How to Choose Investments and Change the World with Chamath Palihapitiya

How to Choose Investments and Change the World with Chamath Palihapitiya

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[??] [treehouse friends] [P. Premaratne] Chamath, thanks for being with us today. For those who don't know you, tell us a little bit about yourself. [Chamath Palihapitiya - The Social Capital Partnership] What did you do in the past? And what do you do today? The past is pretty interesting, although I think it's not that interesting.

I grew up in Canada. I'm originally from Sri Lanka. I came to Canada when I was about 7, went to what they call university, what we call college, studied electrical engineering, and then in this weird twist of fate ended up working at an investment bank for a year, really disliked it, applied to all these jobs online so that I could move to California to be close to my girlfriend, who is now my wife, and I ended up working at a company called Winamp, which created a pretty seminal product which was a media player called Winamp, at the time very much the largest and most popular media player on the Internet-- precursor to iTunes for those that don't know it. That was bought by AOL, and I worked at AOL for a few years. I ran the instant messaging division and then-- >>That's ICQ.

That's AIM and ICQ, A-I-M and I-C-Q. I went to work at Facebook in late 2006 and worked there for about 5 years. I was sort of 1 of the 5 executives that ran the company for a long time, did a bunch of interesting things there, and then last July I left Facebook to start my own fund, sort of to invest and start the next generation of companies. >>Okay.

Let's talk a little bit about Facebook. Without getting into super details, how is it like there, because I'm sure a lot of people who are listening to this want to hear about how it works. It's amazing. The place has really an exceptional culture, and I think that's what's allowed it to be so successful. The most important thing that we did right at Facebook was we had a very decentralized, bottom-up philosophy of how things should work. When you look at companies that are run well and things that can endure, it's because really smart, interesting, creative people that aren't necessarily in positions of senior management have enough say to make the right decisions when it counts.

And I think that's something that Facebook has always gotten right, and I think it's allowed it to attract really great people, and I think it's what will probably allow it to be a really great company for a long time. But it was a wonderful place to work. >>Very cool. Talk a little bit about what you do today. What's your fund about? When I left Facebook, the biggest thing that I realized-- and this is part of the work that I did there. My team built Facebook Platform, then I sort of also built a lot of the mobile products-- or my team did.

And my biggest realization was, wow, we built a lot of this really interesting plumbing for the Internet, this next phase of highly decentralized, largely social products, but what was lacking was a lot of the really great things to sit on top of that infrastructure. And what I was really interested in was pushing the boundaries beyond what was traditional. Most people when they think about social stuff are thinking about games and other very obvious categories, and I was asking the question, "How do the new rules of the Internet change and reshape how, for example, "the healthcare industry works or how we learn and how education works "or how people get access to credit and how the financial services industry works?" And so I wanted to sort of focus my energy on those, which tend to be very kind of like big, hairy areas that traditionally Internet people don't spend time in. But I thought the rules had changed enough where it was possible, and at the same time we as a society need to fix those areas if we're going to thrive. Very interesting. What is it about investing that attracts you? What drives you to do what you do? I know in previous interviews in the past you referred to analogies between poker and startups and the thrill of both. >>Yeah.

Is it the same with investing? I would actually say that I don't like investing. I actually like company-building. I really like the phase from an inception of an idea to that second or third major iteration of a product. That's where I feel the most comfortable, from 0 to a few hundred employees. I love the challenge of being this David against some Goliath. I like being an underdog.

I like just working all hours on something, being elbow to elbow with people that just have nothing going for them other than just a lot of chutzpah. And that's just a really, really cool, pretty bad-ass kind of environment for me. I don't really like being some corporate executive type.

The problem is, I think the industry in general--and I think this is the world-- we all look at false idols a lot, and we kind of pick people and put them on a pedestal and we want to emulate them. And invariably what happens is it's the person who shouts the loudest that gets the attention. And I think that ends up never working.

You don't get a lot of credit for being in the bowels of building companies at that phase. But in my opinion, that's where the most value is created and for me it's the most fun, so that's why I do it. >>Okay. Correct me if I'm wrong, but the work that you do tends to revolve around achieving social good, and it might mean waiting longer between some of the returns on your investments. No. I'm not that interested in a bunch of social good, to be honest with you.

I'm interested in change. I'm basically convinced that people right now who are in positions of power are there for completely the wrong reasons and shouldn't be. And so the question is, how do you change the dynamics and the cycle of power and the balance of power? And in my opinion, when you empower individual people to make decisions, they tend to make more coherent decisions and they tend to make better decisions. And so when you look at a lot of the problems that are ailing the United States or ailing the world, these are problems that bureaucracies have created.

