, you yourself have to be a lego to somebody else.
PALIHAPITIYA: And that’s what composability and decomposability means. Those are the three pillars of this Brave New World, and it’s going to rewrite capitalism. I build an organization that doesn’t have a company around it. I make everything hyper transparent. It takes small amounts of money to completely blow up entrenched interests. And then all of that value, I must make available to anybody else and I cannot say no to them.
Think of how the world today works. That’s not how it works. If you wanted to build an app on the Apple App Store, they can say no.
RITHOLTZ: Right, you got to get their approval. And if — and even if you get their approval, there’s nothing that prevents them as Epic Games have learned of saying, “We’re going to pull back. We don’t like what you’re doing.”
RITHOLTZ: So — so let me ask what I think is an obvious question. Capitalism has proven itself extremely adept at co-opting challenges to itself. The old-line capitalism would — capitalists would sell you the rope to hang himself, but it turns out not to be all that true …
RITHOLTZ: … because the capitalist is also going to be selling tickets to the crowd and building hotels. And before you know it, what was going to be a single event becomes a giant economic engine. What’s going to prevent those existing bulge bracket firms, ivy league schools, endowments, the usual capitalist from plowing into crypto, and blockchain, and all the fun stuff that’s going on …
PALIHAPITIYA: Nothing and they should. And …
RITHOLTZ: … but co-opting it so it becomes just part of the …
PALIHAPITIYA: It’s not.
RITHOLTZ: … capital firm (inaudible).
PALIHAPITIYA: … it’s not …
RITHOLTZ: You’re saying it’s impervious to that.
PALIHAPITIYA: It’s — it’s not — it’s not co-optable (ph).
RITHOLTZ: It’s not.
PALIHAPITIYA: But I think that they should be a part of it. I — I don’t like exclusion. I am like a inclusion maximalist like, you know, what is the — like the mission of Social Capital, right, or vision. I had a vision at our firm. We write — we talk about it all the time, which is even the starting line.
Now, imagine you had a world where you could find the smartest rocket scientist, the smartest mathematician, the smartest biochemist, the smartest materials engineer, the smartest A.I. person, the smartest artist, the best seamstress, whatever it is, the world today doesn’t allow us to find the best human capital as expressed in any of the things we need to move the world forward.
Why? If you’re a woman in the wrong country, you’re screwed. If you’re a colored man in the wrong country, you’re screwed. If you’re, you know, Jewish or not Jewish in a certain country, you’re screwed. If you’re, you know, gay in this country or that country, you’re screwed. If you’re in the wrong caste in this other country — I mean, like the amount of limitations we put on maximizing human potential is insane.
RITHOLTZ: Half the world doesn’t allow people to reach their potential.
PALIHAPITIYA: It’s probably more. And it’s all by design. We choose to let these inefficiencies compound. And so, you know, I believe that we are way better off where there’s a race, right? My — my vision is like there’s a starting line, the gun goes off, everybody on the earth is on an even playing field to start not to end, but to start. And some people will take the offramp and become, you know, a fashion designer, and you would say, “How did this guy come out of nowhere to become — you know, or some people go off and do music in a way that you never thought was possible?” And there’ll be such a renaissance of possibilities.
So, I’m an inclusion maximalist, which is let’s get everybody into the party, give everybody the same tools, and then let’s see what happens. It’s so fair and just for people. And what I don’t like is because I went to XYZ school or because my last name is XYZ or because, you know, I worked at XYZ place, I should have some advantage. And I don’t think that’s right.
RITHOLTZ: So, am — am I being overly optimistic in saying that world you’ve described bulge bracket firms, big banks, Ivy League schools, it’s a very 20th century construct, and it was pretty clear early in the 21st century that that was losing its grip on — on the economy, on the government, and on capitalism itself or am I just being to Pollyannaish with that?
PALIHAPITIYA: I think you’re — I would not include like — you know, look, I think the financial organizations have enormous potential to adapt and be an incredible participant in the future. And I think that there are so many good people inside these banks and organizations that I think will thrive. So, I’m kind of convinced they’re — they’re on the side of history going to be judged wrong.
I have much more of an issue with universities.
PALIHAPITIYA: I think they’re fundamentally on the wrong side of history, and I think that they have done an enormous disservice to so many of our kids and parents because, basically, in the — look, if you take the cost of a university education and you graph it as this function of time, and you put one single dot on it as a trigger for price inflation, I would annotate that dot as the 1982 U.S. News and World Report that started to create university rankings in …
PALIHAPITIYA: … America. It — literally you can see that costs were contained until that stupid magazine tried to create this insert to sell ads, by the way.
