Venture capital is headed for a ‘huge, rude awakening’
2017-08-28
Venture capital is headed for a ‘huge, rude awakening’

Social Capital CEO Chamath Palihapitiya says if they want to survive, investors need to seek out a deep, operational understanding of their businesses.

Investment firm Social Capital has filed with the SEC to create an alternative to banks for companies that want to go public. And according to its CEO, Chamath Palihapitiya, the future will mean doing a lot of other things that venture capitalists don’t usually do.

“We do seed, venture, growth, equity, debt, private, public,” Palihapitiya said on the latest episode of Recode Decode, hosted by Kara Swisher. “Once we’ve made a decision to be beside you, we will never go away. We will deploy code, we will deploy people, we will help you every day understand your business better.”

By “deploy people,” he’s referring to an in-house roster of data scientists and other experts that Social Capital believes can help give its portfolio companies an edge over the competition. Palihapitiya said venture capitalists should seek out a deep, operational understanding of their businesses, and should bring their own experiences as entrepreneurs to the table to create a codex for new businesses.

“We’ve spent time deploying code, aggregating data, deep inside the bowels of hundreds of companies, thousands of companies before you,” he said. “What that’s left us with are these artifacts. It’s a knowledge base that says, ‘When you try this, it works. When you try this, it doesn’t work.’ Now you can give people, literally, a punchlist of things that can make their business better.”

The problem, according to Palihapitiya, is that most investors aren’t equipped to offer this sort of insight. He predicted a “huge, rude awakening” for the firms that don’t evolve.

“Most of the practitioners are dated, in their philosophy, their framework and their capability,” he said. “These are people that grew up in a different time where the social signaling of where they went to school mattered enough that they could get these ‘prestigious’ jobs. The problem is, it’s not a ‘prestigious’ job, it’s a critical job.”

He criticized investors who take credit for successful entrepreneurs based on a “gut feeling,” rather than data and iteration, and said LPs will tire of having their money locked up in private securities for a decade or more as fewer companies go public. And the big disruptor, he predicted, could be a tech giant like Google, Microsoft or Amazon directly entering the fray.

“Most of the businesses are built on top of them,” Palihapitiya said. “It doesn’t take much to imagine a world where Amazon says, ‘Well, I’m renting you the computer, I’m renting you the storage, I’m renting you the algorithms, I’m renting you all of this stuff ... Oh, I’ll just give you some money along the way, as well!’”

“What’s the difference between them and a venture capitalist? Nothing!” he added. “Except they do it systematically, quantitatively, unemotionally. And as a result, they get a lot more people in the game.”