Are VCs Worthless? Why Start-Ups need to go after hard things
Chamath Palihapitiya on big-tech monopoly and what needs to change in the VC ecosystem.
Link to Info-slides.
Listen to audio summary.
About the speaker
Chamath Palihapitiya is a venture capitalist and the founder and CEO of Social Capital (SC). He started as an investment banker eventually switching to be a growth leader. He helped build several Silicon Valley companies including Winamp (100 million users by 2001), AIM+ICQ (250 million users by 2004), and Facebook (1 billion users by 2012). He is also an investor in companies like Yammer, Playdom, Box, Palantir, and several other ventures including the NBA team Golden State Warriors.
The summary talks about his views on the venture capital ecosystem, what makes businesses successful and why Big Tech is winning.
Key Takeaways
The current VC ecosystem is affected by the inherent structural problem of being a Principal-Agent. This has choked their capability of driving innovation and being growth enablers.
The basics of capital allocation need to be revisited from building the right investment team, vision statement, and allocation strategies.
Businesses need to understand the dynamics of operating in a tech enabled ecosystem. This requires an understanding of underlying business problems via a data enabled approach and the whole process managed by an experienced team.
Companies such as Google and Amazon have avoided disruption by being the best at what they do i.e. leading innovation in their niche, using huge balance sheets to ensure survival, and making fundamentally utilitarian products in their segments.
Palihapitiya’s view on why the current VC business model is broken
Victims of Principal-Agent Problem: VC firms make investment decisions on behalf of their investors which leads to conflict of interest when it comes to taking investment decisions. This reduces the risk-taking ability of VCs as they must align with investor vision instead of calling shots. In turn this leads to multiple investments to spread risk instead of a few large bets.
Excessive focus on returns: VCs invest with a promise of returns for their clientele forcing them to make the cheapest and fastest paying investment decisions. This drives their investment away from products that can be beneficial for the larger society.
Cultural misalignment: The prime objective of VCs is to take calculated risks on individuals and nurture an atmosphere of growth for them. Unfortunately, the culture has evolved into unfruitful hierarchies, organizational politics, and preference for beautiful decks over real business value. This misalignment leads to chasing of fallacious metrics — press releases and mention on leading platforms such as TechCrunch.
How Social Capital is reinventing venture
Team construction: SC does not hire financial people instead investment decisions are taken by experienced product managers and engineers with a deep understanding of the technological landscape. The investment team includes people who have been a part of successful projects from companies such as Facebook, Google, and Apple.
Capital allocation strategy: The SC strategy on capital allocation is not based on cashflows (often non-existent for start-ups) instead the focus is on a team’s deep understanding of their product — both technically and operationally. SC then benchmarks these practices against their intellectual database comprising of data from their portfolio companies, experts, and third parties. This practice enables them to be agnostic in their investment i.e. they do incubation, seed funding, series A and beyond, and also manage a hedge fund.
Long-term focus: Chamath focuses on hard problems of current times which means instead of betting on consumer internet companies he prefers long-term solutions solving humanity’s core problems. For instance, investment in healthcare, where costs and regulations give rise to the massive possibility of becoming a monopolistic giant that can get billions in cash flows but over a significantly longer period.
Lessons for business leaders
Foster strategic partnerships: Businesses need to accept that almost all their assets are or will be impaired by technology. Mitigating risk from disruption will require them to adopt a culture of partnership with risk-sharing arrangements. For instance—SC and Ford working together to solve latter’s autonomy problem using Social Capital’s technical expertise.
Build trust across ecosystem: A CEO’s key skill is to create trust and hope for the business model (especially in a start-up) across stakeholders. This is achieved by making their narrative inspirational and at the same time believable resulting in high employee morale and retention. For instance—Elon Musk, CEO of Tesla, known for his moonshot business ideas and ability to deliver them.
Create strategy on business realities: Large businesses need to consolidate their market and create returns over longer periods by spreading costs and using their large customer base. Small businesses, however, must stay focused to become a successful niche in the market. The businesses that can see annihilation are that of the middleman. As technology makes connections between businesses stronger and easier to implement, the need for the middleman will die out.
Why Big Tech will continue to thrive
BigTechs have avoided disruption by leading innovation, focusing on core product value, and using their balance sheet to ensure survival (R&D, multiple acquisitions).
Amazon: The company has a winning culture i.e. getting incrementally better each day with constant learning. They have successfully evolved by building on top of their existing businesses and making utilitarian products across segments.
Google: As per Chamath, Google leads the pack when it comes to understanding the AI landscape. Their recent innovation, the TPU chip, attacks the AI problem at its core. The chip is custom designed for running machine learning algorithms making them way faster than any other chip. Deployed across the Google suite, the chip will enable data gathering and analysis unlike ever seen before.
Conclusion
Businesses need to look beyond investment as often VCs have to keep their interests above the companies, they invest in. Start-ups need to focus on building great products by understanding underlying business problems and using data to guide their strategic decisions.
Are you sure the link is correct? It's taking me to some panel discussion around FinTech. I think this is the correct one https://www.youtube.com/watch?v=Nqy6CcU84Xs