Term Sheet -- Friday, June 26, 2020

Chamath Palihapitiya wants to be the Warren Buffett of tech investing

June 26, 2020

Social Capital CEO Chamath Palihapitiya has high ambitions.

He wants to be the tech generation's Warren Buffett.

The former Facebook executive is no stranger to turmoil. In recent years, his venture capital fund, Social Capital, closed to new funding amid an internal shakeup that led to the exit of several major investing partners—but despite the turnover, Palihapitiya has lofty goals.

"I think Social Capital is stronger than ever," he told Term Sheet, when asked if he plans to build up his fund again. "I don't think [Social Capital] will be a venture capital firm. I think eventually what I'll do is I'll take Social Capital public: My ambition is to be our generation's Berkshire Hathaway."

As part of that, Palihapitiya, who has invested in the likes of Slack, has turned his attention to later-stage companies through his Special Purpose Acquisition Companies, or so-called blank check companies that allow the investor to acquire a private company to take it public. Palihaptiya last took space tourism company Virgin Galactic public by partnering with Richard Branson in 2019.

In recent months, he also raised a second and third blank check company—Social Capital Hedosophia II and III—respectively aimed at a business inside and outside the U.S. The former raised some $360 million while the latter raised some $720 million.

Palihapitiya was light on the details, but said there's been "robust interest" in the duo.

He joined Term Sheet for a free-ranging Q&A session, discussing his plans for creating the next Berkshire Hathaway, "arrogant" VCs, the link between capitalism and racism, the question of accepting funding from police pensions, and more. The answers are edited lightly for clarity.

Around the time you came out with your first blank check company, other venture capital-backed companies were choosing the direct listing route as an alternative to the traditional IPO. Why do you still prefer the SPAC?

The issue with direct listings is that it takes just as long as an IPO and it doesn't raise any money, so it's problematic for companies that need actual capital. And with a direct listing, it turns out you can get sued still: We're currently handling shareholder lawsuits at Slack even though we didn't raise any primary capital. So direct listings don't seem to be the most efficient way. The SPAC is so elegant: It's a 90-day process because it is effectively a merger—it's a different branch of securities law that takes less time. The minute you shake hands and agree to a price, for example when [Virgin Galactic cofounder] Richard Branson and I shook hands in May of 2019, the company was public by October of 2019. I think SPACS are the way tech companies will go public in 50 years.

We've said that we want to do SPACs A to Z— we want this to be a repeat thing that we do over and over again and we think there will be a lot of companies going through the process.

Why do you think major capital firms didn't jump on board the SPAC train?

I think VCs are kind of short-term focused, mostly stupid, pretty arrogant, and I don't think I'm their best friend because I kind of speak the truth in a way that makes them uncomfortable. So I think they'll hold off as long as they can with anointing us as a winner—until they realize they need to raise more capital to create returns in their fund, and then they'll capitulate like every bozo that's late to a party.

In the meantime, the founders who have control over their companies can do anything they want, regardless of what the VCs say. So we work with them. But will all VCs eventually capitulate and do it? I think so.

Slack chose to go public via direct listing. Did you ever bring up the idea of a SPAC to Slack?

No. Can I tell you why? Because the main actor, Stewart [Butterfield], already decided what he wanted to do. And as a person who was about to make [money], I shut the fuck up.

Do you plan to raise more funding for Social Capital?

I'll raise more SPACs. Maybe I'll do something in climate change at some point, but for right now, I'm very happy where I'm at. There's also a lot of businesses that have been beaten up as a result of the coronavirus, so I've been spending a lot of time looking at that. I've spent a lot of time, frankly, in the credit markets and investing in credit opportunities with some highly structured, high-volume bets. There's been a lot of asymmetry building because of what the Fed has been doing.

Do you ever plan to hire more people to build Social Capital back up again?

I think Social Capital is stronger than ever. I think eventually what I'll do is I'll take Social Capital public: My ambition is to be our generation's Berkshire Hathaway. I don't think [Social Capital] will be a venture capital firm—it'll be a Berkshire, a holding company that, instead of holding Gillette and Coca-Cola and McDonalds, will hold technology businesses. If I hire more people, I'll just get distracted. Investing is not a team sport–company building is a team sport, but investing is an individual sport.

