Preface: Chamath Palihapitiya, a former AOL and Facebook executive, and current CEO of Social Capital, chairman of Virgin Galactic, and owner of the Golden State Warriors, said in an interview with Unchained that he had his family office allocate 1 million BTC at $80 in 2013. Since then, he has personally handed over a large amount of BTC to DCG (Grayscale) for management, but he only sees Bitcoin as a financial hedge. In addition, he also said that he would not invest in Ethereum and did not care what Defi was. In the article, Chamath Palihapitiya touches on a wide range of issues, including Bitcoin, the coronavirus pandemic, civil unrest, and broad economic trends and predictions. Here are some highlights: whether his economic forecasts have changed in the wake of the pandemic; why he believes a debt crisis will occur; How he sees BTC’s success as a hedge against the dominant asset class; how the economic pendulum will swing toward consumers; why he doesn’t mind big companies and hedge funds being wiped out; Whether he subscribes to the argument that Bitcoin is not relevant; Why the coronavirus pandemic has yet to drive institutional adoption of cryptocurrencies; Why he can’t see the merits of Ethereum; How the economy will become more decentralized in the future and whether blockchain will be a part of it; Why he prefers SPACs to ICOs; why he treats capital as a service; why he thinks the government should crack down on big corporations;
(Photo: Chamath Palihapitiya, CEO of Social Capital and Chairman of Virgin Galactic) Chamath Palihapitiya: Hi, how are you? Laura Shin: Great, it's great to have you here. You were the youngest VP at AOL, you worked at Facebook when it became the dominant social network, you became a billionaire at 32, you became the owner of the Golden State Warriors at 33, and then you founded Social Capital and invested in Slack, SurveyMonkey, Box, Wealthfront, Digital Currency Group, etc. Then, in 2018, some of your partners at Social Capital left, and you suddenly made a shift and transformed Social Capital from a venture capital firm into what you call a technology holding company. At the time, there was a lot of buzz in Silicon Valley about this, and then later, in early 2019, you did an interview with Kara Swisher where you talked about how you had come to live this lavish lifestyle, you were partying a lot but not feeling fulfilled, and you said that a lot of these changes were part of your emotional awakening, a transformation to understand what truly made you happy and to become a better person. So I'm wondering, now that we're in 2020 and you've made a huge change, I'm wondering how you've been weathering this pandemic mentally or psychologically, especially in terms of social distancing and dealing with all of the economic uncertainty? Chamath Palihapitiya: I'm sure it was a real growth moment for me, but it was really hard. I think for the first time in my life, I've been through a period where, you know, I felt depressed at times, I had anxiety, I didn't sleep as well as I used to, I really felt alienated from the people around me at times, and I think it was a lot harder than I thought it would be. It was really hard to build a routine, and I took a lot of little things for granted. You have to live in a world where you live, where you love, where you work, and it all becomes a blur with no clear boundaries. It becomes very monotonous, and the days don't have clear boundaries, so Saturday looks the same as Wednesday. I've gained some weight, and I'm not exercising as much. So, the past three months, I've been doing some soul-searching. And I think it's required me to be more resilient, but I think it's also made me more reflective about my progress and learning to be kinder to myself and think more and realize what's important and I'm really proud of my journey and being at home has probably made me more grateful because I understand what a difficult process it has been. Laura Shin: Yeah, I wanted to ask as well, early in the pandemic, you mentioned in a podcast interview with Kara Swisher how you expected credit markets to seize up and that that would ultimately have a chilling effect on the stock market, private equity, real estate, etc., and you felt that would also freeze up venture capital. So here we are, three months into this, and the stock market is largely up. The Fed just announced that it will buy up to $250 billion in individual corporate bonds, and I'm wondering if there are any revisions to your forecasts for how this pandemic will play out economically given what you've seen so far? Chamath Palihapitiya: Yeah, I mean, I think the general premise of what I said is still true, but the fact is that the timing was wrong, and frankly, it's still wrong. So I really had a sense when I said that, and I think what we've seen is that the Fed will do anything to prop up the stock market and the bond market, almost as a symbol of the resilience of the U.S. economy, even if it's not necessarily a reflection of how the economy is actually working or how we would measure success or what's actually happening, and you just have to accept that outcome and accept the fact that you can't fight the Fed and they have virtually unlimited money printing. So just recently, when they announced that they were going to buy individual bonds, what we know is that right now for every dollar that the Fed buys in the bond market, there is a price increase in the stock market. If