The Saga of Chamath Palihapitiya

Are you, are you arguing to let airlines, for example, fail?

Yes. Chamath Palihapitiya. He's an engineer, a venture capitalist, a poker player. He owns the Golden State warriors, he takes companies public via SPACs, and now he might be the next governor of California. I'm John Coogan and today we're covering the wild roller coaster ride that is Chamath Palihapitiya's career in tech and beyond. Even if you feel like you know Chamath's story, stick around. I think you'll learn some interesting things. While it's easy to look at him today and think everything he touches turns to gold, he had some really wild ups and downs. We have to start with his childhood since his upbringing informs so much of who he is today. Chamath was born in Sri Lanka to two working class parents. When he was six years old, his father got a job at the Sri Lankan High Commission in Canada. So his whole family moved. But once they arrived in Canada, his dad lost that job and started drinking. His mom worked nights as a housekeeper and a nurse, and they really struggled to pay the rent on their 400 square foot apartment. When asked about his favorite book, Chamath gave a very illuminating response.

Oh, there is one book that I would recommend which I've read end to end and I think for me, and I'm just going to tell you in this immigrant condition or like the psychology of how I helped myself, it's called Adult Children of Alcoholics. It is written in three parts and part one is what have you lived? And it goes into so much detail that it was just stunning to me how much of that I had lived. And for the first time in my life when I had thought that I was suffering alone, I realized so many other people had gone through this, so much so that this woman in the 70s could write a definitive book about it. Okay, that's section one, then section two is. It then says, here's probably all the traits that you brought with you into your adult life. And so many of them rang true. And then section three was, here's how you can start to put together a plan to help fix yourself. Adult Children of Alcoholics. It's the only book that I really would recommend.

The fact that he's so open about his childhood is really amazing to see. That book outlines a number of personality traits, and as we get further into Chamath's story, you'll see how these traits influence his decision making. While in high school, Chamath started working obsessively on any job that could help pay the bills, and he quickly found small entrepreneurial hustles like running poker games for his friends, where he would bring in $40, $50 per session, acting as the house. He developed a lifelong obsession with poker, but that didn't stop him from excelling in school and earning an electrical engineering degree from the highly competitive University of Waterloo. After graduating, he spent a year working in finance as a derivatives trader at a Canadian investment bank, but it clearly wasn't fulfilling his interest in technology, so he moved to California to work at aol. After just a few years there, he became the youngest vice president in the company's history and led their instant messaging division, which was hugely popular back then. Chamath has seemingly always had his ear to the ground when it comes to emerging technology, so it makes sense that he would leave AOL to work in venture capital at Mayfield, only to leave that after a few months to join Facebook. Everyone who joined Facebook in the early days quickly became fabulously wealthy, and Chamath was no exception. He does stand out from the typical Facebook employee stereotype though, in that he was focused on growth as opposed to software engineering, and took a very aggressive approach to management. Far from the nerdy coder tropes we often see, Chamath was called a bully for pushing his team to focus on growth at all costs. Facebook's aggressive growth strategy is highly controversial now, and Chamath has actually publicly said that the product should be redesigned to prevent the distribution of extremist messaging. Looking back to the traits outlined in his favorite book, Adult Children of Alcoholics, you can see how someone who takes themselves very seriously, has difficulty with intimate relationships and is generally impulsive could be an aggressive manager in a high growth organization like Facebook. Ultimately, Facebook's growth was so astronomical that a few ruffled feathers by his direct reports had little impact on his reputation. Chamath was responsible for growing Facebook's user base from 50 million to 700 million in just a few years, and was seen as a master of growth in Silicon Valley. So with his tech bonafides in order, Chamath set out to build something on his own. He had already been making highly successful angel investments in companies like Palantir, Pure Storage and Playdom during his time at Facebook, so starting a venture capital firm was a logical next step. But he wanted to do things differently and create a new venture model called Social Capital. His rags to riches experience gave him incredible confidence in the capitalist model, but he thought that rich people were generally too risk averse and often failed to make Big bets on world changing companies because they were more preoccupied with staying rich. In 2011, Chamath told the New York Times, venture capital firms tend to focus on having large amounts of assets under management and collecting fixed fees. That creates perverse incentives because you're focused on deploying as much capital as fast as possible. I want to be antithetical to all of that. With the goal of acting as a contrarian venture capitalist, he enlisted the help of the most high profile contrarian in Silicon Valley, Peter Thiel, because of their experience working together to grow Facebook in the early years. Thiel was a big fan and had this to say of Chamath in 2012 I think he's analytically quite brilliant, which is always a good thing to be if you're an investor. And he also really is an entrepreneur in the broad sense of the word. He gets things done in these somewhat complicated situations. Typically, VCs don't exclusively invest their own money. They raise large funds from limited partners like pension funds and college endowments. They do normally put in a small portion of their own money. But Peter Thiel advised Chamath to be much more aggressive. Here's Chamath discussing how Thiel affected him in a conversation with Andrew Yang.

