Chamath Palihapitiya Is Creating The VC Firm Of The Future

Palihapitiya’s venture capital firm is tackling problems and taking on risks Silicon Valley’s old guard VC firms have so far not approached

Venture Capitalist Chamath Palihapitiya is the founder of Social Capital, a firm specializing in funding tech startups. The firm has made a name for itself in Silicon Valley based on its focus on healthcare, financial services and education, fields usually neglected by the VC community. Launched in 2011, Social Capital raised $600 million in 2015 for its third fund. Its three funds now manage investments valued at over $1.5 billion, according to Palihapitiya. VC heavyweights in the Silicon Valley made names for themselves and fortunes for their investors by picking winners like Google, Facebook and Amazon early. Palihapitiya believes there are still even bigger problems than any of these darlings of the Valley have been able to touch, like around healthcare, education, financial inclusion and digital identity.

How would you describe Social Capital LP, the firm you founded in 2011?
The right way to think about it is that we are building a modern technology version of Warren Buffett’s Berkshire Hathaway. It is a company that owns and invests in the next generation of great companies. Unlike Berkshire Hathaway, it’s less important for me that we own 100% of the business because a lot of Buffett’s businesses are very traditional, consumer-staples businesses. A lot of businesses I’m involved in require fantastic people that you have to compensate with equity and partners that you want to share your equity with. So the difference between our long-term plan and Buffett’s is that we won’t own 100% of the businesses, but we want to own as much of the best businesses for as long as possible.

Can solutions to first-world problems be adapted to countries like Sri Lanka, because we have a different set of challenges? How do you find alignment between the investments you are making in the US and here?
The problems we focus on are global in scale and scope. For example, we’ve started the most important cancer genomics business in the US. It’s taken us five years, and now we treat about 10% of cancer patients in the US. Cancer is a global phenomenon, and I think that product can work anywhere in the world. We’ve done the same thing with asthma and emphysema, and we’re doing the same thing in diabetes. All of these are examples of businesses that largely started in the US but address global problems. Diabetes is a chronic disease that affects people everywhere, just like cancer. With climate change and pollution, asthma and emphysema will also affect people everywhere. So I don’t think many of the businesses we work with address only first-world impediments.

Besides the Google Loon project, what else can become an opportunity here if you receive the same sort of welcome you got for Loon?
You have to think about it as a stack. We are first working on the most basic level of the stack, which is the infrastructure. High-speed Internet access is the 21st century equivalent of roads and highways. Once these roads and highways are built and predictable, then you can think about what sits on top of that infrastructure. In my opinion, areas of real opportunity are around digital identity and payments, etc.

An important thing an economy needs to move from a developing to a developed one is the expansion of consumer credit, because you have to be able to spend ahead of your earnings if you are going to create the kind of growth that America and Europe have seen. In order to do that, you need to make sure that people are educated and relatively healthy, and then ensure the capability for these people to spend. Those are some of the handful of opportunities that I think make a lot of sense.

If you rely on traditional infrastructure, traditional vendor supply chains and traditional costs, it’s impossible to offer low-cost, high-bandwidth, high-quality solutions. What I do know is that by experimenting with Loon, these micro cells and this next generation software, we have the ability to completely change the cost structure

Are you working on those opportunities outside the US, for example in digital identity?
We were actually the first company that started to work on top of Aadhaar, the digital identity system in India. We started a company that is now one of the biggest digital payments businesses in the country. Now we are moving beyond payments to things like consumer credit, because for India to become a truly developed country, it will need to have a massive expansion of consumer credit. I think what works there may work in other parts of the developing world as well.

How far along the road are you in India?
The payments business is huge and it’s really working. But we are in the very early stages of figuring out how credit works, so we still have many years to go in that.

You’ve got a diverse set of investors. How are the funds performing?
They are not vintage based, which means that you spend one and then raise another. My investors are not investing concurrently, they invest serially. Early trends are quite promising. We’ve compounded somewhere between 30-40% a year – since we started – on a billion and a half dollars. So it’s pretty good.

Where do you think the bigger opportunities lie? Your investments are stretched quite wide – payments, education, healthcare, digital identity, high-speed internet, etc. What excites you the most?
I have a great group of partners. The good thing about having a great team is that we all have different interests. One of my partners really loves financial services and another loves enterprise software. For me personally, I’m really interested in healthcare and telecom infrastructure. I love healthcare because I’m attracted to businesses that can improve people’s quality of life, and telecom fascinates me because it’s the simplest way to have the most broad-based impact on people.