you put another $250 billion of liquidity in there, you might see another couple hundred basis points of price increase in the stock market. So when the music plays, you have to dance, and right now, frankly, when interest rates are at zero, there may not be as much penalty for using leverage for a long time. So I think you have to participate in this market now until further notice. Laura Shin: Earlier, when you said you would also revise the timeline, you said you thought it might be 36 months before a full recovery, would you revise the timeline? Chamath Palihapitiya: You have to wait for something very important to happen. The good news is that there is still a lot of room for the market to correct, and if you look back at the Fed, I'll give you a specific example. So when the Fed announced their primary and secondary lending, they announced a series of regulations, and if you look at those regulations, there are still a lot of people who don't qualify. There are also some American companies that do qualify for Fed assistance but are declining to take it because they don't want to be regulated on pay and other things, so when you put all of that together, there are still some companies in the real world that are not necessarily making enough money to pay back their debts, and when you see defaults, which are likely to happen in the next 12 to 36 months, you don't need as much movement in a lot of markets. So specifically, when you look back to 2008, all the money was coming from very specific segments, including mortgage-backed securities and the credit derivatives associated with them. Similarly, now, I spend a lot of time looking at investment grade indices, and the equivalent credit default securities and credit derivatives around high yield indices, so a 5% to 9% default rate is possible simply because the number of companies that issue U.S. debt but make money in non-dollar denominated currencies and can't pay their debt is rising. So this debt crisis is imminent and it's only going to get worse. We're really just pushing the can down the road, and the only thing the Fed has to do is to buy broadly any security, including stocks, which frankly is the only tool they have left. I think if they did that, it would put a lot of pressure on the dollar, and frankly, it would put a lot of pressure on the U.S. economy, and it's something that no one has ever done. The worst outcome, we don't know yet, and the best outcome is Japan. In Japan, the Bank of Japan now owns 80% of all ETFs . 80% of every dollar is owned by their own government and it's been 20 years, it's just a mess and unfortunately the US will eventually see this unless we find a solution. The question is when, I think the non-US companies holding US debt are going to be the ones that push us over the cliff. Laura Shin: You said on CNBC that you feel the government is doing too much to save these companies, and you said it like you don't care if the hedge funds don't go bankrupt, and I just want to know, if the government does what you suggest, would you be willing to be wiped out? Chamath Palihapitiya: I mean, I've never really been defined by my money. I think I'm an evolutionary person with the same values. When I was younger or harder to deal with, I might have been a little skeptical, but I'm still the same person, and frankly, when I was a kid on welfare or growing up, or in my 20s, 30s, or 40s, I feel like I have the same values as everybody else. I think money is a projection that other people use. I used it myself for a while, and now I use it less, so it's been a real pleasure to be able to really realize that teachers who make $60,000 are just as important as I am, so you can take all the money, I really don't care. It's been a fun ride either way. I think I've created a bunch of great memories for myself, and it's been an amazing ride that I hope to experience for another 50 years. And what I said on CNBC was just a sense of frustration that the United States is an economy where the vast majority of GDP is created by consumers, and the way that consumers drive the U.S. economy is by spending money, and when you take income away from American consumers, and they lose their jobs or because they can't earn a wage, then they're going to spend less, which means the economy contracts, and you have a recession. So first principles thinking would tell you that you put money in the hands of consumers and you put enough money in their hands that they have more than they need to live on and then they spend the extra money and the reason why this is important is because it forces companies to reopen faster and then hire more people. It always happens and what you're going to see is that they're going to have to pay more and then the consumer has more money but this is actually a very nice rebalancing of what has happened over the last 40 years and that's where the pendulum has swung. In economic theory, the pendulum swings between labor and capital, and what we've really done over the last 40 years of trickle-down economics is to swing the pendulum toward capital, where the working class doesn't actually have the earning power that they previously had, but putting more money in their hands, you actually have to pay them more to get them to come back to work, and that's not a bad thing. It will realign what is a very uneven distribution of leverage and therefore put power into the hands of labor, put more money into the hands