PALIHAPITIYA: So, what were they motivated by? They were motivated by, you know, selling CPM inventory to like R.G. Reynolds and Ford, right? Paper ads in a magazine has all of a sudden tricked university administrators to think that this is a luxury good that should be meted out like a reservation line to get an Hermes purse. That is insanity. And especially in a world where we can have, you know, pervasive Internet connectivity where we can find the best grade five science teacher, you know, the best, you know, A.P. calculus teacher that we’re not letting all of humanity benefit from that, to me, is insanity.
So — and then on top of that, there’s just moral overlay now inside of universities where they will also then now make judgments about what you can be taught. And so, what that effectively does is rob people from the ability to learn from first principles, right, to attack an idea down to the basics and build it back up, which is a toolkit. It’s a process thing.
So, I — I — I’m very negative on universities and what they’ve done culturally, and academically, and institutionally, and societally in America. Less so about like, you know, I think financial firms, in general, will be great participants of this new capitalist ecosystem, but I — I think the universities have completely failed.
RITHOLTZ: That’s quite an interesting take. And I know a few people who share versions of that perspectives on both the left and the right. The criticism of the — of the U.S. college and university system is — is pretty robust.
Let’s stick with one more criticism. We’ll talk about zombie companies. You had criticized the pandemic bailout of companies by the U.S. S government. Tell us what you specifically were unhappy with when it came to entities like airlines.
PALIHAPITIYA: I have no issue I want to be clear with airlines. And quite honestly, I have — you know, look when a company — I just want to set the table stakes. When a company goes through bankruptcy — any company — you know, it can happen in a way that preserves employment for all of the employees. It can happen in a way that preserves pensions.
Now, you know, rapacious people who take over companies and force them into bankruptcy can do all kinds of bad things, but it’s also possible that you can do it in this other way as well.
What I was reacting to in that moment was that we were about to reward a behavior. So, I had no issue with airlines, but I had — I had an issue with the following behavior, Barry. We have seen R&D investment inside of America’s companies effectively go to zero over the last 20 years. We’ve seen instead buybacks replace R&D investment in that same period of time. We’ve seen compensation plans get written by boards that completely reward a manipulation of earnings per share. And then we see CEOs optimizing earnings per share by pilfering all of this money that should go into R&D into buybacks.
And the airlines, to be very honest, were one of the worst offenders of that. The airlines knew climate change was coming. Did they invest in a fuel stock that was basically more carbon-efficient over the last 20 — 25 years? No. Did we figure out a way to do more efficient plane routing? No. Did we influence how Boeing and Airbus really build those airplanes to be — you know, to have better wing designs? No. They optimized for massive free cash flow, and they optimized for share buybacks, and they optimized for massive compensation plans to the CEOs of those companies.
Now, in fairness to the airlines, it wasn’t just them, it was entire industries. And then the idea that you go and you bail them out before you bail out individual folks on main street, to me, seemed very unfair. And I thought what would be better would be to show people that actually we want to reward R&D. You know, we want to make buybacks harder.
And, by the way, if you look at what’s proposed in the current, you know, plans that are in front of Congress, there are elements of what I proposed, right? Folks are being forced to — basically, they will be taxed on buybacks. Great idea, I think the tax should be much higher. And then they should be — there — and there are some incentives for R&D. And I wish those incentives were higher.
Now, put all these things together. Why is that idea so powerful today sitting here in 2021? Yeah, we’re in September ’21.
PALIHAPITIYA: We’re seeing China unravel, right? We’re seeing the great vertical integration of the second largest economy in the world. And what that’s going to create is a national security interest for us to be reliant on ourselves and to be diversified in who we work with around the world. That requires an enormous amount of R&D so you cannot keep doing share buybacks and compensation schemes to CEOs. The right CEO’s in the S&P 500 should be plowing 20, 30, 40, 50 percent of free cash flow to solve these problems because these are of national interest and national security.
RITHOLTZ: That’s a really interesting place to take it. I was not expecting you to go there. We think of China as both a — I’m not going to use the word that everybody uses and it’s terrible, but both a industrial ally and an economic competitor. You’re taking this to the whole next level. National security requires us to bring back a lot of the manufacturing that we’ve outsourced to China, whether it’s semiconductors or something less sophisticated.
PALIHAPITIYA: China is a frenemy.
RITHOLTZ: That’s what I was trying to avoid.
PALIHAPITIYA: They’re — they’re an exceptionally intelligent brilliant frenemy. And so, we have to be extremely thoughtful and strategic in how we engage in them — with them. But here are a couple things that I think will come to pass.