Which of your three funds is closer to maturity?
It’s got a complicated name, Fund 1. On a dollar-rated basis, it’s compounding at 35-40%.

On all metrics, we are the top fund in Silicon Valley right now. The real businesses that I think will create tremendous value haven’t even returned yet, like this cancer genomics company. Wait until it’s treating 50% of cancer patients globally. How much is your life worth?

I think we’ve picked really good areas, and we were fortunate to have enough money where we could take a long-term view. Some of these businesses will take 10- 15 years to fully mature, but I think that’s ok.

Regarding Google Loon, what would be the challenges in the final stage of implementation?
Once the micro cells are built and fully tested, the hard part is to figure out retail distribution, like how do you get this into the hands of the people. I suspect it will be done in partnership with our carrier partners like Mobitel and Dialog. When you have a device or upgrade to a new phone, we can also give you these micro cells, and enable a extremely simple way where you can just plug it in and it works. Those are some really important problems that we are going to have to solve.

Carriers say the cost of international bandwidth is their biggest challenge to delivering more affordable, high-speed internet. With this project, you are forecasting 5-10 US cents charge per gigabyte for end users. How do you bridge this cost divide?
I can’t speak to the cost of Telcos here, so let me say it in a different way. If you rely on traditional infrastructure, traditional vendor supply chains and traditional costs, it’s impossible to offer low-cost, high-bandwidth, high-quality solutions. What I do know is that by experimenting with Loon, these micro cells and this next generation software, we have the ability to completely change the cost structure. For example, what does international bandwidth mean when the signal is coming from a satellite to a balloon to a base station? I think it probably means you can do something that’s 90% cheaper than what you are doing today. But we need to figure out viable engineering solutions to all these problems, because it’s not the laws of physics that create these cost overhangs, it’s basically predatory pricing and the lack of competition.

So Google Loon balloons can link direct to satellites than to the fiber optic cables here? Is that the most cost-effective option?
Yes, they can. But there are many cost-effective options – drones, satellites directly, or fixed-pay stations on the ground. What carriers should want is a multitude of options to deliver their signals to the handset. Through this competition, they can drive prices down, which they can pass on to the consumer.

Sri Lanka is possibly very far from developing/incubating the sorts of companies that you are looking at in Silicon Valley. Do you see any bright spots here where we could potentially leapfrog?
I’m Sri Lankan, so clearly genetics support creative people building innovative things. We need to find out what are the boundary conditions that prevent that. Part of it is the fear of failure. Life doesn’t have to be zero-sum. When you make it zero-sum, you impact the psychology of the people.

People need to collectively shift the mindset where you are positive about all kinds of innovation. That’s the best thing about Silicon Valley – failing is celebrated more than succeeding. If you are not willing to make that change, don’t expect the same kind of innovation here that a place like that generates. But I think it is possible. Genetically, I’m a testament to the fact that it’s possible.

 

What is Rama Corp’s involvement with Google’s Loon Project in Sri Lanka?

Rama Corporation, a firm controlled by Silicon Valley venture capitalist Chamath Palihapitiya’s Social Capital, is spearheading a project to provide high-speed internet through a network of balloons used as telecom transmitters to fill gaps in broadband coverage. The balloons – functioning like floating telecom transmitters at 75,000 feet above ground (twice the flight altitude of commercial jets) – are deployed by Google’s Project Loon, providing the last mile connectivity to regions lacking broadband coverage. Rama Corporation is testing the technology to connect Google’s floating transmitters to the fiber optic networks of local telco operators.

The technology is experimental. Rama figures users will need a micro cell – a small mobile phone base station – though which devices can wirelessly connect to the balloons in the sky far above them. It’s currently experimenting with micro cell technology and software that connects this network. It expects to launch commercial services within a year.

Broadband services will be available and billed through existing operators.

Twenty five per cent of Rama Corporation shares will be held by the Sri Lankan government following discussions. Local telcos Dialog and Mobitel may also become equity partners in Rama Corporation by the time commercial services are launched. Ddetails of any government concessions to Rama in exchange for the 25% equity are unknown. Rama will require radio frequency spectrum – a limited public resource – to connect users on the ground to Project Loon’s balloons, which is does not have.