When Chamath Palihapitiya talks, you are compelled to listen diligently.
Chamath is a Sri Lankan-born, Canadian-raised, American tech-mogul-extraordinaire. But it’s his less brief story that is worth reading. His affiliations include being Facebook’s prized growth hacker, a renowned VC Social Capital’s founder, a hedge fund founder, and owner of the Golden State Warriors.
You might even think him a smug individual. His pinned post on Twitter might give you some idea as to why. He more than hints at why his Venture Capital firm is the best of the lot. Well, the data does back his claim, but should he still be making it? Awfully rude, ain’t it? Unless, he elaborates on why he says that Social Capital is ruling the roost.
Which is exactly what he did.
Capitalism 2.0 – Social Capitalism
Chamath’s recent talk at the Nasscom Product Conclave 2016 was titled Capitalism 2.0 and his VC goes by Social Capital. The economics topic he seemed to refer to here is revolutionising capitalism for the modern world. And how he intended to go about doing this is by starting off with a few interesting anecdotes.
The difference between venture investments today and back when they started in the 70s is tremendous. The most prominent services that were sought from these prudent investors were their ability to help startups grow their businesses using their experience and networks (apart from the moolah, of course).
LinkedIn was the first major disruptive force in this established equation. Upon its advent, any startup could connect with and inmail just about anyone for a very expendable subscription fee. Next came Social Capital’s whole host of well developed analytical tools, which no one could imagine giving away for free. But it did, claiming that it saved everyone’s time and helped maintain focus on making the company even better. The tools, named the 8-Ball provide growth accounting, cohort behaviour, and distribution of product-market fit all measured for the core unit of value for the business (typically users and/or (possibly recurring) revenue).
Using this, a company could successfully benchmark itself, validate, and work on expediting growth.
Adding on to what LinkedIn and Social Capital started, AngelList for ease of hiring right, Amazon’s free cloud storage services and many such others have made a startup’s task a lot easier. Similar historically relevant value-adds by investors fail to create just that – value – for startups today and the justification of apportioning massive equity shares for money ought to be considered unreasonable, claimed Chamath.
According to him, there is an abundance, an over-supply of investments available from investors. That in this day and age, capitalism should only act as an enabler.
Capital ought to be accessible in the same way as water is today – open a tap, get the amount of water you desire, close the tap. The cost of capital ought to be lower today and the investor’s value add should lead to more pricing power in the hands of the venture.
Entrepreneurs should get what they sweat day in and day out for, in turn, encouraging more innovators to embrace the startup culture, reverberating a kick start for capitalism yet again. This is Social Capitalism à la Chamath Palihapitiya.
The concept is pretty cool. But it doesn’t excuse his boastful prediction of Social Capital becoming the most successful VC in the near future. Social Capital is one of the fastest-ever VC firms to reach an AUM of $1 Bn. It has invested in 111 companies to date, off which 18 have been acquired and one has had an IPO. Good numbers, great numbers in fact. But not really enough to back his prophecy – so it was time to pull out the aces.
At the talk, Chamath revealed that Social Capital has been testing automated valuation and investment for startup funding. It claims to have made a significant breakthrough through advanced algorithms, using which it is capable of deriving a definitive yes or no to the preeminent funding justification question. Bonus points for the valuation numbers, of course.
To ensure it’s effectiveness, Social Capital ran this computer tool on all its prior investments and the team was convinced of its authenticity with its high accuracy responses for historical successes, duds and even missed opportunities.
In fact, Chamath even let us know that the last round of funding for Slack was based on the response of this tool. No discussions on the decision whatsoever – take a moment to reflect on the importance of this.
It removes the most important hindrances for logical investing – human errors like ego, passion, personal bias to data, misinformation, or even lack of information.
The key to success for an investor has always been to divorce yourself from the above stated ills, and now apparently, there exists the perfect tool for it.
Such a tool, if proven widely successful, bolsters Social Capitalism, wherein even the last bit of value by an investor – the appraisal of the company becomes redundant. Money provided will translate exactly into stake shelled out by the startup. More power to the entrepreneur – the golden age of investments beckons! But it’s too early to jump the gun.
Although many firms have been working on something similar and applying some facets of algorithmic calculations into their investment decisions, none have stood out with claims of an exceptional record or future prowess attributable to such a computer tool. It will remain to be seen how Social Capital fares.
But if it does, you know who said it first. Not us, it was Chamath, a straight-shooter, with his sights set on the stars.