The Unusual Ambitions of Chamath Palihapitiya

Author: Institutional Investor URL: https://www.institutionalinvestor.com/article/b1lw211ts92n62/The-Unusual-Ambitions-of-Chamath-Palihapitiya One-line: A profile of Chamath Palihapitiya — a billionaire investor “turning on his own,” attacking hedge funds, value investors, and the VC fundraising treadmill, while arguing for capital allocation aimed at society’s biggest problems.

Highlights

• It began when Chamath Palihapitiya argued, in a CNBC interview on April 9, that “zombie companies” like airlines did not deserve a bailout from the U.S. government, despite a global pandemic that had shut down business — and travel — the world over.
• Then he took aim squarely at the men (and they are almost entirely men) running the hedge funds he blames for the corporate world’s inability to weather a crisis in the first place.
• Palihapitiya continued. “Who are we talking about? We’re talking about a hedge fund that serves a bunch of billionaire family offices. Who cares? Let them get wiped out. Who cares? And then, with a practiced insouciance: “They don’t get to summer in the Hamptons? Who cares?”
• “On Main Street today, people are getting wiped out,” an utterly calm Palihapitiya reminded CNBC’s well-heeled viewers. “Hedge funds are not.”
• “I don’t think these things are controversial. These are the things that I believe. And I think what happens is that people are a little shocked by the Radical Candor in public because they’re not used to it.” #Conversation
• These “people” should start getting used to it, for Palihapitiya, it is clear, is not taking on just hedge funds. Whether it’s value-investing “morons,” the Silicon Valley venture capitalist elite, or university endowments, to name a few of his targets, Palihapitiya — himself a billionaire — is doing one thing that many of similar means find abhorrent: Turning on his own.
• “It’s fine to fail,” he told attendees at a San Francisco StrictlyVC event that year. “But if you fail because you didn’t have the courage to move to Oakland, and instead you burned 30 percent of your cash on Kind bars and exposed brick walls in the office, you’re a fucking moron.” #Failure
• “He speaks the truth. He says the stuff people are thinking but no one has the balls to say out loud,” says Tom McGovern, the managing director of Idealab, an early-stage investor.
• The outfit was also a not-so-subtle way for Palihapitiya to thumb his nose at the Silicon Valley dress code of the era: khaki pants and blue blazer. “His attitude was ‘I’m not like all you guys. Fuck you. I’m smarter than you, and I’m going to show you,’” says the former colleague.
• But Palihapitiya also had mastered what has become almost a cliché requirement for success in VC land: “He didn’t just think about where things were — but where they were going to go,” Kapoor notes.
• “People wanted to listen to him,” Kapoor says of Palihapitiya. “Lots of people can articulate ideas that everyone agrees with, but can you articulate with vision and logic ideas that are not mainstream? That’s his gift.” #Contrarian
• “Everything was so successful. I’m working and working and working, but I wasn’t happy,” he recalls. “And then as I sought happiness in my personal life, I found happiness in my professional life. I didn’t need to manage hundreds of people or thousands of people anymore. I wanted to be a real allocator of capital, because I wanted to change the parts of society I disagreed with.”
• “I don’t think investing is a team sport,” he says, referring to arguments at the firm over what he calls “power-sharing agreements” that led to the departures — some voluntary, others not. (By all accounts, it was messy and Palihapitiya didn’t handle it well.)
• “The fundamental underwriting decisions of great investors over long periods of time are very lonely individual decisions,” he explains. “It’s about a kind of pattern recognition that very few people have. I don’t know if I have it. But in order to find out, I need to isolate myself and do it myself.” #Investing
• Palihapitiya says he prefers the money-raising process of a SPAC to that of a VC fund. “SPACs are short bursts of effort from a fundraising perspective, while VC fundraising requires more hand-holding and thus time and focus,” he notes. “As a head of a VC fund, you are no longer an investor; you become the head of investor relations. This is not a job I either liked or wanted to do.”