Xi is the new Mao. There is only one economy, then that’s China Inc., and China will have to deal with their — you know, a lot of — all of this, by the way, is motivated — is — is motivated by demographics. China is a demographic time bomb.
PALIHAPITIYA: And it’s probably already gone off. And this is why I think Xi is acting much more aggressively than he has. He has a huge …
RITHOLTZ: When — when you say demographic time bomb, that was the single-child policy.
PALIHAPITIYA: Single-child policy for far too long.
PALIHAPITIYA: There’s not enough girl, there’s too many men. And they’re — they’re an aging population. I mean, all of those boundary conditions, you know, young, capable men were great fodder for industrial manufacturing, and — and automation, and exports during the 90’s and 2000’s. But now these men are 40 and 50, there’s not enough women, there’s not enough kids, and so it’s a huge problem for China.
And, you know, right now I think the forecast is, you know, again the outside-in projections are China is going to shrink by half by the end of 2100. It’s probably worse than that …
PALIHAPITIYA: … based on my observation of how Xi is acting now because if you can vertically integrate the economy, you control outcomes better, and then you can basically have a softer landing for the people that are there. That’s — but as that’s happening, it is beyond a shadow of a doubt that China, at some point, will engage in some sort of foreign adventure.
The only foreign adventure that makes sense for them is Taiwan.
RITHOLTZ: Taiwan, sure.
PALIHAPITIYA: And so, we will be pulled into an enormous decision. What do we have to do today? We have to invest, but not just in semiconductors. It’s an example of a problem where China controls the overwhelming majority of the rare-earths. So, to the extent that we believe in electrification, you know, we have to do stuff there. To the — to the extent we believe in solar panels even, a lot of the, you know, poly — silicon carbonate …
PALIHAPITIYA: … is made in China. Why, by the way? Because China has coal, and you need enormous heat and enormous energy to produce solar panels.
RITHOLTZ: So that raises a — a pretty obvious question. How do you compete with a country that thinks in terms of decades when we — we’re recording this a few days before the debt ceiling vote takes place. We can’t even think in terms of hours and days. How do you compete against a country that thinks in terms of decades and centuries?
PALIHAPITIYA: It’s an elegant — I would go back. It’s an elegant way to tie back to the beginning. The venture capitalist, and the engineer, and the entrepreneur are the most important that they have ever been. And when you marry that cohort of people with a more decentralized form of capitalism, what I think eventually you will have is a lot more bets, a lot more ambitious bets, and some bets that are frankly more duration-weighted, 20-year bets.
You know, and you see some folks right now that have done this, the work that Breakthrough Energy Ventures, Bill Gates organization, has done to fund nuclear. You know, I don’t want to hear people’s opinions on nuclear because most people’s opinions are uninformed. The real thing about nuclear is that if you strip away perceptional issues, this is a real technical solution to climate change in decarbonization. It just is, but it required, you know, a centibillionaire to basically plow billions of dollars of his own money over 20 — tens and 20 years of the time. So, I think that we are solving the problem, but we just need to accelerate it.
The risk that we have is actually one of ideology, which is what you said, which is that we’ve actually, unfortunately, demoralized capitalists. We’ve demoralized entrepreneurs. We’ve demoralized engineers. We’ve demoralized moderates. And that is what we need to fix because sometimes I don’t know if you feel this way, I wonder to myself, “Should I feel guilty for being a business person?” You know, because it’s like — it’s like there’s a — a level of vilification and vitriol that I think is — it’s — it’s — it’s misplaced.
RITHOLTZ: Well, there’s this general frustration and anger, and we’ll talk a little bit about social media that does such a wonderful job amplifying and misinforming people. But there’s a sense that, you know, Apple and Amazon don’t pay their fair share of taxes.
PALIHAPITIYA: They don’t.
RITHOLTZ: And that the system has been rigged by the money class who lobby Congress to get rules that passed for themselves.
PALIHAPITIYA: It has been.
RITHOLTZ: And that — that the level playing field that you so eloquently described has been precluded by the haves wanting to maintain what they have and not allow anybody else to even get a hand on the …
PALIHAPITIYA: Absolutely right.
RITHOLTZ: … lowest rung on the ladder.
PALIHAPITIYA: Absolutely right. All those things are right.
RITHOLTZ: So, what — the — the next question is what can we do about it if we’re not centibillionaires with the ability to bring thorium reactors or whatever Bill Gates is working on to the fore? What can the average person due to accelerate the change that we all know is so needed?
PALIHAPITIYA: A great — it is a — that’s a really beautiful question and well said. People can vote with their time. And in order to do that properly, you need places to allocate that time that give you this kind of purpose.