Why is it that we all talk about how education is the most important thing in the world and every politician to get elected has to have a position on education, but there's more than a trillion dollars of student debt, it's the most encumbered sort of thing that an individual has to deal with, at the tail end of spending all of this money now, there's no guarantee of a job or any really meaningful employment, and then the worst thing is if you actually go bankrupt, that's the 1 thing that won't get expunged. And so you can see how the system is sort of tilted against you. It's really great rhetoric, right? But all of these people have no incentive to actually change the system. And so from my perspective, I'm more interested in creating a dynamic where actually people are empowered and can live lives where they are self-sufficient economically, they can do whatever they want, they can buy the things they need, they can have a great life. And if you look to these people who we've put as false idols, they're just going to let you down, and they've let us down. I feel like technology and smart people can creatively solve these problems in ways that policy and other things can't.

I just want to do that because I think it's the right thing to do. >>Right. You mentioned that you like investing in 3 sectors: education, healthcare, and financial services. Why those 3? Let me go through each one. Healthcare, the reason I love it is because I think-- There's a macroeconomic reason, which is obvious, which is trillions of dollars of costs, costs spiraling out of control.

It something that will literally bankrupt the United States and most of the Western world if we don't fix. And what we need to fix is correlating investment to outcomes and creating a cycle where the incentives aren't to crack your body open and to do a bunch of random procedures but to do all of the stuff upstream that actually allows you to live a healthy life. And to me, there's a lot of really clever things that software and hardware and products can do to do that. And so I like healthcare because I just think that you can save so many people's lives by doing interesting things. I'll give you an example. So many people today don't even get a basic blood test. It's irrelevant where you live--Western world, developing world, Third World-- it just doesn't matter.

But most of the major maladies of the world can be detected and fixed if you just had that. The problem is you probably get a blood test once a year and it costs $1,000. And you go to a lab and you sit there with a bunch of other people, and it's impersonal, it's kind of antiseptic, and you don't like it. And so we're building this product that basically decomposes this million dollar machine down to a hundred dollar machine that works off of your cell phone camera chip sensor, the same thing that you use to take pictures. >>Very cool. The reason why that's transformational is now you reduce the cost to dollars, and individuals can do it in their bathroom or their home, and now all of a sudden you start to change the incentives for people to care about their own body and to understand their own body, and then they're empowered to actually do something. So that's why I like healthcare.

Education, I think it's because policy is so fundamentally broken we are letting down an entire generation. And the problem with that is that it will create massive instability. You're already seeing this now--people rioting in places like London a few years ago, Paris a few years ago, Spain a few months ago. When people rioted in the Arab Spring, that wasn't a political pushback; that was a socioeconomic pushback by all these young people who were like, "We're frustrated." It was this fruit vendor that immolated himself that started the whole thing.

And so when you think about that, a third of the world is under the age of 18 now, 1/3 of the population--billions and billions of kids-- young people who have all this potential. So how do you pay that off? By tricking them and forcing them to get into $150,000 worth of debt to go to a school to get a degree that maybe doesn't matter where they can't get a job afterwards-- >>No. just so you can get reelected? That's terrible. Those are lies, right?

And so I feel like if you can, for example, teach people how to code-- which, in my opinion, is the most fundamentally obvious blue collar job of the 21st century-- that's just a great thing, and you replace trillions of dollars of cost in debt with hundreds of dollars of opportunity. It's just an obvious trade-off. And then financial services, I just think there are a lot of people with great ideas, and I think there are a lot of people when empowered with capital can do really good things. I'm really interested in ways where you can redistribute capital.

I think right now capital has been aggregated by a lot of these monolithic institutions that aren't trusted for a whole host of reasons. I think some are valid, probably some are not as valid, but in general, what's happened is a very risk-averse culture by people who control the lubricant that's necessary for economies to develop. And so if you can develop these alternative capital flows and marketplaces and systems that create liquidity for individuals, you give them the chance to now build these businesses and do what they think they should do, invest in the things that they believe are worth investing in, and I think again, in general, individuals are better decisions makers than these small groups of people that kind of live in ivory towers. >>Okay. That's very cool. When you're looking for these companies that do what reflects your ideals, what do you look for in a founder? What qualities make a good leader, and how do you know that this person can make-- [Palihapitiya] This is a really interesting question.