of labor and actually kind of disrupt and kind of end the trickle-down economic theory that worked in the '80s but frankly in the '90s and 2000s and now is an outdated economic philosophy that doesn't reflect the way the world works. Laura Shin: You said there's a space for an uncorrelated hedge in everyone's portfolio, and you said Bitcoin could serve that purpose. You also called it fool's insurance, and I was wondering if you think the coronavirus pandemic is a bit like Bitcoin's moment ? Chamath Palihapitiya: Not really, I think when I talk about this being foolproof insurance, what I'm saying is that we want something that, frankly, protects our wealth, no matter how much we have. For me, Bitcoin is the only thing that I have seen so far that is not at all correlated to the decision-making process and the decision-making institutions, because at the end of the day, any other asset class, stocks, debt, real estate, commodities are all closely related, they are closely tied to the legislative framework and the interconnectedness of the financial markets that brings together many governments that do this. So it's almost like a bet on the dominant asset class in some ways and making sure you have a small amount of insurance, and insurance is not something that's going to make 50 cents on the dollar, insurance is something that's going to take a dollar and get you $1,000 in return. And you want these big, asymmetric returns because you want to ensure a small amount of insurance that basically gives you overall growth, and that's why I think you should take 1% of your portfolio and put it in Bitcoin and then don't look at the price, don't look at anything, and hope that 1% goes to zero and then you own 99%, but if that 99% goes to zero, then that 1% might be worth 120% and then you feel like a genius. Laura Shin: But I guess what I'm confused about is, if you know that the government is not handling COVID... I mean, in terms of how to best handle stimulus and deal with the economic impact, why do you feel this is not a moment where people could turn to uncorrelated assets? Chamath Palihapitiya: Since the Great Financial Crisis, governments have done 6 or 7 forms of quantitative easing, depending on how technical you want to get, and so we can pick any one of those moments and say this is Bitcoin's moment, and what I'm trying to convey to you is that I think those who are waiting for a big event are probably going to be doing more speculation than they are doing for the health of Bitcoin . I think it's a horrible parade. A bunch of little things that end up adding up to the fact that the entire way we think the world's financial infrastructure works is off, and it's going to be the sum of a lot of bad decisions that I don't think is worth the time. I just think it's a pattern and when you see a pattern like that I think you just have to be ready to hedge it and be on the other side of it and hope that the pattern stops and honestly if your bitcoin bet paid off it would be catastrophic for the world and it would have a huge impact on a lot of people and all of us who are concerned about these issues who are not hedged by bitcoin so you almost don't want that to happen. Laura Shin: But you can really only see one path to success. You can't see any other reasons why it would succeed, even in a world where not everything else falls apart? Chamath Palihapitiya: No. I mean, people might say it's a frictionless payment mechanism or payment rails. But I don't think so, I think there are products that are easier to use, and ultimately they will be virtual payment mechanisms that connect the world, whether it's WhatsApp or Cash App or Venmo or WePay. All of these things will eventually be connected together in an underlying framework that will allow seamless money transfers, instant zero-cost payments in a ledger that gives you security and transparency. I think all of these things are going to happen eventually, so that the use case for Bitcoin becomes less and less and more of a tool, and then you have to think about what the underlying value of that tool is. People have been trying to make the case for gold, saying that it has industrial uses, and I would probably say that overwhelmingly, people are using it as a tool to hedge other parts of their assets and other parts of their portfolios. Similarly, we will continue to make the case for the industrial value of Bitcoin indefinitely, but the overwhelming use case for most people will be as a financial hedge, and I think that’s good enough that that will generate returns for us. Laura Shin: Out of curiosity, when you first heard about Bitcoin, did it take you a while to understand its potential? Because a lot of people say, at first, I dismissed it, and I wonder if that was the case for you as well. Chamath Palihapitiya: Well, there was a very famous person in the Bitcoin ecosystem, his name is Wences Casares, and he introduced me to Bitcoin in 2010. He introduced me to Bitcoin again on the day we were going to Las Vegas to celebrate his 40th birthday, and I remember three days later, I called my family office and told them to buy 1 million Bitcoins. That's how I started, and the price of Bitcoin was around $80 at the time, and it sounded interesting. It took me a couple of years to really understand it afterwards, I don't fully understand all the mechanics of it, and I've forgotten most of the mechanics now to be honest with you. I researched it at