And so, there should be more nuclear reactor companies that exists so that more people can choose to work there. You don’t need to be a nuclear scientist. They need accountants. They need lawyers. They need, you know, all kinds of different people — I.T. people. You know, they need facilities people. So, there’s these breakthroughs in science. There should be more of these.
The first part is really the critical part of what you said. We need to reframe the legislation. We shouldn’t be preventing people from trying. We should take or fix the laws that make trying hard. I’ll give you an example.
One of the most important things that we could do for society in the United States is to fix chronic kidney disease, hypertension, and heart disease. We all know people …
RITHOLTZ: The three biggest killers in the U.S.
PALIHAPITIYA: … we either all have it or we all know people with it. We are all taking some form of medication for it, OK?
There has not been nearly as much progress in these things over the last few years because, unfortunately, we have some legislation that says that if you want to go and, you know, invest in diabetes — Type 2 diabetes solutions or, you know, heart disease or whatnot, you have to also — after all of that work is done, which we already know cost billions of dollars, spend another couple billion dollars and have a $10,000 person longitudinal trial on cardiac safety as well. That’s just kind of like a — a double-standard.
RITHOLTZ: FDA standard operating procedure.
PALIHAPITIYA: You know what that does? Well, if you take $1 billion of cost and lay on another $1 billion of cost, what you basically say is like, well, maybe the available number of companies that could fix this problem are 100, you reduce them to 10.
PALIHAPITIYA: And they’re all public, and they’re all beholden to public shareholders. And none of them are going to come out and put out a press release that says, “No, we’re just going to torch earnings for the next two years while we go off on this.” You know, they’re not going to do it.
PALIHAPITIYA: So, we need to change and refactor some of these laws. But we — so I think — I think the solution is to not demoralize the people who earnestly want to be on in the arena. You know, again, the Roosevelt quote is so good, it’s like you want to be the person that’s in the arena with the dust on your face. You’re going to have some wins, you’re going to have some losses, but you’re not on the sideline. And you just got to give those folks a chance to try. And I think if we can fix some of these laws and regulations, there’ll be less entrenched interest, and there’ll be more entrepreneurship.
RITHOLTZ: Quite, quite fascinatin. You know, I’ve had people tell me, “Yeah, Chamath, you got lucky.” You’ve had far too many successes for me to think that this is the result of random luck, including you tried to buy the Sacramento Kings.
RITHOLTZ: It didn’t work out.
RITHOLTZ: But a friend said, “Hey, you know,” this is back before the age of Curry, before the Warriors were …
PALIHAPITIYA: Yeah, 2011.
RITHOLTZ: … up and tender.
RITHOLTZ: Hey, you know, I’m looking to pick up the Golden State Warriors. Would — would you like 10 percent of it?
RITHOLTZ: You’re like, wow, OK. You put $25 million into it. Last year, I think that $25 million was worth $0.5 billion. What’s it worth now? Is it …
PALIHAPITIYA: That’s about $0.5 billion, $600 million.
RITHOLTZ: All right. So — so that’s what 25X?
PALIHAPITIYA: 25, yeah.
RITHOLTZ: That’s a lot of — so anybody who says the guy just got lucky, you can’t get that lucky that frequently and recognize opportunity when it comes along. So first I have to ask, what’s it like being a team owner or a partial owner.
PALIHAPITIYA: Yeah, it’s incredible.
RITHOLTZ: Fun, right?
PALIHAPITIYA: Oh, it’s incredible. You know that I — I built some deep relationships with a — a bunch of the players, past and presen. You know, we’ve had a lot of really great moments together, friendships. You know, I found a lot of kinship in these players because they’re — they’re a lot like me as well, like it’s like you get committed to a craft, you get committed to excellence. We all had very similar backgrounds as well growing up, so there’s a lot of, you know, shared empathy and just having, you know, tough childhood circumstances and fighting through it.
They’re — they’re great. I mean, there — there — there are — there are three of all of the guys I’ve — that I’ve become unbelievably close to who I would say are my — are my dear friends, you know …
RITHOLTZ: So overall the whole experience sounds like it’s just …
PALIHAPITIYA: Absolute blast, absolute blast.
RITHOLTZ: … everything you could’ve — could’ve.
Let’s talk a little about SPACs. You’ve done really well with SPACs, including talk about 20-year time horizon, Virgin Galactic, I mean, that is not a — let’s make next quarter’s numbers, that’s a decade long process. What attracted you to that company?