I think a lot of people have these frameworks that they use and very rigidly live within these frameworks. The founder has to be technical, or the founder has to be between this age and that age, or the founder is generally of this gender, or the founder has to have gone to these schools. And so you develop all of these rules mostly based on the historic look back of what's worked before. And what I think that basically eliminates is this idea that most people have the ability to be brilliant at something. And for me, what I'm really trying to figure out is whether they have the right characteristics that allow them to be malleable enough to seize an opportunity because in the world of startups, in my opinion, there is as much, if not more, luck than there is skill. Timing, the right technology decisions at the right time, a few critical hires at the right time, a few critical features at the right time, and frankly, you can have a substandard group of people get those things right and beat what is on paper a tremendously better group of people who didn't make those decisions. >>Right.

So what you're really trying to figure out, in my opinion, is how does their mind work? Are they scrappy enough? Are they listening? Are they cynical enough to push back? Those characteristics are hard to define, and I think they're manifested in wildly varying ways. What I'm trying to figure out is whether those things exist and can I plant enough seeds where the intellectual curiosity of the person will guide the decision, as opposed to some great rhetoric that I may spew and then they just blindly run into a brick wall because that's what they think I told them to do. That's not important. A lot of people out there think that you need to have this revolutionary idea because there are so many ideas floating around now. Do you think founders need to have revolutionary ideas, or is it the execution of a normal idea? Revolution starts in evolution. You could have the biggest, craziest, audacious idea in the world, but unless you can put 1 foot in front of the other and make that first step, you're screwed and none of it matters.

And again, all it does is it may allow you to wrap yourself in some really elegant rhetoric, maybe it allows you to be really followed on Twitter and appear at Tech Conference. None of that matters. All of that crap washes out in the end because if you suck, you suck. You may be articulate, but if you suck, it doesn't matter and you'll be revealed to be a sham.

What matters there is just that ability to understand what that first specific set of things needs to be with that broader, bigger goal in mind. But if you can't put your first foot in front of the other-- And you know what's amazing? Most people can't because they get wrapped up in the rhetoric of the vision and the mission and all of this grandiose blobbity blahing that they screw up and they're their own worst enemies. I like revolution, I like disruption, but I'm skeptical that things start that way.

Let's just say ultimately, 5 years from now we look back and we think that there was a massive sea change politically in the Arab world because of the Arab Spring. That fruit vendor self-immolated because he was frustrated. Now, maybe he started a revolution, but that took courage to do what he did.

That's not right nor wrong, in my opinion, but my point is that's an example of how a revolution started with a small-- not a small thing, it was a big thing--but 1 thing that was tractable within him. And I think these broad-based, gnarly expressions of how all of these huge, crazy things can happen, they happen over many, many, many, many, many years. These are massive tectonic plates. It all boils down to 1 person doing 1 thing.

And I think that for a lot of people that's hard still. [Premaratne] You sometimes like to take on a more hands-on role with the companies that you work with. Is that normal of an investor or a VC to do? I think it's probably atypical. That's sort of why we've constructed this base that we've constructed, which is to have a lot of these really interesting companies here very early on.

And what it allows me to do is sort of transfer knowledge. Look, right now I've come out of 12 years of operating some of the most interesting consumer businesses that have been built on the Internet. And I've been a part of now 3 massively seminal interesting products: Winamp, AIM and ICQ, Facebook.

And so there's a body of knowledge there that's really relevant, but it's only relevant for a short period of time. Four years from now I'll be as dumb as any other VC, but in these next 3 or 4 years I probably have some reasonable knowledge to transfer, and so the best thing that I can do is make sure I'm in a position to get that into as many people as possible because then at that point what I'm hoping is then I'll be able to learn from them because they'll really understand the rules of how the next 10 years will evolve, and then I'll be able to learn from them and they'll feel a sense of not necessarily obligation but maybe hopefully a little bit of gratitude combined with a little bit of pity, and then they'll want to sort of teach me. >>Right. How should someone approach you as an investor or VC? You don't have to possibly talk about specifics on how you find companies that you work with. But in general, if someone has an idea and is down the road with a startup and is looking for a VC, what do you think is the best way to approach? This is unfortunately the standard corporate response that every VC gives you, and I don't really have a better one. But the way that this culture works is in many ways similar to how American Idol works, for better or for worse, which is there's all of these intermediate levels of selection and filtering that happens.

So for example, you know somebody that knows somebody that knows somebody that knows somebody that knows me or any other VC. And typically what happens, it goes through this chain and people ask this question, "Hey, does it pass my sniff test?" And if it does, they pass it to the next guy because they want the next guy to not look at him and say, "Why did you send me this thing?" >>Right. So it's like if your idea is for chocolate-covered dog biscuits, you're not probably going to go and try to pitch that to Kleiner or Sequoia. And so somewhere along the chain someone is going to say, "You know what?" "There's a more appropriate avenue of capital for chocolate-covered dog biscuits."

