Social+Capital, the League of Extraordinarily Rich Gentlemen

Some VCs are in it for the money. Some claim they’re trying to save the world. Chamath Palihapitiya and his investors swear they’re doing both
Photographs by Guido Vitti

Chamath Palihapitiya couldn’t wait to show off one of his startups. On a Friday afternoon in April, he headed from his office in Palo Alto over to Redwood Shores, Calif., a tract of suburban cul-de-sacs built on marshland by the San Francisco Bay. Palihapitiya is a former Facebook executive who quit a year ago to found a venture capital fund, and his enthusiasm is a physical force. He’s an elbow-toucher and raconteur whose favorite interjection is “Dude!” When he’s in full rhetorical flight, his heavy-lidded eyes open as wide as a Marx brother’s. One of his closest friends, Guy Laliberté, the founder of Cirque du Soleil, describes him as “the type of person you fall in love with. You trust him right away.”

As he drove, Palihapitiya raved about Integrated Plasmonics, founded early last year by three scientists in their mid-30s to make an ultracheap, all-purpose medical diagnostic device. “The idea would be: You have this little strip, you could lick it, you could pee on it, or you could put a microdrop of blood on it, stick it into this little machine, and it’ll do a full characterization,” Palihapitiya explained. The chip would measure cholesterol levels, glucose levels, blood counts, kidney function, and the like. “You can basically know every day, every week, every month, everything that’s happening in your body.”

Chamath Palihapitiya: 'I believe in massive meritocracy'
Guido Vitti

Palihapitiya’s fund, the Social+Capital Partnership, has invested $3 million in Integrated Plasmonics, money that has let the company build a lab in a warehouse in San Francisco’s Mission District. Until a few months ago, the three founders—Robb Walters, a physicist, Dylan Morris, a biologist, and Nilesh Shah, a chemist—were in a split-level stucco house in Redwood Shores. They lived upstairs and built a clean room in the garage out of stuff they bought at Home Depot so they could test their chips in a germ-free environment. White coats, surgical caps, and shoe covers hung just inside the garage door. When Palihapitiya stopped in, they were packing it all up. Lab equipment bought in online auctions spilled from cardboard boxes; tall whiteboards covered with multicolored equations were still mounted on the living room walls. The place looked like it had been tagged by a particularly numerate graffiti crew.

Dylan Morris heard about Social+Capital (the “+” is silent) last December—someone he met at a party told him about a fund “interested in hard-core people doing hard-core things” whose list of investors included Peter Thiel, John Doerr, and Reid Hoffman, some of the biggest names in Silicon Valley. At the time, the Integrated Plasmonics founders were finding it impossible to raise money. Most venture capital firms weren’t interested in funding an unproven technology that would require complex nano-engineering to turn into a marketable product. “The traditional life science VCs don’t have an appetite for technical risk today,” Morris says. “Maybe they did a few years ago, but given the recession, they’ve moved to later-stage, lower-risk investments.”

July 26 (Bloomberg) -- Some VCs are in it for the money. Some claim they're trying to save the world. Chamath Palihapitiya and his investors--Peter Thiel, Reid Hoffman and Sean Parker among them--swear they're doing both. Here, Palihapitiya and a handful of his Social+Capital partners tell Bloomberg Businessweek how they plan to do well by doing good. (Source: Bloomberg)

That risk is a large part of what attracted Palihapitiya. He loved the exotic science, the homemade garage clean room, and how, at a time when the best-known Silicon Valley startups are social networks and apps, Integrated Plasmonics is trying to make a sophisticated physical device. That no one else saw it the way he did only egged him on.