the time, and I made a decision to buy it and never think about it again, and generally speaking, I never thought about it again. I mean, I remember my family office went haywire when Bitcoin hit $20,000, and they were like, uh, and I was like, guys, don't tell me. I don't want to know. It's like, take it off the balance sheet. Don't look at it, don't get psychologically affected by this number. It doesn't mean anything, and then Bitcoin went down to about $3,000 again, and then they called me again. They're like, uh, and I'm like, guys, I told you, it doesn't matter what's going on here, so I don't know where it is now, 9,000, 8,000, 10,000, whatever. Laura Shin: I think it's 9500. Chamath Palihapitiya: Yeah, I can't tell you what the price is. Laura Shin: I'm curious, you did say just now that your fund owns almost 5% of all Bitcoins, which I don't believe is the case, so I'm wondering what percentage of the total Bitcoin you own now? Chamath Palihapitiya: I honestly can't tell you. I don't know, but we're very active buyers, and of course there are some sellers in the fund because there are some LPs in the fund besides myself. I gave DCG a bunch of Bitcoin so that they can support the Grayscale ETF, so I don't know, but yeah, I feel pretty good about what I own. Like I said, I should hedge 1%. Laura Shin: For example, if you want to rebalance? Chamath Palihapitiya: I haven't actively balanced it yet, actually. I've gotten distributions from other people, so when I get more, frankly, it's just to give it to Grayscale , and the reason is that I don't want to handle the coins myself. I'd rather receive shares of an ETF because that's easier for me to manage. So I don't want to touch Bitcoin, I just think it's a huge administrative and logistical burden that I don't want to take on. And to some extent, it's also a security issue that I don't want to take on. So, it's Grayscale's problem, or it's Coinbase's problem. Laura Shin: Well, one thing I wanted to ask you as well is, you just said that you don't really follow the Bitcoin market, but you also heard that Bitcoin took a huge hit at the same time that the coronavirus panic hit the stock market, and I was wondering if that affected your thesis that this is an uncorrelated hedge? Chamath Palihapitiya: Well, I mean, I think it reinforces that now, the people who are day trading or speculating are the same people who are day trading or doing other financial markets, and therefore, they are subject to the same psychological ups and downs, so when people are selling stocks, it's because they want more liquidity, whether it's because of margin pressures or because they have a directional view on the stock market. I think the same is true for Bitcoin because many everyday market participants are actively trading it just like they would any other stock, bond or commodity so it's not surprising to me that Bitcoin would go down when the stock market goes down. I'm just telling you there's a portion of people who view it as a hedge and will never look at it and then, to be honest, there's a large portion of people who view it as a hedge and make money in short term increments. And as long as the number of those people is greater than or equal to the number of people who view it as a hedge, it will mirror other financial markets. When stocks go down, you might see Bitcoin go down, and when stocks go up, you might see Bitcoin go up, and in general, I feel like that’s what we’re seeing, and that speaks more to the short-term nature of people in the asset class today, but that might change over time as well… Again, when there are hundreds of thousands, millions, tens of millions, hundreds of millions of people like me who own Bitcoin, lazy people who buy Bitcoin for completely different reasons than speculation and who have neither the time nor the interest to care about its day-to-day functioning, then that will be very good for Bitcoin. Laura Shin: One more thing, you said in another interview that you disagree with the statement that "Bitcoin is digital gold", and I'm wondering why you disagree with that statement. I don't think it's necessarily incompatible with the idea of an uncorrelated hedge . Chamath Palihapitiya: I mean, the problem is when people talk about gold, they get very rigid. And frankly, I think some people hold gold because they believe that at some point, we'll get back to the gold standard, or philosophically, they believe very strongly in the gold standard. Others do have reason to believe that, you know, industrial uses, there's a portion of the trade value that goes up and down based on its industrial value, which is not untrue. I don't think enough people think of it as a pure inflation hedge or market hedge, so my comment is that describing it in terms of gold complicates the explanation and if you want mass market acceptance, then for any product, including Bitcoin, what you need is real simplicity, which is why I encourage people to really embrace the simplicity of Bitcoin, which is that it's basically a fool's insurance just in case the people in charge really screw up finance. Laura Shin: Now we're going to talk about cryptocurrencies a little bit, and I was wondering what impact you think this coronavirus pandemic will have on the entire cryptocurrency market, not just Bitcoin. Chamath Palihapitiya: Well, I really wanted to see how the traditional market participants, in a moment like this, would react. If you run a hedge