Now, if those chocolate-covered dog biscuits had some sort of biosensor built in to it so that you can now map the intestinal tract of the dog and prevent parvo and 9 other diseases, maybe, right? So there's all of this filtering that happens, and so by the time that it gets to these guys, it's at a point where they can make relatively straightforward decisions. That's typically how it happens is you know somebody who knows somebody who knows a VC, and it kind of goes through that cycle. That being said, there are still many, many people who, in my opinion, should have access to capital to pursue their ideas and don't, and that's why I think there are some amazing things that are happening right now in this sort of financial services ecosystem that is, in my opinion, transformational for capitalism and capitalism by individual entrepreneurs. Specifically, a company that I think is doing amazing things, AngelList. You could be in some small little town somewhere and it could be you and 3 people who just have a really great technical idea, and if you can explain that well and you can start to put out a beta version of a product and be out there in the ecosystem and have credibility, you could raise money there. So to me, that's amazing. If I was an entrepreneur that didn't know anybody, I would first try to go this path of AngelList and try to build some technical credibility and product traction and use that as a conduit to get introduced to people via that chain.

Okay. This is a pretty long question, so bear with me. When you left Facebook, you wrote a pretty inspiring message that's on TechCrunch right now, and since then you've gone on to invest and mentor many entrepreneurs and companies. [] As an investor, when you encounter a founder who has had past failures, do you view that as battle scars that make him stronger now, or is it proof that that founder doesn't have a good track record? >>It depends. It depends on how they failed. I would say I still believe everything I wrote in that departing note that I sent to the people at Facebook.

I had a functional role, but part of my job at the end was probably to be this kind of curmudgeonly old-timer who made sure that we never veered off of our Northern Star. When companies work, the biggest thing that happens is you revert to the mean. And what I mean by that is the mean is every crappy company out there. And we all work at crappy companies. We've all done it. We all look at our boss and think, "This guy is an idiot. How does he have this job?" "This company is so stupid. I hate my job. Is it time to leave yet?"

We've all been in that position. And so the real question that I was asking myself at Facebook was, "What happens and how do companies end up in this situation?" And my realization is every company gets there eventually. But that last word is the most important.

And so the challenge of a senior executive team is to prevent that regression to the mean, and culture is the only thing that does that. And so I would always speak to all of the people that we hired every Monday, and part of it was to scare the living shit out of them, but part of it was to be unapologetic about a culture that valued transparency, openness, authenticity, and value over perception. So it's not about politicking, it's not about managing up, it's about doing good stuff and that the engineer that could be the most junior person has as much or more power than me. And that's an awesome dynamic because it allows the smart people who are capable to do the right thing.

So that's what I talked about. When I left, that note was meant to encapsulate all of that. I think I've realized that all of that is still the same. So when I meet an entrepreneur and they've failed, the thing that I'm trying to figure out is how did they fail? And this is going back to what we talked about earlier. Did you just not listen and keep battering your head because you heard something or read something and you just didn't refuse to pivot? That kind of stubbornness can be good, but it can also be extremely destructive. Did you fail because you got the market wrong but you built a great product? That's actually not such a bad thing. That happens, right?

It happens to the best of us. I've failed more times than-- And then the last thing is are you comfortable with that failure? The people that can own it, in my opinion, that's a very special class of person. And part of it is just being around enough people. That's why Silicon Valley is so great because it celebrates failure as much as it celebrates success, and I think that's awesome. I grew up in Canada.

I love Canada, but what's frustrating about being Canadian is we don't celebrate failure. And so it's all about mean reversion, it's all about managing the middle. And so if you're an outlier, you feel extremely isolated and you feel stupid when things don't go right, as opposed to trying to learn from it, rinse and repeat, try again. >>Right. So I'm trying to figure out how did they fail and what did they learn? In general, I think it's a good thing.

In general, though, what I would say more importantly than anything else is are you humble enough to realize that when things worked it was you but it was also a lot of luck, and then are you courageous enough to realize that when it failed it may not have been as much you but you've learned enough to now avoid the same mistakes? Those are the 2 things that you have to figure out. You have to be humble enough to realize timing is everything, people are everything. The team, the conditions, your competitors--so many things came in to making something work at that time. It's not so replicable. Similarly, if you failed for the right reasons, that could be great DNA to go again and try again. A while back, in a bunch of other interviews you mentioned that in the past you wanted to jump into the VC world, and you sent out internship letters, right? >>Yeah. And you got a bunch of noes back, but you kept going and you found your way into this world.