PALIHAPITIYA: When I got under the hood of Virgin, I was attracted to how complicated the solution was and how many things they had to put together because — so I had a different business at the time, which I still own a large piece of, I’m the largest investor of, but it’s the second most valuable private space company after SpaceX. It’s called Relativity Space.
And Relativity had decided to try to 3D print the whole shebang, the engines, the rocket, everything. And — and — and it was an incredibly ambitious project, and it’s — you know, now it’s a multibillion-dollar 0 company and, you know, touch wood that it’s successful. But in all of that, I had learned how technically complicated space was, and I fell in love with it. But I had also learned how building for space allows you to build for the earth.
So then when I encountered, you know, Virgin and Branson, you know, I was like, “I can’t believe, Richard, you have spent so much time and dedicated so much money to this endeavor.” These guys had created a revolutionary design for a plane. And I say planes specifically because most rockets go up and down vertically.
PALIHAPITIYA: And Richard’s, you know, engineering was for a horizontal takeoff and landing. And when I explored that further, you know, his vision was not just to be able to go to space, but then to also go to different points on the earth and to use that same rocket. They had — had to build their own hybrid rocket engine. They had to design fuel. They had to — all this incredible stuff. And to me, what I saw were a lot of embedded option value. And so, I was really proud to be a part of that. What they’re doing, I think, is very special.
RITHOLTZ: So you’ve also been very successful in the SPAC space, the Special …
RITHOLTZ: … Purpose Acquisition vehicle company. Tell us a little bit what attracted you to SPACs. They have a long history. I don’t think the average investor realizes SPACs have been around for decades. They just seem to find the new popularity over the past couple of years.
PALIHAPITIYA: So yeah, I’ll tell you my motivations. There are two. One is very selfish, which is I want to own pieces of great businesses for as long as possible, and there are businesses that I’ve known in Silicon Valley being, you know, birth and growing up over the years where — for whatever set of reasons I wasn’t an investor in in the private markets, but I was like, wow, this could be really great businesses and, you know, I wanted to get to know them.
And in that process, SPACs were a great way for me to compound my capital. Why? Because I am an enormously large investor in these things, right? So, you know, SPACs work is that you put up a little bit of money for the potential of a huge return, and that’s where most people start and stop.
I do something additional, which is then I lead a pipe, and I put a lot of my own money. The smallest pot I’ve ever written is $100 million, and the biggest, I think, is closer to $150 million. I can’t remember the exact number. But the point is that I love the process of putting my own money to work in a way where I have to really pay attention and make a really good decision. It’s an incredible process, so that’s my part.
But then the second part back to what we talked about before, I do think this is a way of creating more an even playing field. I think that, you know, typically IPOs of hot shot tech companies are reserved to folks like me. Rich guys with lots of assets who have great relationships with the banks, and you just get fed these deals. And again, I think it’s better where there’s an even playing field and everybody has a shot to find these — to find these gems.
And the SPAC is really clever because you can bet on the person who can find the company. You can also then, if you don’t like the company, redeem and get all your money back.
PALIHAPITIYA: So, there’s this downside protection. You can buy it in so many different points in time in the cycle, you know, before you find a target, once you found the target, after the target has been, you know, bought and de-SPAC’d. I think that embedded optionality is actually really beneficial for retail individuals because they have many bites at the apple to make a good decision. And that’s very different from when, you know, you typically buy a stock where you’re now really wedded to that decision. But the redemption features of the SPAC, I think, are very powerful and — and — and not — not talked about enough.
RITHOLTZ: So — so let’s stick with the concept of the level playing field and — and not seeing deals only flow to folks like you. Let’s talk about angel list and influencers and others that are — or have — have great deal flow.
PALIHAPITIYA: I love — I love all of that.
RITHOLTZ: You do? So — so …
PALIHAPITIYA: I love all of that.
RITHOLTZ: … it’s not just — so the first question is, A, does this create competition for deal flow …
RITHOLTZ: … with folks like you?
PALIHAPITIYA: Yes, and I — and I think that that’s right and good.
RITHOLTZ: And — and B, what is the result of that competition going to be? Are — are we going to see venture capital eventually decentralized?
PALIHAPITIYA: Yes, and I think that that’s incredible.
RITHOLTZ: So — so what does that look like? What does DeFi V.C. look like 10 years hence?
PALIHAPITIYA: So, phase one was things like angel list, which was building the infrastructure so that smaller funds and SPVs, like single-purpose vehicles or special purpose vehicles, could get created in an automated way.