fund, there are two things you should do, or one thing you should do, and one thing they do. What they do is they are usually very leveraged because they try to take very small amounts of incremental risk, and the way they do that is they usually hedge. That's why it's called a hedge fund. I think at this point they would consider Bitcoin and add it to their basket of tools for running hedge market strategies, but by and large it hasn't happened yet. I think there is a certain amount of activity, but the infrastructure of Bitcoin doesn't really allow for market participants to come in at scale, which would involve a lot of leverage, using their prime brokers, all of the typical things that we do when we go into the stock market or the bond market. I mean, for example, I can do a multi-billion dollar credit default swap tomorrow, and I can do it with tens or hundreds of millions of dollars of actual capital. I have the infrastructure available to be able to trade at scale or to direct at scale. So, it's still too difficult for hedge funds to get involved in the Bitcoin market, there aren't enough people, there isn't enough liquidity, there isn't enough leverage, there isn't enough insurance, there isn't enough understanding of Bitcoin by traditional players and prime brokers, so all of these things will slow down the natural development of Bitcoin, so I hope that at this moment, people will think about these things out of necessity. Unfortunately, Bitcoin is still largely correlated to the S&P 500, so you can’t really think of it as a hedge yet. People who are long the S&P don’t think Bitcoin is going to be any better. Laura Shin: Okay, I'm curious as well, what value do you see in other crypto assets, especially Ethereum? Chamath Palihapitiya: No, not at all. Laura Shin: Why not? Chamath Palihapitiya: I'll use a fair example to illustrate this, when Obamacare was passed, there was a clear tailwind for health insurance, and you could buy a basket of health insurance companies, or you could buy UnitedHealthcare, and that basket would do OK. UnitedHealthcare has grown 10 times in the last 10 years. If you believed in smartphones, you could have bought a basket of cell phone stocks when the iPhone was first released in 2010, 2008 or 2009, and you could have bought Nokia, Motorola, Samsung and HTC, or you could have bought Apple, which, frankly, crushed the rest. The point is, there are clear winners in any market, and that doesn't mean other things can't win. But there’s a weird psychological effect that almost drives these second- and third-tier winners, which is this desire out of this insecurity that people have, and then what they do is they create these convoluted narratives, can they win? Sure, but have they ever won like category killers? No. I mean, do you really want to be long Lycos and DuckDuckGo, or do you just want to be long Google? So if you really want to make money, my view has always been, find the one that's going to win, Facebook, Microsoft, Apple, Google, Amazon, and then buy it, and what you shouldn't do is try some complicated spread trade or participate in the 2, 3, 4, 5 targets. You can certainly make some money, but the brain damage and the stress caused are too great, and the complications that may occur, and it is absolutely not worth it. Laura Shin: So you basically view all crypto assets as one category? For example, you don’t separate them into different categories because a lot of people would say Bitcoin is a currency and Ethereum is a decentralized application platform, and they don’t view them as competing. Of course, there are people who think they are competing, but a lot of people just view them as fundamentally different things, but you… Chamath Palihapitiya: I'll give you a different example, you can look at Mercado Libre as an incredibly sophisticated, Central and South American delivery platform, and you can look at Wayfair as an incredible example of how you can buy or design furniture over the internet. And then I look at them and it's like, there's the Spanish Amazon and there's the furniture Amazon, so I think, well, I'll just buy Amazon. Honestly, Laura, this goes back to one of my philosophies, and what I've learned over time is that I really made my life harder than it needed to be, and I made too many decisions in my life, and I've realized as I've gotten older that the best decisions are the ones that are really instinctive, the simplest ones, and you use a lot of data and you can find all kinds of clever ways to slice and dissect things. But at the end of the day, the simple decisions are often the best, the most defensible, the most enduring decisions, and one of the simplest decisions you can make is to buy the category winners and hope that the category as a whole does well, because if so, they will gain disproportionately as long as the category stays at the top of the category, and that has been absolutely true in the market for as long as I can remember. Laura Shin: I'm also curious, have you seen what's happening in the DeFi space? Chamath Palihapitiya: I don't even know what that is. Laura Shin: OK, then… Chamath Palihapitiya: But I own Bitcoin. Laura Shin: All right, let's move on. I wanted to ask you, too, because in a way, we're already getting to that topic. In a 2017 interview with Jason Calacanis, you said that ICO activity was a fringe thing, and you said that people really need to get back to the core basic business principles. You