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

Recode Decode : , , ,
Notes By EWerbitsky

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