Let me ask a provoking question. In light of the conversation on race that has been sparked by the death of George Floyd: Do you think capitalism and racism are inherently linked?

I've never thought about it and tried to explain the two together. Maybe the best way to talk about racism is to say that it exists, and it is not about the people that are overtly racist—because to be honest those people are fringe and easily identifiable. But then there is this large silent majority who, through some combination of fear or ignorance or a lack of desire to have a conversation, end up in a different place where a lot of these unconscious biases and microaggressions come from.

But if you solve racism, [I think] then capitalism has an even better chance of flourishing. And my personal opinion has always been that this combination of capitalism and democracy are the two most complete frameworks we have ever figured out. It is the best product-market fit of anything that we've ever tried. Fascism didn't work out so hot, the features of communism weren’t super great, and socialism was meh. But the combination of capitalism and democracy is a feature set that allowed a little startup called America to basically kick everyone's ass. But it will die unless you iterate. And I think in this next iteration, what young people in particular are saying is that we view everyone as fundamentally equal. I think it is time for the gerontocracy to realize that they are really out of touch with how people want to live their lives.

You think it is a generational issue?

In my opinion, we've seen a schism that is really defined by age. If you look at the protests, these are overwhelmingly young people, and overwhelmingly the people that have lost the most trust and faith in the system because they've been locked out from the annals of power. Let me give you a market example: The average age of a CEO in the year 2000 was 40. [Note: The average starting age of a CEO in 2001 was 49.] The average age of the average CEO now is, wait for it, 60. [Note: The average age of Fortune 500 CEOs at time of hiring is 58.] You have people who were given enormous responsibility when they were young who have decided that they are not going to pay it forward to the next generation.

These are also the people that grew up in a time of segregation. [Note: Segregation ended in 1964.] And out of ignorance, and the lack of desire to change to status quo, they are going to hold onto power and reinforce stereotypes and reinforces biases. And I think that prevents us from deconstructing what racism is: I think it is a public-health problem, I think it is a mental-health problem, and I think this is a prosperity problem. And I think when you look from those lenses, you have to eradicate it, because that is not how a functional society optimizes itself to be the best.

And that is also probably where you can find common ground that want change on some level, but maybe are scared of saying something stupid—and I get that.

So who are you donating to? When we look at the leading candidates now, they are older.

I've donated half a million to the Senate Democratic PAC. I think it's really important that there is a Democratic Senate.

What about Democratic presidential candidate Joe Biden? At 77, he's not exactly young either.

I want to see who he picks as Vice President. But I'll probably give him $250,000 to $500,000 there.

Given this conversation around police brutality, I wonder, would you accept funding from police pensions?

Some, yeah. I would want to know what is the collective bargaining agreement they might have with the city in which they operate. And now, what I would know to ask for are the behavioral records of the policemen and an audit of their records to make sure they are policing through the lens of social justice. If the answer was no, I would not take their money. And if the answer was yes, I would take as much money as I could and I would give them economic incentives to do more of that.

Lucinda Shen
Twitter: @shenlucinda
Email: lucinda.shen@fortune.com

VENTURE DEALS

- Tanium, a provider of endpoint management and security, raised an undisclosed amount from Salesforce Venture. The funding raises Tanium's valuation from $6.5 billion to $9 billion.

- Byju's, the Bangalore-based education startup, raised an undisclosed amount from Mary Meeker's Bond. Read more.

- Sana Biotechnology , a Seattle-based biotech engineering cells as medicines, raised $700 million in funding. Investors include ARCH Venture Partners, Flagship Pioneering, Canada Pension Plan Investment Board, Baillie Gifford, F-Prime Capital, Alaska Permanent Fund, the Public Sector Pension Investment Board, Bezos Expeditions, GV, Omega Funds, and Altitude Life Science Ventures.

- Oscar, a New York-based direct-to-consumer health insurance company, raised $225 million in funding round. Investors include Alphabet, General Catalyst, Khosla Ventures, Lakestar, Thrive Capital, and new investors Baillie Gifford and Coatue.

