September 26, 2018 (LBO) – After multiple reports of chaos at Sri Lankan born Chamath Palihapitiya’s high profile silicon valley venture capital firm Social Capital, the colourful former Facebook founder has gone public in order to quash rumours of the firms demise.
Palihapitiya has restructured the firm as a holding company with permanent capital emulating legendary investor Warren Buffett’s investment vehicle Berkshire Hathaway.
The following tweet and recent blog post by Palihapitiya attempt to explainin the tumultuous transition:
Now that we are a holding company and operate on permanent capital, I will be publishing @socialcapital returns. The format will be similar to Berkshire’s annual letters. I will publish this each year end but will try to do an interim one around Oct1.
— Chamath Palihapitiya (@chamath) September 25, 2018
The Reports Of Our Death Have Been Greatly Exaggerated…
When we established Social Capital in 2011, the goal was to develop meaningful solutions to meaningful problems — which is why we started with a focus on healthcare, education and financial services. They are areas that we believe share a common trait: a critical part of humanity’s infrastructure that had not sufficiently benefited from the broader advancements in software. The byproduct was a world that was advancing rapidly but increasingly asymmetric — favoring the few at the expense of the many.
The motivation to do this was also quite personal — an abiding belief that many more people could accomplish much more, had these systems been working coherently for them.
Accordingly, I did what I could to jumpstart our work, committing as much of my capital as it took to achieve our mission and giving our team the courage to incubate and invest in solutions to hard problems overlooked by the vast majority of the investment community.
Looking back over the past seven years, I believe this approach has proved successful. We have worked alongside great teams to build solutions to hard problems like diabetes (Glooko), precision medicine (Syapse), climate change (Aclima), internet access (Swarm), reforestation (DroneSeed), education (Brilliant), urban planning (UrbanFootprint) and financial inclusion (Ezetap). Alongside these incubations, we’ve made startup investments in Slack, Intercom, Saildrone, Groq, Carta and many others that have enabled the growth and expansion of technology around the world. Together, our holdings in many public and private companies have created a portfolio that is performing very well.
Our public fund returns rank in the top 5% of all hedge funds globally according to Morgan Stanley and, collectively, our four private funds have beaten our peers’ returns by 32%, on average, according to Cambridge Associates’ VC benchmark.
As far as the business of investing goes, Social Capital was firing on all cylinders. We were the second fastest firm in our industry to pass $1B of assets, was managing more than $2B of capital, and investors were clamoring to get in. However, as the firm grew, I found us incrementally drifting away from our core mission and our strategy was increasingly that of a traditional investment firm. It became harder to take the risks we took in 2011 and it became easier to play the same game as every other VC — raise a fund, collect fees, manage limited partners, deploy the capital in obvious things, rinse, repeat. While this is a very reasonable path for most people, it wasn’t right for me and my core team.
By the summer of 2018, we had finished a detailed examination of the many ways we could expand; a thorough process that gave us clarity on what was most important to the organization — it wasn’t about raising more money from outsiders but rather executing on our mission without any constraints related to sector, geography, asset class or timeline.
When making critical decisions I’ve learned to take our time, ignore the noise, be emotionless and always be data driven. This framework has led to the right outcome many times even if it looked “foolish” at the beginning (starting Social Capital, buying the Warriors, buying Bitcoin, investing in Amazon, etc. etc…).
This is the next decision along this framework and brings us to today and how we intend to iterate Social Capital. We are no longer accepting new outside capital. By the end of 2018, we will have finalized a set of changes we began in 2017 and will become a technology holding company that will invest a multi-billion dollar balance sheet of internal capital only. Solving hard problems is what we started to do and solving hard problems is what we need to do more of. This requires a radical form of self-belief — not necessarily about our ability to solve them but in our desire to commit ourselves to the long, sometimes uncomfortable path towards progress.
At its core, Social Capital is returning to our founding principles — an organization that identifies hard problems and assembles experts, IP and experiments that allow us to learn about these problems deeply. Once we have conviction about a solution, we will then execute — by building and/or buying what it takes to solve the problem we identified. Rest assured, we will continue to make new investments — $50M–250M per company — and will focus our efforts on businesses where we can make a difference, in keeping with our mission and values. Importantly, we will continue to support our existing portfolio with capital and growth services as before.Our team will be there to help drive growth and our balance sheet can and will support follow-ons for companies that are tracking.
Making these changes will allow us to reprioritize operational discussions of investment rounds, dilution, cap tables, etc. in favor of technical discussions about ideas, problems and solutions.
But mostly, these changes will give us the freedom to pursue our mission without any distractions, work on the problems we have prioritized and do so for decades if that is what it takes to solve them.
I am proud we keep taking risks and have not gotten comfortable. I want to thank the team that has helped get us here and put us in a position to begin this next chapter. Several Partners have left Social Capital to join other VC firms or start their own while several more are in the process of doing so — I am proud to see them use our platform as a jumping off point for their next adventures and I wish them the best of luck.
I want to thank our limited partners who have entrusted us to be good stewards of their capital. I have always been the biggest investor in our funds and have managed your capital the same way I managed my own.
Finally, and most importantly, I want to thank the great entrepreneurs who are working tirelessly to improve the state of our world. It may feel, at times, that you are alone, but you are not and we will increasingly show up when you need us most — unconstrained and risk-on.