And I remember I was sort of on my way to take a vacation right before I started social capital and I got on the phone with Peter Thiel and I said, peter, do you want to invest with me? And I had made Peter a lot of money at Facebook and so he said, absolutely. How much are you going to invest in yourself? And what's crazy was up until that point, nobody had asked me that. And I said, I don't know, like 5, 10, 15, 20 million bucks. He goes, not enough. He's like, you need to be at least 30% of the money. And at the time it was like a $300 million fund or something. And so I did it. And the most important thing, Andrew, that I got from that was control. And I didn't realize how important control would become because when I chose to invest in some of these areas and push came to shove, there was a lot of investor capitulation, because these folks are paid to basically get money back into their institutions and endowments and family offices that they work on behalf of. And this is when I really started to see the problem, which is that you have these enormous problems, parts of society that are broken, where free markets and capitalism could fix them. But then the money comes from essentially rich people. And the problem is helping rich people stay rich is a a pretty sad use of one's time, quite honestly, at the end of the day, and b their appetite to take risk is de minimis because they like staying rich.

Mentors can be incredibly important when it comes to making big decisions, and I think it's really interesting that while in recent years Chamath and Thiel have diverged politically, they clearly aligned on some very important philosophical ideas relating to technology, capitalism and investing. Thiel has spoken at length about the work of Rene Girard, the French philosopher who argued that all desire is at its core mimetic. Essentially we want what other people want. This idea has become really popular in Silicon Valley, and you can see Chamath make a nod to the idea of mimetic desire in this clip from this week in Startups, where he's discussing how an obsession with technology, entrepreneurship has spread throughout the world.

At the core of it is why? Because everybody wants to feel validated and in the absence of being able to validate oneself from within, you will seek others to validate you. And what's dangerous about the world that we live in, which is entrepreneurship and technology, is that it is so in the bullseye of everybody else now. Everybody wants to be in it, around it, on top of it, under it, associated with IT funding IT being a part of it, employed by it, employing. I mean all of it is true. And so it's a very intoxicating, shiny object that people want to have around them and so they will use whatever devices that they have to co opt that.

The venture model that Chamath had developed at Social Capital of taking risky bets on impactful technologies worked, at least for a few years. He was able to increase the fund's size from $250 million to over $1 billion. But then in 2018, the firm hit the skids. Axios reported that Social Capital was essentially falling apart. Chamath's co founders both left the firm and sources said that he wasn't attending investor meetings. People speculated that his divorce had drawn his attention away from the firm's day to day business, and Axios went as far as to call him Silicon Valley's Icarus. They summarized their article by saying, bottom line, Social Capital appears to be done, at least as a major venture capital investor. But they couldn't have been more wrong. And that's what I love about Chamath's story. He does make mistakes. He is fallible, he is human. But he gets back up and he keeps fighting. The technology press had written him off as a failed VC and to some degree they were right. Since 2018, social capital hasn't raised another fund focused on early stage startups. But that's because Chamath had found a new way to have an impact on technology companies. He would Help Unicorns go public Traditionally, when late stage startups want to go public, they have to embark upon a long and arduous IPO process that can take over a year. The process is led by an investment bank and requires the company to present rigorously vetted financial statements that are then scrutinized by public market analysts. IPO pricing comes with risks on both sides. If you price too high, the market might sour on the offering and you could be forced to cancel the IPO entirely like WeWork did. And if you price too low, you could see shares pop on the first day of trading like Airbnb did, meaning that you left money on the table. Special purpose acquisition companies, or SPACs, aim to improve this by raising the money beforehand and then negotiating with a company directly on price after the money is in the bank. Here's how it works. SPACs are shell companies with no actual commercial operations, but are created solely for raising capital through an IPO to acquire a private company. This is done by selling common Stock, usually at $10 per share, and a warrant which gives investors the preference to buy more stock later at a fixed price. Once the funds are raised, they will be kept in a trust until one of two things happen. First, the management team of a spac, also known as sponsors, identifies a company of interest, which will then be taken public through an acquisition using the capital raised in the ipo. Or second, if the SPAC fails to merge or acquire a company within a deadline, typically two years, the SPAC will be liquidated and the investors get their money back. SPACs have been around in one form or another since the early 90s, but they've usually been the last resort for smaller companies to go public. As a matter of fact, CD Projekt, the company behind Cyberpunk 2077, actually used a SPAC to go public in 2010. But SPACs have been on a tear lately, and Chamath has taken full advantage of the boom. Here's chamath explaining why SPACs are so important.