- ENTEROME SA, a France-based clinical-stage biopharmaceutical company focused on the microbiome-immunoinflammation axis, raised €46.3 million ($52.6million) in funding. Investors include SymBiosis and Takeda Pharmaceutical.

- Enko's, a company using machine learning techniques to sort through chemical compounds to find promising candidates for new active ingredients, raised $45 million led by the Bill & Melinda Gates Foundation alongside Anterra Capital, the Rabo Food & Agri Innovation Fund, Finistere Ventures, Novalis LifeSciences, Germin8 Ventures, and TO Ventures Food. Read more.

- Element Analytics, a San Francisco-based data hub provider, raised $18 million in Series B funding. Activate Capital and Forte Ventures co-led the round and were joined by investors including Evonik Venture Capital, Kerogen Digital Solutions, High Tide Foundation, and existing investors Kleiner Perkins Green Growth Fund, Ajax Strategies, Blue Bear Capital, Schneider Electric Ventures, Honeywell Ventures and ABB Technology Ventures.

- Avalanche, a New York-based open-source platform for launching decentralized finance applications, raised $12 million via token sale. Investors include Galaxy Digital, Bitmain, Initialized Capital, NGC Ventures, and Dragonfly Capital.

- Doorkee, a New York-based digital rental platform for landlords, raised $5.7 million in early-stage funding. Simon Baron Development, Corigin Ventures and Alpha Edison led the round.

- api.video, a Bordeaux-based live video scaling company, raised $5.5 million in seed funding from Blossom Capital and Kima Ventures.

- Candidate Labs, a San Francisco-based hiring platform for sales and marketing professionals, raised $5 million in seed funding. Investors include Signalfire, Fuel Capital, and BoxGroup.

- APDS, a New York-based public-benefit corporation focused on education for the incarcerated, raised $5 million funding. New Markets Venture Partners and ReThink Education co-led the round and was joined by investors including Partnership Fund for New York City and Converge Venture Partners, as well as first-time investments from ECMC Group, New U Venture Partners, and Strada Education Network.

- Teooh, a London-based avatar-based virtual gathering platform, raised $4.5 million in seed funding. Investors include Spark Capital and General Catalyst.

PRIVATE EQUITY

- Heartland Home Services, a portfolio company of North Branch Capital, acquired First Call Plumbing, a Jenison, Mich.-based provider of residential plumbing services. Financial terms weren't disclosed.

- Thoma Bravo and Madison Dearborn Partners will invest in Syntellis Performance Solutions, a software division spun out from Kaufman, Hall & Associates, a Chicago-based consulting service. Kaufman is backed by Madison Dearborn Partners. Financial terms weren't disclosed.

- ZSi-Foster, backed by Snow Phipps Portfolio, acquired Hydra-Zorb Company, an Auburn Hills, Mich.-based provider of pipe, hose, and tube clamping for the hydraulic, HVAC, plumbing, and refrigeration markets. Financial terms weren't disclosed.

OTHERS

- Sazerac acquired the Paul Masson Grande Amber Brandy brand from Constellation Brands for approximately $255 million.

- Houlihan Lokey (NYSE:HLI) agreed to acquire MVP Capital, an independent advisory firm in the technology, media, and telecom sector. Financial terms weren't disclosed.

- Springhill Entertainment, a media company created by LeBron James and Maverick Carter, raised $100 million to create content giving voice to the underserved. Read more.

- EW Scripps is weighing a sale of Stitcher, its podcast service, per The Information. Read more.

IPOS

- Albertsons Companies, a Boise, Id.-based grocery chain, raised $800 million in a downsized IPO Thursday. It posted $60.5 million in revenue and income of $131 million in 2018. Cerebus (44.3% pre-offering) and Bessemer (14.9%) backs the firm. It plans to list on the NYSE as "ACI." Read more.

EXITS

- Keysight Technologies, Inc. (NYSE: KEYS) acquired Eggplant a digital automation intelligence specialist, from The Carlyle Group. This transaction is valued at US $330 million.

- Apple acquired Fleetsmith, a San Francisco-based cloud-based device management platform. Fleetsmith's investors included Menlo Ventures, Index Ventures, and Tiger Global Management. Financial terms weren't disclosed. Read more.