I was looking forward to hearing Chamath Palihapitiya speak at the venture capital 2016 Post Seed conference. The first time I heard Chamath speak live, the host warned the audience that it was highly possible that Chamath would “hurt people’s feelings.” And true to form Chamath, who tells it like he sees it, had people either cheering or clenching their jaws.
A strong track record in finance gives Chamath credibility. And while his fiery style may hurt people’s feelings, his commentary is generally supported with data.
At Post Seed, the dark performance room was packed with entrepreneurs and prominent venture capitalists representing firms that have invested early in Youtube, Eventbrite, and Fanduel to name a few.
The brown Warren Buffet
Chamath, founder and CEO of Social Capital, has said that he aspires to become the “brown Warren Buffet.” Chamath has a BA in electrical engineering and started his career on Wall Street as a derivatives trader before transitioning into tech as an executive at Yahoo.
He then moved to Facebook where he was responsible for growth, which translated into a nice payout when Facebook had its IPO. Chamath co-founded Social Capital in 2011, which now invests in private (venture, private equity) and public (Wall Street) companies.
“We should talk about hard things”
Chamath and Semil Shah, the interviewer, walked on stage for the segment titled “Disrupting the Venture Ecosystem.” Semil unfolded a paper, handed it to Chamath saying, “I listed six topics…you choose first” Chamath responded saying, “We should talk about hard things.” He then read Semil’s topics, which included the election, fake news, globalization and trade, immigration, etc. He finished, handed the paper back and in a teasing tone said, “These topics aren’t hard.” Chamath then asked Semil if he could instead talk about the “world as I see it”, which covered the current state of venture capital, media, the type of venture-backed companies he thinks might succeed and practical advice on financial accounting for startups.
Venture capital long term thinking in a world of constant feedback
Chamath predicts that under Trump’s administration, the public stock market is poised to return double-digit performance to investors. As a result, venture investors will have convince investors to think long term, which is difficult he said in a “world that exists in a constant feedback loop.” “Venture capital” he said, “has to invest in building hard things.” Chamath said there are three types of companies, Bits to Atoms, Sticky Companies and Everything Else.
Bits to atoms companies
Bits to atoms companies are fundamentally defensible because they require hard skills, capital and time. Chamath used Amazon, Tesla, SpaceX and Apple as examples of physical goods companies that took over 10 years to grow and scale. He thinks that these companies will do well given increasing interest in advanced manufacturing and “Pro-US” sentiment.
Sticky bits companies
Sticky bits companies are marketplaces and systems of record that exhibit network effects such as Facebook, Snapchat, and Slack. In other words, the value of these companies grows in line with the number of engaged users. As the communities grow they become harder for competitors to disrupt.
Everything else companies are easy to build in a relatively short time frame and plateau after an initial growth spurt. Chamath referred to this category of startups as “dog shit” considering their risk and illiquidity versus liquid stocks.
Can technology startups solve the world’s hardest problems?
The Post Seed audience was attentively listening to the brown Warren Buffet’s views on the new administration’s impact on financial markets and venture capital. So, how will venture capitalists and entrepreneurs respond to a Washington that changes the risk-reward investment proposition? Will Bits to Atoms and Sticky Bits companies get the most venture capital funding going forward? Can and will venture capital continue to fund startups that democratize and disrupt institutions that don’t work for the majority?
What seems certain is that government will get downsized resulting in fewer dollars for research, education and fewer regulations that protect consumers and the environment, giving venture capital a big opportunity to fill in the gaps. And firms such as Social Capital, whose mission is to “transform society by using technology to solve the world’s hardest problems”, are positioned to invest in startups that can make society better.
Why Latinxs should care
I met with a prospective Make in LA investor today. He asked what qualities we want in an investor. (I wish all prospects would ask this question.)
Since Make in LA invests in “Bits to Atoms” companies, i.e., startups that make physical objects, e.g., IoT, robotics, wearables and the like, I said, “We want patient capital so that our companies have time to grow in a disciplined manner.”
I put Chamath’s advice to work by setting the investor’s liquidity expectations early on. With that out of the way, I went on to talk about Make in LA’s mission, vision and guiding principles. Ultimately it is the company’s mission and vision that will sway the investor’s decision to invest.
Venture funds can’t survive without investors and are influenced by them. It is, therefore, imperative that Latinx accredited investors consider venture funds and managers that align with their values not just for the return potential but also for the potential to drive transformative technology.