Step two is happening right now, which is that individuals are taking the leap and saying, “I don’t need to be a part of my, you know, an infrastructure. I’m going to be — I’m going to hang a shingle and I’m going to do it my own.” And there’s an incredible solo GPs, some of them are some of the most successful investors in the world. And I’m really fascinated by that, so now what’s happening is sort of what I did back in the day., You know, in 2010, I called Embarcadero Ventures because, at the time, I lived on Embarcadero Road in Palo Alto. But to see that to go from that to, you know, folks like Elad Gil, Oren Zeev, Lachy Groom, you know, Brigette Lau, these people are crushing. They are crushing. And I am like, “God, that’s incredible.” So that’s the second phase. You’re going from groups of people to individuals.
And then the third phase after this is I suspect that you’ll do a little bit more automated so that it’s less biased and that, you know, for example, like, you know, a company like if you think about a company today, Barry, you’re going to build it on top of Stripe, on top of QuickBooks, on top of all of the software.
PALIHAPITIYA: Why can’t you just submit all of that data into some API and the next generation of, you know, venture firms will just look at all that data and say, “This is good. Here’s your check and be done with it.” You know, no pitch meetings, you know, none of that stuff. That just seemed so inefficient, so I think that’s the next iteration.
RITHOLTZ: It’s inefficient, but it gives people places to go, excuses to maintain their authority, power, and wealth.
RITHOLTZ: And who wants to give that up? It’s very challenging to disrupt that.
PALIHAPITIYA: No, nobody that has it wants to give it up. I’m probably the only one that speaks about it all the time and it probably, you know, sometimes ticks off my peers. But it’s better, it’s like change. Change is good. Let’s just see what the other side looks like.
RITHOLTZ: So, let — one last question about giving up power. You — you worked shoulder-to-shoulder with Zuck at — at Facebook, but you’ve been somewhat critical about what Facebook has turned into. What sort of advice would you give Zuck today in terms of putting Facebook back on a more positive path?
PALIHAPITIYA: Well, they are now operating from an enormous trust deficit. I’ve worked with a lot of people there. A lot of those folks that are in the senior ranks worked for me when I was there. I really love the people.
I think that the best path forward is to go to the regulators and figure out how to write a legislative framework that allows them to implement some rules that are scalable. You know, I think the fig leaf is now pretty much gone about …
PALIHAPITIYA: … about Section 23. You know, I think that they’re a publisher. That’s pretty much clear, so it’s about — it’s about — but ultimately honestly, here’s the thing, Barry. You have an almost trillion-dollar company. It’s getting attacked by Apple who is trying to literally eviscerate the Facebook business model and lift the value of the rest of the Internet and the inventory on the Internet.
You have all these decentralized projects now that are trying to reconstruct social hierarchy in a way that’s more measurable and transparent. You have regulators all around the world that are clamoring for something to happen, and then you have these mental health issues now for — for a parent with a child that you — that we all have now a responsibility to deal with.
I think if folks were willing to let that company be one-quarter of its market cap, you can probably implement a bunch of rules. It would just mean that, you know, a small number of people would be much less rich, but then I think the rest of society wouldn’t care that much, and they will continue to use Facebook.
RITHOLTZ: Interesting. And before we get to our favorite questions we ask all our guests, I got to throw you a curveball. You were pretty successful at the World Series of Poker events. You — you — you won — you placed 101st, which is no …
PALIHAPITIYA: In the main event out of 7,000, yeah.
RITHOLTZ: In the main event, that — that’s out of like …
PALIHAPITIYA: … and almost 8,000.
RITHOLTZ: All right. That — that’s a substantial number. What …
PALIHAPITIYA: I’m totally card dead, by the way. I mean, if I got — if I got even a few cards, I could’ve made an even deeper run.
RITHOLTZ: So — so here’s the question. What are the parallels between Hold’em — No Limit Texas Hold’em …
RITHOLTZ: … and — and venture in investing?
RITHOLTZ: That’s the question I wanted to get to.
PALIHAPITIYA: And life. Everything.
PALIHAPITIYA: You start life in some situation. You start poker with a stock of chips. In life, you could be born to the richest man in the world. You could be born in poverty. You could be born with a disability, right? So your — your stack is different, right? Some people have a huge stack, some people have no stack. Poker, same thing. There’ll always be somebody at the table who can buy in from 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. Sometimes all the right decisions, right outcomes. Poker, same thing.
Poker is a chance for you to see that pattern, take a step back, and realize how much of it is really in your control and how much of it is not. And if you really pay attention, poker teaches you that the process is in your control and your reaction to the outcome is in your control, and everything else is luck.
RITHOLTZ: Right. The outcome is not within your control, just how you approach it …
PALIHAPITIYA: How you approach it …
RITHOLTZ: … and how you respond to it.