The company gave Palihapitiya an opportunity to prove his credo: Venture capital, properly deployed, can solve the biggest problems, filling a void left by the shrinking scientific ambitions of governments, foundations, and international organizations. He sees the Integrated Plasmonics chip, because it promises a real-time, low-cost biochemical snapshot of the human body, driving sweeping changes in health care, saving lives and money. Doctors will catch problems earlier, and be able to monitor whether patients are taking their medications and in the right amounts; insurance companies will get the information they need to price premiums more accurately. “It is a massive, massive, massive opportunity,” he says. It’s exactly the sort of solution, he believes, that the world needs him to be investing in.
At 35, Palihapitiya already has a glittering Silicon Valley résumé. For much of his tenure at Facebook he was the executive responsible for increasing the number of users, where his success is easily measured: When he took over, the network had fewer than 50 million users; when he left, it had 750 million. (It’s now closing in on 1 billion.) His shares in the social network made him a centimillionaire several times over. Since leaving Facebook, he’s joined an elite gang of programmer-entrepreneurs who made their fortunes together, and now invest, socialize, and figure out what to do with their enormous wealth together. “I think he’s analytically quite brilliant, which is always a good thing to be if you’re an investor, and he also really is an entrepreneur in the broad sense of the word—he gets things done in these somewhat complicated situations,” says Palihapitiya’s friend Peter Thiel, a founder of PayPal and Palantir Technologies who was also the first significant outside investor in Facebook. Thiel has invested his own money in Social+Capital. “He’s trying to create another iteration of the venture capital model,” Thiel says. That business could use a new iteration: The Kauffman Foundation, which has hundreds of millions invested in venture funds, recently published a report showing that over the past 20 years, 62 percent of the funds it invested in didn’t even beat the stock market. Once fees are factored in, half actually lost money.

With $275 million under management, Palihapitiya’s fund isn’t particularly big—billion-dollar funds aren’t uncommon in Silicon Valley. What sets him apart is his ambition to create a working model of what he calls “activist capitalism.” Unlike a Bill Gates or an Andrew Carnegie, who made their fortunes then devoted themselves to philanthropically spending them, Palihapitiya sees no reason to separate those two missions. He wants to continue to make millions, if not billions, through investments that serve high ideals. Social+Capital will mostly limit itself to investments in three sectors—health care, education, and financial services—because he has decided those are the sectors most in need of, and resistant to, fundamental change.

This purpose-driven fund requires purpose-driven money. So rather than raising capital from faceless institutions such as pension funds and university endowments, as VCs typically do, Palihapitiya has assembled a group of individuals—extraordinarily wealthy ones who share his crusading streak. He recruited billionaires such as Germany’s Nicolas Berggruen, Hong Kong’s Li Ka-shing, Brazil’s Jorge Paulo Lemann, and the U.S.’s Eli Broad because he admired the focus of their philanthropy. He enlisted venture capitalists such as Thiel and Doerr, David Bonderman, a private equity investor, and Chase Coleman of hedge fund Tiger Global Management because of their track records as investors. Palihapitiya brought in technologists and entrepreneurs such as Reid Hoffman (LinkedIn), Sean Parker (Napster, Facebook), Kevin Rose (Digg), and Joe Hewitt (Mozilla Foundation, Facebook) to help his companies build their products. And he lined up a few strategic partner investors such as Facebook and the Mayo Clinic because they were institutions whose missions, he thought, meshed with his own.

Palihapitiya sought a mix of ages, from techies in their twenties to patriarchs in their golden years (almost all of the individual investors, however, are men). There’s a list “100 deep of people we were approached by, whom we turned down,” he says. “There may be room for them in the future, but all of these people were hand-picked for a reason.” In his description, it begins to sound a bit like a league of superheroes—the Avengers, maybe—except that everyone’s superpowers are subtly different forms of business acumen and gigantic checkbooks.
The Social+Capital offices are in an old Palo Alto bus depot made over with the lustrous industrial aesthetic of a Chelsea art gallery. Palihapitiya hosts a monthly happy hour, along with his partners Mamoon Hamid and Ted Maidenberg, both of whom he lured away last fall from U.S. Venture Partners. Guests drink and mingle among the brushed-metal furnishings and ergonomic chairs. If Palihapitiya is interested in talking to someone, he’ll take them into the main conference room, a glass cube in the middle of the polished concrete floor.

At a party in March, he sat down with two young programmers, Sue Khim and Silas Hundt, inside the cube. He had just met them at a startup conference, and as they watched the party noiselessly continue outside the glass, he told them their company, Alltuition, “a TurboTax for college financial aid,” wasn’t ambitious enough. True, they were streamlining the college loan process, and that was a considerable achievement, but it meant their company would be profiting from the growing dependence of American higher education on indebted students. “Basically, he said, ‘It sounds like you guys really want to solve big problems,’” Khim recalls, “‘but isn’t this product a little bit parasitic on the existence of a flawed financial aid system?’”

