Former Facebook employee Chamath Palihapitiya, and founder of Social Capital, one of the most formidable venture-capital firms on Silicon Valley, talked with Vanity Fair about what is wrong with the current VC approach of the Valley and the world.
Palihapitiya is a Sri Lankan immigrant that escaped a civil war in his homeland before eventually landing a job at a new company called Facebook. His firm, Social Capital, has backed numerous tech companies with valuations in the billions, such as Slack, Box, and SurveyMonkey. But that doesn’t mean he has bought in the hyped unicorn culture prevailing in the VC world today.
In his interview with Vanity Fair he discusses three of the main hurdles surrounding the current VC system.
1) Lack of a grand audacious vision
The VC industry has to come to terms with the fact that there have only been a handful of investors who had this extreme visions for great investments in things that turned out to be amazing businesses like Facebook, Google, and Uber. Everybody else reacted to that success by trying to do the thing that most approximates to the thing that is working. As a result, most of those businesses, that where fundamentally not good, were run poorly. These businesses should have never been invested in, in the first place. In his words, “We need to divorce ourselves from venture capital as an occupation and focus on using capital as a way to take really big bets on things that just seem totally audacious. Right now we haven’t done enough of that, and the result is that most of the things we’ve funded are mostly crap and largely worthless.”
2) Lack of mission driven affinity
Palihapitiya states that the key of his VC company’s success is to focus on acquiring mission-driven people for your team. This will become the competitive advantage in a world that is just looking for the next best fast thing. “Historically, companies like Microsoft or Apple have taken 25 to 35 years to get to the kinds of valuations that Facebook got to in 10 years. And the reaction to this in Silicon Valley is to try to find things that work really quickly. Over the last seven or eight years, Silicon Valley has really fallen in love with fast growth. Part of this is the risk aversion of the financiers, who themselves want to have short-term wins and want to fund things that look like they’re working in the short term.” This will undermine intellectual laziness and decrease the amount of investment in ‘beauty pageant’ companies. Turning focus on businesses that are technological ambitious, difficult and that require tremendous intellectual horsepower, that can basically move humanity forward.
3) Lack of a clear business model
“We have to get back to this world of having pretty reasonable discipline on business models and understanding that many of these gross-margin businesses will never, never break even or become profitable.” There is no time for “venture philanthropy” anymore. VC needs to do a better job at eliminating the clutter and really focus on businesses that have a long term profitable vision. Valuable companies take decades to build. A lot of the new-generation, remote-control-type businesses—where the phone acts like a remote control to replace an offline experience—are generally, to date, highly, highly, highly unprofitable. Time will tell whether any of those can become a real business at all.
Photo by David Paul Morris/Getty Images.