say, hardworking people like those with pensions, or people who work in hospitals, don't need crypto in their digital wallets, and you may have heard this investment thesis that many cryptocurrency funds are saying that the services and products currently provided by tech giants can be fundamentally transformed through decentralized service provision provided by cryptocurrency networks, where users can own part of the network through tokens, and they call it a Web3-like investment thesis. So I'm wondering what you think about this. Do you think there's merit to this, or are you going to continue to call this fringe bullshit? Chamath Palihapitiya: No, I think the idea has merit. However, I think the specific framework for it is overly intellectual and overly complicated. Again, the products I've been involved in have really scaled, like Facebook and Slack are just a few examples, and when I ran AIM at AOL, and Winamp, the predecessor to iTunes, all of which I helped scale to over 100 million users. I'll tell you about my experience there, using Facebook as an example, which has billions of users. Simplicity of design, simplicity of ambition, doesn't mean you don't have ambition, it just allows you to make and filter decisions in a more basic framework, so you don't get these, complex product features or implementation paths, etc. One thing to realize is that the product development cycle on the Internet also tends to be a pendulum, just like I said in the previous economic cycle example, in the economic cycle, the pendulum swings between labor and capital. On the Internet, the pendulum of product iteration swings between highly concentrated and highly dispersed, and right now, we are in the very concentrated part of the cycle. We have a few companies that do many, many things for consumers, but they will fall apart. It will fall apart because consumers get tired of the Swiss Army knife and want better, simpler products, and companies will fill that gap. Part of the reason this can happen is that the standards for product development become more open and more standardized, so applications can talk to each other just fine. All of this enables a more open collaborative product process that benefits consumers, and then the other part is that governments are going to become more aggressive and undermine trust, so they're going to break these large products apart. So in all of this, I think we're going to become more decentralized, and I think the next 15 to 20 years of product iteration will be like that. It's going to be a lot of disaggregated services working together nicely and neatly. It also means that the companies themselves won't be as large, but that's also a good thing. I think it's easier to just build a $5 or $10 million company and then make a few hundred thousand dollars in profit and then live in a place that they want where they can have a humane life and raise a family and be connected to the community than to try to be the next $5 trillion behemoth because a lot of that is just luck and timing that you can't replicate no matter how smart you are. All I'm saying is that this is an idea that's worth taking a look at. And I don't think when you ask customers, they're going to want or say anything about blockchain. They're going to describe a use case, and however you do it, the better and faster you get there, you'll win, and if it includes blockchain, that's great, but if you're premised on it and include it or something else, then I would think that's not the right place to start, and you're probably going to fail. Laura Shin: I actually wanted to ask you more about that, but first, before we get into that, I wanted to dive a little deeper into your thoughts on ICOs because you've been trying to reinvent the IPO, or at least solve some of the problems that existed in the IPO process with Social Capital. And you can correct me if I'm not saying that correctly, which is basically executing a SPAC. So why do you think that's a better way to do an IPO, whereas an ICO, again, provides easier liquidity... but obviously you don't think ICOs are the way to go. So do you see any way that blockchain technology can be used, or is it like you said, the technology is irrelevant and maybe SPACs just solve the problems that you see? Chamath Palihapitiya: The technology doesn't matter, the results do. What matters in this case is the following. There were 8,000 or 9,000 public companies in 2000, and now there are about 4,000. Two-thirds of the S&P 500 have no R&D budget. Now, you can say, this is a stock market problem, but I actually think it's an American economic problem, which is that we don't have capital markets that can support emerging, high-growth, fast-moving companies, and what's missing is a resilient way to really build for America's future. So we need thousands of companies to go public, so we need to build the capital market in a way that they understand why they should buy future growth and product iterations and R&D. It is this obsession with current cash flow that drives the private equity boom, drives the debt boom, drives 8,000 listed companies to 4,000, and drives many unnecessary public equity market volatility . So, by building this platform, this IPO 2.0 platform, what I really want to do with my partners is to some extent pioneer a way to provide a way for young, high-growth companies that can invest a lot of money to go public in the next 5 to 10 years, and the way I do