• “In the venture market, building has become harder. Companies take longer and longer to get any kind of material breakout, and they’re less and less likely to do so, which then means that these companies are private for 12, 13 years. But if a venture fund is to be in business, they need to raise money every two or three years. So they’re in the business of basically pumping up their companies. You show mark-to-market gains, you show fake IRR, and you raise more funds. And LPs are the fuel to all of this. They are the ones that are torching their money on fire, feeding this dynamic.” #Investment Returns
• He argues that that dynamic drives a lot of short-term behavior, which is then imposed on the companies hedge funds invest in via buybacks or dividends. “Less than a third of S&P companies actually have R&D budgets. Do you think that’s by choice, or do you think that’s by investor pressure? I think a lot of it is the latter.”
• “Those guys are morons,” says Palihapitiya of many value investors. The historic way of determining value by looking at balance sheets and discounted cash flow no longer works, he asserts. #value investing
• “Today, when money has no value, because we’ve essentially printed all the money in the world and we’ll continue to print it over and over, you have to find value in other parts of the balance sheet, so you have to go to things like brand or intangibles,” he says. “And this is where their mathematical models break, and then their brains explode.” #value investing
• “I am a by-product of an enormous number of progressive ideals — universal health care, almost-free basic Education, a social welfare policy to take care of the lowest rungs of society but give them a path of upward mobility.”
• Still, he insists he has loftier goals. “I care more that there’s change. I like to think that if all of these starting lines are evened up, there’s people way better than me who will do even more than me. I’d like to see some of that in my lifetime,” he says.
  • Find the quote about “Imagine the number of Steve Jobs who are underfed in Africa and can’t change the world.” #Find the Quote
• Take Aclima, a maker of digital sensors that can take a block-by-block measurement of air pollution and greenhouse gases.
  • “Why is that important?” asks Palihapitiya. “It turns out that when kids go to school near places that have high emissions, they have high absenteeism. They actually are more functionally and educationally, not pejoratively, retarded — like you’re held back relative to peers that go to other high schools or primary schools or middle schools in areas where there isn’t as much pollution. Turns out that socioeconomically, we do a really good job of putting immigrants and poor people near areas of high pollution.”
  • Aclima’s technology can pinpoint where those areas are, yet the company was starved of capital when Palihapitiya showed up to become its Series A lead investor, says Herzl. (Palihapitiya notes that Aclima was rejected by his partners, so “I just did it by myself.”)
  • As Herzl explains, “The kind of innovation in Silicon Valley applied to retail and consumer apps has not been applied to the biggest challenges facing society. That’s what Chamath is trying to do — take all of these amazing technologies and capabilities developed in Silicon Valley and apply them to the biggest challenges in society.”
• But Palihapitiya also believes that the problems are much bigger than what technology can solve on its own. They need government. “That’s its job. One of the most important jobs, right after health and safety and security of citizens, is incentives. Government shapes behavior with Incentives.”
• Others suspect his wealth made Palihapitiya less concerned about what other people — presumably those in the financial world — think of him. He has an answer for that:
  • “I actually think I care even more now what other people think, but I care more about the people that don’t have a voice as much” instead of some “random capital allocator who at some very basic level I don’t fundamentally respect because of the politics, or because of the game that the capital allocation process transforms it into.”
• “I think he’s absolutely right,” says Kapoor. “You can be a great investor and a great capitalist and at the same time rewrite the rules of how it’s all distributed.”
• “Right now we are going to go through two or three years of pain. And then I think going into 2024 and out of it, we’ll have a political change, we’ll have an ideological change.”

How it connects

• Chamath Palihapitiya — the subject; this is the anchor profile for his investing philosophy.
• SPAC — his preferred fundraising vehicle over a VC fund.
• value investing — the discipline he dismisses as broken in a zero-rate world.
• Investment Returns — his critique of “fake IRR” and the VC fundraising treadmill.
• Contrarian — articulating non-mainstream ideas with vision and logic as his core gift.
• Incentives — government’s job, in his framing, is shaping behavior with incentives.