Now the former Alltuition team works out of the Social+Capital office on a new company, Brilliant. It’s a brainchild of Palihapitiya’s, and he moved them from Chicago to Palo Alto to start it. Set to launch this fall, Brilliant is a global online talent registry where bright kids, whether in the slums of Lagos or rural Pakistan, can take tests and post profiles and draw the attention of recruiters at Western universities and multinational corporations. “We are creating a product that basically identifies the world’s smartest kids,” says Palihapitiya.

Another company the fund has invested in is Simplee, a website that tracks and integrates health insurance claims the same way personal finance sites such as organize expenses and income. A startup called Lift—still in the pilot stage—makes a mobile app that will help users alleviate anxiety through exercises and remote coaching based on cognitive-behavioral therapy. Neo is a financial-services company that incorporates social networking data into credit-risk calculations. It provides an alternative to FICO scores, which often disadvantage recent immigrants and others with little credit history. A site called Treehouse provides users, for a monthly fee, with a steady diet of bite-size remote training sessions in Web and app programming, “the blue-collar job of the 21st century,” as Palihapitiya sees it.

Odds are, some of those companies will flop. Still, as he talks about them, Palihapitiya returns again and again to a favorite phrase: “It’s just so good!” He leans on the last word with a resonant growl. Good, he means, for people who would otherwise be denied or overcharged for medical care or education or financial services. Good for investors like him, good for the world.

Silicon Valley has a long tradition of civic-minded capitalism and a pronounced messianic streak. The original Valley tech startup was founded in Palo Alto 73 years ago by two friends, William Hewlett and David Packard, who famously insisted that a company’s obligation to its shareholders did not trump those to its employees, or to society at large. The venture capitalists Vinod Khosla and John Doerr, two of Palihapitiya’s idols, have for years been preaching the gospel of “social impact” investing, arguing that entrepreneurs and VCs have a vital role in the fight against global problems such as poverty, pollution, and disease. Google’s “Don’t Be Evil” motto sums up an abiding strain of the tech ethos: a faith that gobs of money can be made in the service of a higher good. “Every entrepreneur seems to have a little angel on one shoulder who’s saying, ‘Change the world, change the world!’ and a little devil on the other shoulder saying, ‘Get rich, get rich!’” says Paul Saffo, a technology forecaster and longtime Silicon Valley observer. “It turns out that if you only listen to the angel it can often devolve into a children’s crusade, and if you only listen to the devil you often won’t take the necessary risks.”

From left: Ed Jones/AFP/Getty Images; Jonathan Alcorn/Bloomberg; Fred Prouser/Reuters

Palihapitiya, at his most impassioned, goes further. He argues that the kind of companies that can help the most people and solve the most intractable problems can’t help but be lucrative, that doing good while doing well isn’t just possible, it’s tautological. There are other “social” venture funds—the Acumen Fund or EBay founder Pierre Omidyar’s eponymous firm, among others—but they are either entirely or partly nonprofit. Social+Capital, on the other hand, is decidedly and aggressively for profit. “If you focus on impact and think about generating impact, you will make money,” Palihapitiya says.

The amount of his own money in the fund is a measure of his belief in this idea. He has invested $60 million. In contrast to traditional VC funds, where the partners have comparatively little of their own money at stake, Palihapitiya, Hamid, and Maidenberg are providing nearly a quarter of the fund’s total.

Not coincidentally, Palihapitiya’s vision of a better future is one where more institutions act like VC firms. One of his most ambitious proposals is for Brilliant, the talent registry site he’s funding, to create a university in a few years. The school would provide a top-flight science and engineering education—much of it online—to the smartest students Brilliant can find, without charging tuition. “What if there were nine Steve Jobs—and maybe there were—but only one got to the starting line and really was able to run the race of his life?” he asks. “What if we had three guys like Steve Jobs who were able to run the races of their lives? What if there could have been six?”

Brilliant would use the ample connections of Social+Capital’s investors to find jobs for graduates. And then, Palihapitiya suggests, it could earn a profit by taking a percentage of the earnings of its alumni for much of their career. Each student, in other words, would be a venture investment. Palihapitiya calls it “The University of the Brilliant.”