No, I got no response back. The 2 people that wrote me a no, which I remember to this day because I still look up to these 2 people and they're the most incredible people in the world, John Doerr and Vinod Khosla. They're the only 2 people. And to this day they probably don't remember that they did it. This was in 1997. Maybe they do. I don't know. I've never asked them.

I can't find the letters now, which is a real shame. I had them until about 2007, 2008. And maybe it was just their EA that wrote it and they signed it. I don't even know if it was a stamp. It didn't matter. To me it was just like I really wanted to see what this world was about because I was like, "Wow, these guys are creating the future."

"I'm going to create the future." No one even gave me the time of day. I literally sent 50 letters. The only 2 people who were thoughtful enough to take the time to actually send something back saying, "Thank you, but we don't hire interns," was these 2 guys. >>Right.

Going off of that, how should entrepreneurs deal with noes when they talk to VCs? Does it mean that your idea is terrible, or does it mean that you're just not there yet or you're not fit to run a company? >>It means neither of those things. Listen. There is a massive lemming culture and mentality in most industries. When you're looking on the outside in, the tendency is for most people to assign more credit than most industries deserve. So when I'm on the outside looking in to the hedge fund industry, what I'm probably thinking is, "Wow, they're all geniuses." "These guys just know what's going on. They're manipulating the world."

Capital flows, finance, the stock market. And what you realize on the inside is, "Not really." Most are bozos and most are following a few guys who really know what they're doing.

I could be on the outside looking in to the world of molecular biology and genetics and think, "Wow, these guys have the keystone to understanding the human body." And then you dig a little further and what you realize is, "Not really." Most people are following the work of a few who are really leading the pack. And I would say this industry is not dissimilar to any of those.

There are a few people that have the courage to have their own perspective and do what they think is right, and then there's a lot of people that do what those other people do and chase so that they're not late. And so what you can't get tricked by are the educational qualifications of people-- meaningless. It doesn't matter where you went to school. It doesn't matter if you have an MBA from Harvard or Stanford. There are a lot of idiots I've met that have MBAs from Harvard and Stanford, and there's a lot of geniuses I've met that have dropped out of school.

I would say you should have a healthy skepticism to this industry, like every other industry. In most industries there's just a few people that are really good, and most industries are cluttered with a bunch of people who run around following those few people. Do you think VC funding is always necessary? Some companies have an explicit goal of, "I'm going to take this idea, "and once I get funding I'm going to exit." Do you think that funding is always necessary for a startup? It's not necessary, especially now, because you can find very different forms of capital. And that's why I think it's a very healthy dynamic because now the entrepreneur becomes more empowered to build the type of company they want, the type of culture they want to stay in. For example, I know a lot of really, really great entrepreneurs who have taken capital from some of the most prestigious venture capital firms in the world, only to get fired.

And when you look backwards on that decision, they think it's the single worst decision they've ever made. Sometimes these companies have gone public, these people have become rich, but it didn't matter to them because it left such a bad taste in their mouth. You could look at that and say, "So what? You wouldn't have been public." We don't know that, right? The counterfactual is impossible to know. But what it does tell me is now that you can go to AngelList or if you're building a product you can go on KickStart and deficit finance a bunch of stuff. It creates all these competitive forces that now rationalizes power back to the individuals who are starting and working at companies, and in my opinion, that is much better.

I just think it will create better behaviors and better outcomes. And outcomes may not mean splashy IPOs. Outcome may just mean you can hire 50 people and you run a company that's profitable and you're a great member of your community, you have a great lifestyle, you spend time with your kids, your kids are normal, all of the executives on your team are great people in their community, their kids are normal. That will do more to change the world than being a douche and having a billion dollar IPO. You know what I'm saying? So legacy is a very tricky, interesting thing, and I think people chase these societally defined norms of what success is, and I think now that there's all of these different ways, the real challenge is for all of us to deconstruct that and actually live our own lives. To wrap it up, what advice do you have for future entrepreneurs out there? I think it's very hard to give you 1 pithy sound bite.

But again, I think it's having the courage to be yourself, healthy skepticism and cynicism. Do not develop a sense of idolatry around any individual person. Don't read the blogs, don't read Twiitter. All of that stuff is a whole amount of self-reinforcing rhetoric and promotional propaganda that can be informative but needs to be balanced with your own internal sense of what you want to do, how you want to do it. That's the most important. A lot of false idols, so just be very careful. Listen to your own gut. You're probably the best decision maker that you know.

Thanks, Chamath. Thank you for taking the time to do this. >>Thank you. [treehouse friends] [??]

2021-02-03 18:16

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