April 3, 2020

The Investing Landscape is Done | Chamath Palihapitiya on Recode Decode with Kara Swisher

Check out the Episode Page and Show Notes

Key Takeaways

• Before people start investing again, the public markets need to reach the psychological bottom then the private markets need to hit bottom
• Long term profitability was maximized when the world was maximizing efficiency: cheaper, faster, better
• The world is moving toward maximizing resiliency- that is, expensive, slower, and not as efficient BUT more reliable
• Resiliency means more nationalism, more borders, more restrictions
• There’s no room for political ideology now – “In these times, you have to believe in the team that’s on the field now” – Chamath Palihapitiya

Intro

Chamath Palihapitiya (@chamath), is the CEO of Social Capital

Host: Kara Swisher (@karaswisher)

Economic impact of the Coronavirus pandemic

• Before people start investing again, two things have to happen first:
  • 1.  The public markets need to reach the psychological bottom
  • 2.  Then the private markets need to hit bottom
• It will take about nine months for this process to play out
• Liquid investments owned by private equity firms and venture capitalists have dropped in value by 30-70%
• Economic fallout of the crisis will be expansive:
  • Credit markets have seized up
  • Commercial real estate is uncertain – i.e., if people were more productive at home, why pay for commercial real estate?
  • Restaurant or big mall infrastructure won’t be the same
• The Federal Reserve is backing every form of credit now, so it means the US government is now backing every creditor or business and that is a socialist regime
• Massive implication – there will be so much government debt even on the state and local level, that corporate taxes will go up

What would Chamath invest in now?

• Nothing! – Other than his holdings in Virgin Atlantic, Slack, and Amazon, Chamath is completely in cash
• The CEO calls this “the buying opportunity of a lifetime”, but is waiting
• He said the coming days will see similarities to the Great Depression and the financial crisis of 2008, such as:
  • A huge drop in GDP
  • High short-term unemployment
  • Erratic market behavior similar to 2008-2009
• “We’re likely at the beginning of the beginning” – Chamath Palihapitiya
  • People first have to deal with the emotional upheaval the pandemic has brought on, then with the economic stress
• The new scary pragmatism is: what is the cost of one life vs. the fallout from massive unemployment

What verticals Chamath will invest in the future? 

• 1.  Hard tech infrastructure based around transportation and climate – the government will be spending big to boost employment
• 2.  Healthcare – driven by the need for a healthy population that can survive pandemics  
  • Eradicate heart disease, and diabetes
• 3.  Education – forget expensive degrees, educate people with usable degrees
• 4.  Infrastructure that allows people to work remotely

Is anyone investing in Silicon Valley?

• People are raising funds, but mostly to honor deals made prior to the Coronavirus crisis
• Anything else would be irresponsible

What about Bitcoin investors?

• Chamath predicts the following must happen before “the Bitcoin bulls will have their day in the sun”:
  • The Eurozone will dissolve – Germany will say no to more bailouts
  • The Euro will fail
  • The US dollar and gold will do well
  • There will be a sovereign debt crisis in emerging markets
• All this will probably play out in the next 2-3 years

What should start-ups do?

• Make the hard decision to conserve at least 36 months of cash for a buffer
• For every month of a “drawdown” phase, it takes 2-3 months to come back up
• Chamath expects we will be in the drawdown phase for nine months and then another 27 months before the economy to recovers
• “Companies have to figure out the implications before pricing valuation – things change fast in moments like this, you don’t get paid to be a hero” – Chamath Palihapitiya
  • Ex) Airbnb’s evaluation dropped overnight- the supply went away because people took listings down to try and find renters

What about companies that didn’t raise cash and don’t have 36 months of cash on hand?

• They are no longer price makers, but price takers
• People with the money (VC) are now price makers
• We don’t know what the final bottom is

Has this all sunk in?

• No.  We want to be optimistic but taxes are going up for businesses
  • E.g. France taxed Apple amidst the Coronavirus epidemic
• Long term profitability was maximized when the world was maximizing efficiency: cheaper, faster, better
• Now, the world is moving toward maximizing resiliency- that is, expensive, slower, and not as efficient BUT more reliable
• Resiliency means more nationalism, more borders, more restrictions
• This shift impacts long term profitability and cash flow, which impacts risk
• Going forward, companies will have to price in the possibility of a pandemic and climate change into their products

After the pandemic wanes, what will change?

• Working from home will become the norm
• Hard tech will be a winner
• Software will not be a winner because cheaper, better, faster will no longer apply
• The airline industry will be remade– its already finished
• There will be a renewed push to overhaul the healthcare industry
• E-learning’s moment has arrived

Will Silicon Valley be the same after this?

• No, because if people can work remotely, why stay there? Work where you want to live
• “People will hit the reset button. Who cares how much money you have? They’ll want to be somewhere safe, healthy, with their family in a reasonable place, with a guaranteed salary focusing on what really matters to them and doing something good for society.”

What will happen with big internet companies like Facebook?

• Governments around the world will try to say they are part of a necessary surveillance apparatus
  • China minimized the spread of Coronavirus by tapping into social networks
  • In Western countries, there will be a debate: civil liberties versus public health and safety
  • 9-11 caused a major shift in this respect with the Patriotic Act
• Tech companies will be taxed at a higher rate especially in Europe, maybe 30-40%

Contact-tracing- a necessary evil?

• There are lots of data but it can’t be anonymized, otherwise, there’s no meaning
• People may look back and see that if we had the right surveillance in a time of dire need, we could have saved lives and been spared the economic fallout

How does the President’s performance rate in this time of crisis?

• Trump’s performance is trending higher – he usually uses the stock market as an assessment of how he’s doing, but not when its’ behaving irrationally
• There’s no room for political ideology now
• “In these times, you have to believe in the team that’s on the field now” – Chamath Palihapitiya
• The relief package Congress has passed = one year of the US GDP, it will double the US debt