Calling for a new way to fund startups

Chamath Palihapitiya speaks onstage at the TechCrunch Disrupt NY 2013 at The Manhattan Center on April 29, 2013 in New York City. - 

Chamath Palihapitiya is a former executive at Facebook.  He’s also a competitive poker player and one of the owners of the basketball team the Golden State Warriors. And he’s the founder and CEO of Social Capital, a venture capital firm he started in 2011.  

Palihapitiya has strong views about venture funding. (Well, he has strong views about lots of things.) One of his main beliefs is that the system expects returns too soon, and that capital needs to be “exceedingly patient.”

Social Capital is focused on healthcare, education, and tech with a larger purpose.  The firm has funded companies including Slack, Box and SurveyMonkey. Marketplace Tech host Molly Wood spoke with Palihapitiya about his goals for venture, and what he wants to change. Below is an edited transcript of their conversation.

Molly Wood: When you started the firm, part of what you wanted to do was change the system. For example, you said you wanted a pool of capital that was "exceedingly patient." What does that mean, exactly?

Chamath Palihapitiya:  You take a much broader step back, and you ask the question: "How is capitalism working today?" And I would say it's working a lot less well than it used to. And specifically what happens is there's a lot of hoarding of money. We celebrate a good friend of mine, Elon Musk, amazingly well. But what's tragic is there are so many other people that should also have been funded in the same way. Now what Elon was able to bring was his own capital, which was clearly exceedingly patient. And I can do the same thing.

But what's unfortunate is both he and I still have to convince umpteen numbers of people that the things that we are collectively working on are worthwhile. The problem is that the people that control the money are not rewarded for making 15-year bets. They're rewarded for making year-long bets.

Wood: Aren't most funds 10-year funds?

Palihapitiya: I think the more important implication is not enough funds are actually run by people who control their own money.

Wood: I think some people would make the argument that there could be more risky thinking if you introduce more diversity into the pool of investors.

Palihapitiya: That is absolutely true. I think what happens is there's a lot of money that's been made by venture capitalists. The problem is that I think that they are, by-and-large, a lot that's not that risk-seeking.

Wood: Is it about risk or is it about mindset? When I hear you talk about individuals putting in a lot of capital and maybe partnering with institutional investors, it's hard not to hear that as something that would keep money and power with people who already have it.

Palihapitiya: Well, what's your alternative?

Wood: So, I'm asking is if you get a broader set of—

Palihapitiya: Here's the thing — if you want to do good things in the world, there's just only so much time that one can spend being glass half empty. And so like I'm trying to live my life basically asking myself the question: is it incrementally better than the status quo? If it is, sniping and chiding from the sidelines — it's not constructive. So I guess what I would ask is: what is a better alternative?

Wood: I'm asking if a more diverse pool of people who have a more equal opportunity to raise funds and then invest those funds can also exist alongside this model?

Palihapitiya: But I think what you're saying and what I'm saying are the same thing. I want a different class of people at the table. I also want people who are principals versus agents putting their own money on the line to actually reflect their world view.

Wood: How hard is it to change that system? Because it is a system we have today, and like you said, a lot of people are getting rich.

Palihapitiya: It's actually not that hard. And the reason is because at the end of the day, the unit of value is the entrepreneur. And what's beautiful about these people as a class is they are increasingly open minded, increasingly diverse, increasingly open to change. And when you partner with those people and then they are successful, then the institutional capital, and all the hoards of capital that are like them, capitulate. So I would love to say that we're changing hearts and minds. It's probably not entirely true. They do look at our returns, and they're like "OK, I got to be beside these guys."

Listen to our extended interview with Chamath Palihapitiya here.

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