this is that we pre-wire the IPO. We go to plan investors, explain what we are going to do, we explain the dynamics of the market, then find the target companies, and then break the business model for these people. We price in a reasonable way and eliminate a lot of backlog in inventory. So, the benefit for CEOs and founders is that they have better understanding in the open market and therefore have more long-term support. They have to go public in 90 days instead of 18 months, which is a lighter process, and then for the open market, what is really important is that we use the accumulated "social capital and credibility" to explain to you why we hold this thing for 5-10 years. And, I can only build one company at a time, although in the current situation, the first one is Virgin Galactic, which is a real success. I have financed two more SPAC cases, so let's see what happens. I want to do more cases after this, but by stepping down. ICO, on the other hand, is arbitrage in a very dark gray market, and you also know that people don’t know enough about the financial ecosystem and just make profits from it. I think a lot of these things, which cannot stand the test of time, and I think, will be extraordinary fraud and theft, essentially lying, and these things are unfounded. They don't really represent real businesses, so they are a bit like penny stocks. Do they exist? Sure. Can I tell any reasonable, smart investor to focus on them? No! Will I tell my grandparents to buy them? No! Laura Shin: So the other thing I want to ask is to combine the two aspects we've discussed, because you've been saying that the way to get out of the pandemic is to turn to resilience and how you think about it that might drive more nationalism because it exposes the vulnerability of our supply chains, but as we just said, when I asked you about these three questions, you also said that you feel like there would be a decentralized motivation, and generally speaking, at least in my world, that means they're like borderless encrypted networks, which is obviously very different from what's on the nationalist route. So I wonder, what do you think the two trends will have? Chamath Palihapitiya: I think the government will fundamentally push businesses to become more resilient, which means they will have to outsource more work and they will have to do a lot of things on the shore because they need to look at things from a national security perspective, and economic incentives may inspire people to take that approach. All of this forces companies to do things that are more resilient and less profitable, so that's where the world is heading. But, most importantly, there are a few people who are making multinational products, which, in your opinion, are very accurate and true, they have no borders. Most of these products are online, but what I think will happen is that the economic value of these products will converge to zero, the economic value associated with them will converge to zero, and they will become highly transparent and monitored by the government, and they behave no differently from our payment network today. That's it, when you're doing a deal between two parties or between two countries, the U.S. Justice Department can figure out what's going on in a nanosecond, and the FBI and everyone else can see it at a glance, and I think all these borderless user-based networks will end up doing it, not necessarily because they want to do it, but because they're going to be forced to do it, and I think all governments will be consistent about it. Laura Shin: Well, when it comes to China, the People's Bank of China is already trying its digital currency first. They also have a very comprehensive blockchain program that has over 500 corporate blockchain projects in various financial sectors, and I wonder if when you see the situation in China, do you feel that it makes them ahead of the United States in terms of using blockchain-based systems and central bank digital currencies? Do you think this is a problem for the United States? Chamath Palihapitiya: All of this is... China has a goal, basically to overturn the US dollar's position as a reserve currency, which has a huge impact and is mainly positive for China, so blockchain is a great way for them to promote transparency, theoretical transparency and viability of the Chinese authorities. It can be said that their digital currency can become lighter and easier to use. But frankly, it's all for service, not for pioneering digital currencies or blockchains. It's to overturn the dollar's position as the world's reserve currency, so you can only look at it like this, will the United States respond? Probably, but if it does, it will be in the context of maintaining the unit value of the dollar they have to take. Laura Shin: Then what do you think of the Libra project? Chamath Palihapitiya: The zodiac palace? Laura Shin: Facebook's stablecoin project. Chamath Palihapitiya: I have no idea. Laura Shin: OK, haven't you heard of it? Chamath Palihapitiya: Like Microsoft's Zune? Laura Shin: Is there anything funny about you saying this? Chamath Palihapitiya: I'm optimistic about iPhone. Laura Shin: You're so funny to say that, because I have a friend who works at Microsoft, I remember she had a Zune and then she tried to convince me. Chamath Palihapitiya: I mean, you know Zune exists, right, or like a real player, but you never see it, and then you always hear... Laura Shin: OK, I've