When Silicon Valley has turned to solving societal problems in the past, the record has been mixed. For a few years starting in 2007, investors, most prominently Khosla and Doerr, piled money into solar, wind, biofuels, and other alternative energy technologies, heralding them as ways to make fortunes while helping save humanity from climate change. Then the economy slowed, natural gas prices fell, and many of those investments blew up. “A lot of people were tempted into businesses that just didn’t make short-term sense,” says Saffo.

Palihapitiya himself doesn’t buy this comparison. Green tech, as he sees it, was unique: Fundamental innovations that everyone was expecting didn’t appear, and the capital costs proved too high for private actors to handle. “That was like a perfect storm of failure,” he says, chuckling. Not that Social+Capital is above hedging its socially-minded bets: The fund’s best returns thus far come from investments that have little to do with being merchants of progress. Last summer, Social+Capital invested in Yammer, a social networking tool for businesses—Palihapitiya, an excellent card player, often plays poker with Yammer’s chief executive officer, David Sacks, and had invested some of his own money in the company the year before. When Microsoft bought the company for $1.2 billion last month, Social+Capital made $80 million.
Palihapitiya fell for Silicon Valley the first time he visited. It wasn’t the technology and the spirit of invention that captivated him; it was the money. His family had come to Canada from Sri Lanka when he was 5; his father, Gamage, was an official with the Sri Lankan High Commission posted to Ottawa. In 1986, when it came time to go home, Gamage applied for refugee status. Chamath says his father had made enemies in Sri Lanka with his outspokenness about the needless violence on both sides during the civil war that was erupting there. Chamath occasionally stops and collects himself when he talks about his dad, who still lives in Canada and is suffering from kidney failure. “To my father’s credit—and I think I get this from him—that guy stands up for what he believes in,” Chamath says. Gamage’s own recollection of his exile is less heroic: He was afraid of being killed by the Tamil rebels if he went back, but not because of any stand he took. “All public figures were targeted by Tamil terrorists,” he says. Besides, he wanted his kids to get a good Canadian education.

In Ottawa, the family struggled. Palihapitiya’s mother worked as a housekeeper, then a nurse’s aide; his father had a series of clerical jobs and was often unemployed. They lived in a two-bedroom apartment above a laundromat—his parents slept in one bedroom, his two sisters in another, Palihapitiya in the living room on a mattress he kept stored in a closet. “I used to obsess about those Forbes lists,” he recalls. “I used to look at them all the time and think, ‘I’m gonna be on that list one day.’”

In high school, Palihapitiya got an internship at a local telecom company on the help desk and did the job so well that at the end of the summer his bosses treated him to an all-you-can-eat lunch at McDonald’s. (He ate seven Big Macs.) After graduating with a degree in electrical engineering from the University of Waterloo, one of Canada’s top research universities, he got what he thought was his dream job: trading derivatives in Toronto at the firm BMO Nesbitt Burns.

In November 1999, he went to visit his college girlfriend, Brigette Lau, who was working in Palo Alto for Ernst & Young (the two are now married and have two children, and Lau is Social+Capital’s chief operating officer). She was driving him around, showing him the offices of the tech giants, when the scales fell from his eyes. His road to Damascus was U.S. Route 101 just north of Palo Alto; the voice on high was a billboard reading HIGH OCTANE CAPITALISM AHEAD. “That’s all it said, and I remember this ad now, 13, 14 years later. It had the biggest impact. I was like, I want to do that.”

When he returned to Toronto, Palihapitiya applied for jobs at every tech company he could think of, and got an offer from one: Winamp, the creator of an early Windows-based media player. The company had just been bought by AOL, where he managed to survive continual purges, eventually being put in charge of AIM and ICQ, a pair of popular instant-messaging services. AOL was increasingly a tech world laughingstock, and he doesn’t remember those years fondly: “I kept my head down, I worked hard, I understood how to be politically aware, but I felt it was a lot of make-work.” In January 2006 he left to take a VC job at the Mayfield Fund but soon grew frustrated with that, as well. “It just felt purposeless,” he says. When Mark Zuckerberg offered him a job at Facebook in 2007, he jumped.