PALIHAPITIYA: … and then how you respond to it. And so, you know, I played poker for 20 years. There’s games where I have won literally millions of dollars playing poker. At the highest stakes, the highest levels, I have played them and I have crushed them, and they have also crushed and destroyed me. And I have had to learn to bounce back.
I’ve also played at the lowest stakes, and it built incredible relationships and bonds, and learned things about people, and my tolerance for loss and risk. I would — I would tell everybody in the world to learn to play that game, but view it as a small microcosm of your life and the chance to learn about who you are as a person.
RITHOLTZ: I love that metaphor, I think that that’s great. Before your people like the control room on fire and drag you out of here kicking and screaming, let’s jump to our favorite questions we ask all of our guests, starting with what’s keeping you entertained during lockdown. What do you either streaming on Netflix or listening to in podcast. Tell us what — what’s entertaining you.
PALIHAPITIYA: I have been watching an enormous amount of Dave Chapelle, enormous.
RITHOLTZ: So great.
PALIHAPITIYA: I think that he …
RITHOLTZ: His standup or the Dave Chapelle Show or both?
PALIHAPITIYA: Mostly stand up. I just want to say that I think he is one of the most important figures in society currently today.
RITHOLTZ: As a social critic or a comic or both?
PALIHAPITIYA: I think that he is also a philosopher. I think that he is a social critic more than he is a comedian. And he’s one of the most important voices in America right now because he combines this — I — I really look up to him. He’s a hero of mine. This elegant combination of intellect, empathy, but then fearlessness and courage. And he fights for ideas and free speech in a way that I — I really deeply respect. And so, I’ve been addicted to Dave — I mean, addicted.
I probably — I’ve just watched now things over and over again.
RITHOLTZ: Have you spent much time with the original Dave Chapelle Show?
PALIHAPITIYA: I have, but I haven’t — I’ve made an explicit decision to not go back to it …
PALIHAPITIYA: … because I’ve seen his evolution. And I just get so much joy and I find myself still unpacking so — because I don’t — I don’t listen to him anymore to laugh. I kind of listen to him to think, like, you know, he has a thing right now called Redemption Song, which is a small little clip on — on — on YouTube. And what he talks about — just at the very beginning of this, I mean, the whole story is about him going to Comedy Central to get back the rights to the Chapelle Show, but the thing that he says up at the front about cowards and heroes, I would encourage everybody to listen to and just think about how that plays out in real life, in social media. It’s really powerful stuff.
RITHOLTZ: Really good stuff. Let’s talk a little bit about mentors. Who — who helped shape your career?
PALIHAPITIYA: I had a couple of people that I — so in all my phases I’ve been very lucky when I worked at a bank, I had these two guys that I worked for Mike Fisher (ph), Joe Pruski (ph), who are just incredible human beings to me. Well, Joe (ph) was a bit of a jerk but, you know, I’m just saying that to make — wonderful people.
Then when I went to AOL I had a person I worked for Kevin Conroy who made me basically like all that — my toolbox comes from him. You know, I — I — and then I just picked up a lot along the way. David Goldberg — Dave Goldberg who was, you know, sort of my big brother who passed away. And then honestly my father, you know, again very complicated figure in my life, but in — in hindsight really gave me a toolkit, and I’m very thankful to him for that.
RITHOLTZ: Let’s talk about books. What are some of your favorites and what have you been reading recently?
PALIHAPITIYA: So, I’m reading the “Narrative of the Life of Frederick Douglass,” who — who …
RITHOLTZ: Not the autobiography, somebody else is the author of that?
PALIHAPITIYA: No, I think that’s the title of the book …
PALIHAPITIYA: … by him. And it’s really a pretty powerful moving book. I’ve read a lot in religion recently just because I’ve been very curious. I was raised a Buddhist, so I don’t really understand Judeo-Christian. I just think all you people are crazy, and so I’ve wanted to really understand it and unpack it. So, I — I started with, you know, pre-Christianity sort of like paganism, I guess, just understanding it. And then I’ve moved on to read about Christianity, and Islam, and — and Judaism, and I found it all very kind of very interesting because it’s about like society and, you know, the formation of ideas and governance. And — and — and so I think there’s a lot to be learned there.
I — I — and then I — I just — I — I’ve read this book. I’ve said many times it’s worth reading, it’s called Americana, which is like a …
RITHOLTZ: Love it.
PALIHAPITIYA: … 400-year history of capitalism.
RITHOLTZ: Yeah, spectacular.
