Chamath Palihapitiya is the founder and CEO of Social Capital, a venture capital fund focusing on investing in start-ups solving hard problems like climate change and cancer. A vocal critic of the current VC ecosystem, he's been advocating the breakup of major technology companies like Google, Apple and Amazon into smaller businesses.
Through Social Capital he has been extremely successful as an investor and the fund has delivered overall returns of 997% versus the S&P 500 index which has delivered only 325% since its inception.
In his annual letter to the shareholders of Social Capital, Chamath has outlined a strategy to break up the dominance of big-tech's and create a more equitable system for allocation of capital and high quality STEM talent amongst the large segment of small and medium businesses.
The problem: GAFAM monopolizing the tech ecosystem
According to Chamath, big tech companies like Google, Amazon, Facebook, Apple and Microsoft (GAFAM) have long enjoyed a powerful and almost monopolistic position in the internet economy. Despite a commanding position in the market as a result of its capital and talent strength, these firms have long ignored crucial and hard problems facing the society, and instead focus their resources on pure financial gains.
In his view, VCs have also failed to support entrepreneurs trying to solve the hard problems of climate change, cancer, and space exploration. The investment strategy of injecting majority funds into a few bets results in start-ups eventually spending time and attention on building features than focusing on long term customer value creation. This is one of the primary reason for start-ups not being profitable even though they have raised billions in VC money (e.g., Uber, WeWork, Lyft).
Quoting Chamath, “Big Tech raised a total of $1.34B in venture capital before going public of which $1.3B was Facebook alone. This means that Apple, Amazon, Microsoft and Google raised less than $45M combined before IPO. Even on an inflation-adjusted basis, this is incredible and tells something very important about a raft of today’s startups.” This shows that pure play technology companies normally don’t need to raise much capital.
They are not technology companies. They are tech-enabled hybrids.
He further says, “VCs today are incentivized to generate high salaries via ever-larger funds and their attendant fees. Beware the VCs that raise funds every year - the best practitioners take their time and do not get distracted from the real prize - carried interest - which only comes when you and your employees are successful. A corollary to this is that as governance has decayed and the focus of most VCs is on up rounds and markups, there has been a meaningful decay in strategy at many startups.”
Chamath’s solution to the Big-tech ruckus
Breaking up big-techs: Increasingly governments are scrutinizing these large tech behemoths and forcing them to become transparent and smaller. Building these regulations will require participation of experts who understand these companies and their business models in their entirety. Further, this will ensure minimal impact of lobbying by these players in development of such regulations.
Implement local taxation on big-techs: Any profits and gains generated by these firms should be subject to local taxes. This could result in a sticky situation considering tax treaties and tariff wars at hand but as major economies see a rise in populist and nationalist governments, the likelihood of something like this happening is very strong.
M&A, ESOP and taxation of options: Prohibition should be put on acquisition of the best human capital by these tech companies using their deep pockets thus allowing other small and medium enterprises to access similar resources. One way to do this is to heavily tax stock-based compensation programs like restricted stock units (RSUs) and on the other hand offer tax incentives to people choosing to receive either cash or stock compensation from smaller companies. Finally, it would be prudent for the government to stop these big technology firms from acqui-hiring.
Conclusion
Some might argue that big-techs have delivered innovative solutions that have helped our societies grow and allow a vast majority of people to access resources equitably. However, Chamath argues, ‘while Big Tech initially created a lot of value, the incremental value they deliver now comes at too high of a cost if these companies are left intact as they are. The value created is an increasingly decaying function, while the need for true progress is increasing.’