Under Zuckerberg, Palihapitiya was given a broad portfolio: He oversaw marketing, communications, customer service, and advertiser acquisition, and he ran Facebook Platform, the set of programming tools that allow third-party developers to design apps. At one point he was reported to be heading up Facebook’s skunk works effort to design its own phone. (Asked about this, he says, “I was working on a lot of next-generation mobile, I think you can say that.”)

According to Zuckerberg, it was Palihapitiya who, in 2008, came to him and argued that Facebook needed a team dedicated to growth. “He had this epiphany that by far the most important thing we had to do was just accelerate the rate at which people were signing up,” the Facebook CEO recalls. “People use Facebook largely because they can connect to other people who are there, so more than any product feature that we could build, actually just getting the people that you want to be on Facebook to be there was the most important thing.” Palihapitiya volunteered to run the team, giving up his other responsibilities to concentrate on the task.

As Facebook’s user base exploded, Palihapitiya started investing on the side. His first angel investment, in early 2009, was a $25,000 pledge—more than half his life savings at the time—in the online game company Playdom. He made $7 million when it was sold to Walt Disney a little more than a year later.
Palihapitiya is not shy about his wealth. Unlike Zuckerberg, his personal aesthetic is less comp-sci grad student and more Hollywood mogul. He favors cowl-neck sweaters and designer jeans, and his parking space in front of the Social+Capital offices is marked by the charging station for his Fisker Karma, a $100,000 electric sports sedan. He wears a Richard Mille watch, a brand few nonconnoisseurs had heard of until last month, when a Richard Mille that went missing from tennis star Rafael Nadal’s Paris hotel room was valued at $370,000. Last July, Palihapitiya went to Las Vegas and placed 101st out of 7,000 in the main draw of the World Series of Poker. In August he bought a minority stake in his local National Basketball Association team, the Golden State Warriors.

Palihapitiya also has a tendency to say things that, while emphasizing the inequity of the global economic system, simultaneously call attention to his own place atop it. In criticizing the admissions policies of Ivy League universities, he cracks that, thanks to his money, “my kids could moonwalk into Harvard with kegs on their heads. I’m not saying that’s good, but that’s how it is.”

He’s aware of how he can sound. Growing up the way he did, “I think it created some insecurities, obviously, but it also created a pretty deep-seated drive.” It also shaped his vision of the ideal society. In Silicon Valley, talk about how technology and entrepreneurship can solve social problems often goes hand in hand with talk about how governments can’t. Some of the Valley’s leading investor-philosophers—Thiel, for example, or his fellow PayPal founder, Elon Musk—are outspoken libertarians. Musk’s latest venture is private space travel; Thiel has put money into the development of “seasteads”—floating cities beyond government control.

The Valley’s prevailing Great Man worldview partly describes Palihapitiya. His vision of an international league of revolutionary entrepreneurs and investors has strong hints of Ayn Rand’s Atlas Shrugged. And Palihapitiya’s own narrative, as Thiel sees it, is a throwback to an earlier, more entrepreneurial age: “He is just this classic American story of the sort that I think we don’t have enough of in this country.”

As Palihapitiya emphasizes, though, his story is only partly an American one. While high-octane capitalism made him wealthy, he never would have gotten there without the low-octane Canadian welfare state—his family got public assistance checks, the provincial government funded the summer internship that was his first job, and his father’s considerable medical care was mostly free. “If we were in the United States we’d have been bankrupt,” he says. “Canada would never have given me the opportunity that America gave me, but America could not have given me the social safety net when I was growing up.”

Palihapitiya’s politics are deeply shaped by this, as is his fund, which is an attempt to marry the social safety net and the Darwinian free-for-all so that smart kids like him can rise to the top. “I believe in a massive meritocracy,” he says.

In the fall—October, he hopes—Palihapitiya is planning the first all-hands meeting of his constellation of investors. “It would be sooner, but getting these people in one place is more logistics than planning a trip for the president of the United States,” he says. After that, he’d like to find a way for all of them to meet a couple times a year. “All of these interesting people having a day to thoughtfully engage in the big structural trends of our times and think of ways we can change things,” he says, his voice inevitably rising. “That’s just awesome. It’s just really good.”