There were 8,000 or 9,000 public companies in 2000. There are about 4,000 now. Two thirds of the S&P 500 have no R and D budgets. Now you can say, well, this is a stock market problem, but I actually think that this is a US Economic problem, which is that we don't have capital markets that can support young, high growing, fast companies in a way that really builds for the future of America, the resiliency of America. And so we need thousands of companies to go public. And so we need to frame the capital markets in a way that they understand why they should be buying future growth and product iteration in R&D versus current cash flow. It's this obsession with current cash flow that has driven the private equity boom, that has driven the debt boom, that has driven 8,000 companies to shrink to 4,000, and that has driven a lot of unnecessarily volatility in the public equity markets.

Just like he did with Social Capital's early stage mission, Chamath is focusing on more than just profit. He's arguing that the American economy needs to be less risk averse and pour more money into R and D and high growth companies. It's an exciting message and I think it's why he's become so popular this year. In particular, the four SPACs that Chamath organized in 2020 have done remarkably well. But these SPACs aren't without criticism. The Financial Times published an article in November of 2020 showing how SPAC sponsors like Chamath get compensated for the work they do. And it's pretty staggering. They analyzed 10 recent SPACs and found that the sponsor earned $200 million per SPAC on average. This is because the sponsor typically takes a 20% cut of the SPAC investment as shares in the new company. Of course, massive paydays like this will lead to increased competition, so that 20% fee may fall under competitive pressure. But for now, it looks like Chamath has found an amazing new opportunity and really turned Social Capital around. But returning to the top tier of finance isn't enough for Chamath. As we've seen throughout his career, he is obsessed with raising the stakes. With the social capital SPAC engine running smoothly, Chamath is now running for governor of California. Politics has been viewed as a kind of end game for Silicon Valley folks for a while now. Meg Whitman, the former head of Hewlett Packard, ran for governor of California and lost to Jerry Brown. Sam Altman, the president of Y Combinator, was rumored to have considered running for governor of California, but never entered the race. And Mark Zuckerberg was supposedly planning a campaign for president, although that feels pretty crazy now. Perhaps even more relevant is Jason Calacanis, who co hosts the all in podcast with Chamath. Jason has been talking about running for mayor of San Francisco on and off for several years now, but his website has Always just redirected to his Twitter, so I don't think he was ever that serious. But Chamath actually has a website with real policy prescriptions, like cutting state taxes and raising teacher salaries. So let's take his run in good faith and walk through what he believes politically, starting with his own description of his political beliefs.

I have no party affiliation. I really consider myself an independent, and I value that independence. And I would vote for a Republican. I would vote for a Democrat. I try to vote a person at a point in time and right now. And my belief has largely been the following, Julia, which is that, you know, politicians at their best are. Do no harm because the real things that move society forward are incentives. And incentives are best designed by people who are experts of policy, not experts of politics and policy. People are folks that have decided to study governance their whole lives because they care about it and they understand how incentives can drive your and my and other people's behavior. So what I would love is a political class, broadly speaking, across both aisles, who just get out of the way and who don't make things worse and who allow us to do what we're all capable of doing, which is taking care of ourselves and fending for ourselves, and at the edges, you know, design incentives so that we can take care of ourselves in a more humane and, you know, thoughtful way.

He's not kidding when he says he votes the person, not the party. I looked up his history of political donations, and although he's donated over $1 million to Democratic candidates recently, he did support Ted Cruz's campaign for Governor of Texas in 2011. Ted Cruz has been a big Trump supporter recently, and Chamath definitely doesn't support Trump. But 10 years ago, when Cruz was running for governor, he was part of a Tea Party ticket that was advocating for lower taxes and small government, which. Which it looks like Chamath still believes in today. Looking back at Chamath's childhood, you can tell that his story of pulling himself up by his own bootstraps really informs his worldview. He loves capitalism and wants it to be easier for new companies with innovative ideas to grow quickly. In his mind, that usually means the government getting out of the way and letting free markets solve problems. It'll be interesting to see if his campaign goes anywhere. Obviously, it doesn't take much to throw up a website with a few policy ideas, but given Chamath's ambition, I wouldn't bet against it. There is one attribute from Chamath's favorite book that I keep coming back to when thinking about his career, the difficulty of following a project through from beginning to end SPACs are perfect for someone who wants to move from one project to the next very quickly. Building a company from the ground up can take years it not decades. But the SPAC process is usually just 90 days from start to finish. I think that might be why he's so successful at it. He can bring an immense amount of energy, enthusiasm and intellectual rigor to the project and have a result very quickly. Building a political campaign and then effectively governing the state of California with its $3.2 trillion economy for the four to eight years that he would be in office would require an insane level of focus. He could probably do it, but I wonder if it would make him happy either way. It would be really interesting to hear Chamath flesh out these policy positions in more detail, so I hope he winds up running and we learn more about his political ideas. But let me know what you think in the comments below. Would you vote for Chamath if you lived in California and if you enjoyed this video, please consider subscribing to the channel. Thanks a lot.