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Reid Hoffman and Chamath Palihapitiya on Angel Investing and The Future of Venture | Venture Stories

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Key Takeaways

  • In its current form, venture capital is essentially signing  up for 13 years of illiquidity with terrible returns
    • Additionally, risk-averse behavior makes for a narrow distribution of incomes and no alpha
  • Think in continuums of risk. For small quanta of capital, constantly fire little investments and learn from mistakes
    • For bigger investments, create time to think before making decisions.
  • Your challenge as an investor is to take a contrarian risk and end up correct
    • Ask, “why would smart people not think this is a good deal, and what do I know that they don’t know?” – Reid Hoffman
  • Silicon Valley will continue in strength despite COVID or political concerns
    • That said, remote work and meetings facilitate investing outside Silicon Valley
  • SPACs provide fast time to market, exact price upfront, ability to raise the amount of money you want, and allow you to explain your vision for the future
    • Moreover, SPACs add VC capability because it gives founders a chance for a concentrated ownership position and helps grow their network
  • Technology is inherently deflationary, we confuse this with stagnation
  • Chamath’s goal for the future is to invest in climate change solutions, specifically, carbon sequestration

Intro

Venture Capital is Broken

  • The first generation of venture capitalists started out as entrepreneurs and was thus sympathetic to the journey of a founder
    • Along the road to success they became risk-averse, and now behave predictably and copy each other, this behavior propagates across venture funds and group think becomes endemic
  • In its current form, venture capital is essentially signing  up for 13 years of illiquidity with terrible returns
    • Whereas liquid public markets can return 15%-16% annually, venture funds return 12%-13%

Solo GP Phenomenon

  • Startup studios and incubators enable people to work around ideas in a safe space without the need for big capital to start
    • Moreover, the emergence of individual angel investors and solo GPs provide a broader distribution of incomes, this is where you will find alpha
    • That said, we need to move the window of liquidity in, else it doesn’t work at scale

Continuums of Risk

  • “On one end of the spectrum is what I would call small quantums of capital” – Chamath Palihapitiya
    • This is constantly firing and not thinking twice about investments, mistakes are a learning experience
    • Chamath still does a reasonable amount of angel and early investing, but purely off of his own balance sheet
  • The other end is large quanta of capital, investment sizes of $250MM – $500MM and up
    • This is about inaction, create time where you think rather than make decisions, as being wrong is going out of business

Taking Intelligent Risks

  • Your challenge as an investor is to take a contrarian risk and end up being correct
    • Ask, “why would smart people not think this is a good deal, and what do I know that they don’t know?” – Reid Hoffman
      • This will enable you to understand what the real risks are and your theory as to why you can navigate those risks
    • That said, some risks are unacceptable, such as betting on a deceptive or an ethically challenged founder
    • Risk example: There could have been a horrific event or regulatory changes that affect Airbnb
      • However, if those risks don’t play out, then it’s a potentially huge success

Long or Short Silicon Valley

  • “I think the short answer will be both” – Reid Hoffman
    • Silicon Valley will continue in strength despite COVID or political concerns
    • That said, remote work and meetings facilitate investing outside Silicon Valley
      • It forced people to break away from the idea that all of the goodness exists between San Francisco and Palo Alto
  • “I actually think the coronavirus pandemic has been the salvation of Silicon Valley” – Chamath
    • The best of Silicon Valley is the mindset of celebrating heterogeneity and cooperating, as opposed to the feeling of competing over scarce resources
      •  This hasn’t been the case for the past few years and this is a good way to swing the pendulum back

SPACs are Here to Stay

  • Going public is a step in a multi-decade plan to build something valuable, SPAC is an instrument on this path
  • If you go public in a traditional IPO, you can’t present a forecast for your company
    • In private markets, you present the future, whereas you present only the past in public markets, a completely different mindset
      • There is no good translation layer between public and private markets for what your plans are
      • “If you spend your whole time looking in the past, you can’t describe the future” – Chamath Palihapitiya
  • “You want to align yourself with partners who help you thrive for the duration of how long you intend to build a company”
    • SPACs provide fast time to market, exact price upfront, ability to raise the amount of money you want, and allow you to explain your vision for the future
      • Moreover, SPACs add VC capabilities to these companies because it gives founders a chance for a concentrated ownership position and helps grow their network
    • By contrast, the traditional IPO process will take all the vision, complexity, and drive of a founding team and reduce it to one meaningless metric

Diversification in an Angel Portfolio

  • The best way to predict if you are on track is to examine the next financing round
    • For instance, does a smart person lead the round?
    • Early stage investing is a bet on your judgement of the founders, since there are no real metrics to use
  • Previously, a startup had breathing room to find its niche before competition starts springing up
    • Thus, take the quantum of money you are willing to allocate and divide it among a bunch of startups. For instance, 20 checks of $50K for $1MM total investment size
      • “The a priori ability to size is impossible”, change sizes later once you know what you are doing
    • “You can create a heterogeneous portfolio, and the reason is because that’s how you will identify where the alpha is”
      • “Having 7 food delivery businesses in a portfolio of early stage investments is F*** dumb” – Chamath Palihapitiya
  • Early stage and later stage investing are the same risk, just more money
    • But as you put more capital in, you have to think more about it and have a higher probability of being right

Technology and Zero to One

  • While the digital realm witnessed the most development, its acceleration applies to all other areas in ways that may not be obvious
    • For instance, one may criticize air travel for not becoming faster, but this assumes people prioritize speed over safety and accessibility
      • We are about to get speed too
  • Technology is inherently deflationary, we often confuse this with stagnation

Future Plans

  • Chamath’s goal for the future is to invest in climate change solutions, specifically, carbon sequestration
    • “I think that would be an incredible thing to give to my kids” – Chamath Palihapitiya
    • To Chamath, investing helps refine the decision-making ability, towards a grand goal
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Notes By Mostafa Khaled

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