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