PALIHAPITIYA: Bhu Srinivasan, just the …
PALIHAPITIYA: … the book — book for the ages.
RITHOLTZ: It — it shows what happens when government and the private sector …
PALIHAPITIYA: Work together.
RITHOLTZ: … partner. And it — it — I think it’s a tremendous book and wildly underrated.
PALIHAPITIYA: It’s — it’s a — it’s a tour de force. That’s a — that’s a top 10 book, you know. And then some blast from the past if you’re interested, there’s a great book called “Fermat’s Enigma” by this guy Simon Singh, which is talking about, you know, Fermat has this theorem, which is X to the N plus Y to the N equal Z to the N. And it’s this basically following the story of trying to prove it. Fabulously written book, completely accessible to the general public, superb to the extent you think mathematical — you know, nonfiction can be.
RITHOLTZ: Well, the history of trigonometry is — is — is …
RITHOLTZ: … right there. You know, that is …
PALIHAPITIYA: And then “Liar’s Poker” from Michael Lewis, love that. I really like — I mythologize like Lewis Ranieri and all these guys when I read it. Those are some books I think are great.
RITHOLTZ: Lewis said that that book surprised him because it was supposed to be a cautionary tale, and instead he got …
PALIHAPITIYA: No, (inaudible) that …
RITHOLTZ: … he got endless letters saying, “How do I get a gig on Wall Street?”
PALIHAPITIYA: No, I had these pictures of Lewis Ranieri that was like, you know, I want to become this big dude with suspenders and a cigar and …
RITHOLTZ: Let’s talk about advice. What sort of advice would you give to a recent college grad who is interested in either technology, investing, venture capital or entrepreneurship? What advice would you share with them?
PALIHAPITIYA: I think that there’s a really terrible pernicious trick that’s being played on you, so I’m speaking to this person. There is nothing wrong with putting in the hours and doing your time. And somewhere along the way, we were told and you — we told you that life is a democracy, it’s not. It’s an autocracy. And you need to learn that, at some point, your big leaps will come from the benefit of learning from others. And I think that I see so many young people quit too soon, leave things when things get hard. They go after labels, just the labels have changed. To be a founder means something, and I think it means nothing.
I was an employee until my early 30’s and I learned a ton. So, I would just tell you, chill out, take a deep breath, get a decent job, work in an interesting place, and then grind and put in the hours. Prove you can be there for three to four years before you go off. You can’t quit every six months to a year. That’s not how you build a career. That’s now how you learn anything.
RITHOLTZ: Quite, quite interesting. And — and our final question is a little bit philosophical. What do you know about the world of technology and — and venture investing in startups today that you wish you knew 20, 25 years ago when you were really just getting your feet wet in the space?
PALIHAPITIYA: I wish I knew — well, gosh, I really didn’t — I don’t — I’m going to — I’m going to say something different, which is I have had major phases of ignorance in my life, and I’m really thankful for all of them because I have made enough mistakes to learn from them, to learn that mistakes don’t matter. And so, if I had been robbed of those mistakes, I’d probably be exceedingly arrogant, a complete douche right now. And so, — so I’ll take the fact that says it’s all been pretty good, man, like, you know, I’ve had some real blow-ups. It’s OK. You know, you live to fight another day.
I’m in the arena. You know what I mean?
RITHOLTZ: You’re covered in dust bleeding and …
PALIHAPITIYA: I’m covered in dust.
RITHOLTZ: … fighting a good fight.
PALIHAPITIYA: And anybody that does that is a hero. You’re all heroes.
RITHOLTZ: Love it. Chamath, thank you so much for being so generous with your time. This was really quite fascinating.
And I’m going to tell you, my best conversations where I don’t bother with most of the questions …
PALIHAPITIYA: I appreciate that.
RITHOLTZ: … you really gave the listeners something to think about. And thank you so much, I really appreciate it.
PALIHAPITIYA: Thank you.
RITHOLTZ: Thank you, Chamath, for being so generous with your time.
We have been speaking with Chamath Palihapitiya, Founder of Social Capital, AOL, Facebook, Slack, just really filled with so much insight into technology, venture, and the change that is taking place within capitalism.
If you enjoy this conversation, well, be sure and check out any of our previous 387 conversations we’ve had before. You can find those at iTunes or Spotify or wherever you get your podcast fix.
We love your comments, feedback, and suggestions. Write to us at firstname.lastname@example.org. You can sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz. Check out my weekly column at bloomberg.com/opinion.
I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Michael Batnick is my Head of Research. Mohammed (ph) is my Audio Engineer. Paris Wald is our Producer. Atika Valbrun is our Project Manager.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.