seen one. Chamath Palihapitiya: Oh no, my friend has one, but that's not true. You only see iPhones and iPods, so I don't know what Libra is. I'm a Libra guy and I was born in September, and that I know because it's true. Laura Shin: Wait, but I just want to know, you just said you didn't follow Facebook in... Oh, this is your former employer, you know... Chamath Palihapitiya: It's been ten years, I mean, just like you still remember who you dated 10 years ago? Do you still remember what you ate 10 years ago? Things always happen and everyone will move forward. Laura Shin: Oh my god, I like it. Well, let's talk about the recent news. There's a wave of protests against systemic racism all over the world, and your company has launched a service called "capital as a service." Can you describe what this is for the audience? Can you describe what these investments are, demographically, different from traditional venture capital? Chamath Palihapitiya: Capital-as-a-Service, well, it used to be based on something else. So this topic is very sensitive to me. I always think bias exists. I also kind of believe that I overcome it, maybe I'm more clear or candid, smarter, faster, and better than my white peers, so I'm always a little good, but… Laura Shin: In fact, Chamath, can you tell what you mean, because I don't know if every one of my listeners knows your personal story? Chamath Palihapitiya: I mean, listen, I was born in Sri Lanka, and when I was 6 years old, I moved to Canada. There was a civil war in my country, my parents applied for refugee status, and then I stayed in Canada, and I grew up on welfare. My mom was a housekeeper, and my dad, when he was out of work, suffered from depression and was drinking. In some ways, it's just a tough and nasty way to grow up, but you know, they're good people and they've tried their best. I'm a by-product of many social safety nets, health care and education are the two of the main ones, and I spend thousands of dollars a year in college in Canada. Then I successfully immigrated to the United States and I've got from scratch and I've gotten quite a bit of it, you know, I've already achieved quite a bit. But there are a lot of people who are not making that much progress under the same conditions as me, and it's not because they are not that talented, they are people around me, I'm just lucky. To say there is a very convincing example, I remember when I was 10 or 11, we had to face immigration judges, our lives were in danger, I only remember this white judge in the mid-40s or early 50s and a guy sitting on a bench, they decided my whole fate, I brought it out because it was branded in my memory, I was sitting next to my father, which was kind of like a court environment, and I kept crying if you could imagine the court environment. There was just fear and insecurity because you would feel like you were illegal. Finally, the judge allowed us to stay and he believed in the importance of staying for us. So we stayed and I wanted to say we had paid back, I had paid billions of dollars in taxes, and I also donated tens of millions of dollars to Canada. It was a coin flip incident, which could have been the opposite, and I might not have been today. And then there was the 911 incident, 5 years after the incident, when I was checking in the airplane, they would ask me all kinds of questions, and then I finally realized that I was only racist after 911, maybe they thought I was some Muslim extremist, and I was like, do you have to bring a sign with the slogan "You don't have to be afraid of me"? I just went from Washington, DC to New York for a meeting. When I lived in Washington, DC and worked for AOL, I was stopped by the police many times, and when I was in California, I was stopped by the police many times, and everything I went through was like... And my black friends, they've been through thousands of things like this, they've been through more extreme situations when things happen to them, you know? The first thing I did when I founded Social Capital was the first project I did outside of my investment business, which was my collaboration with Jessica Lessin of The Information, and I said we were going to break down the population and racial makeup of every investor in venture capital, and we published it, and people were very upset, and I remember I wrote an article called Brothers Funding Brothers, and they all hated it. The reason they hate it is because it's the fact and it's been utterly yelling out, they feel uncomfortable, and... I think they've been sticking with it ever since. I took it to the next level and we started a project called Capital as a Service, and the idea is that entrepreneurs exist in all kinds of shadows, colors, genders, sexual orientations. Rather than having a bunch of unconsciously biased people make this decision, why don’t we let the numbers speak? You’ll find all kinds of people around the world running incredible businesses because we allow them to just provide data, and we’ll automatically make financing decisions with an algorithm that doesn’t care what your first or last topic is, what your gender is, where you come from. This algorithm will only look at the quality of your business, make some reasonable predictions about the future situation, and will bring you funds. I don't know what's going to happen next, but I think something like "capital as a service" that forced change may be needed, and things like capital flow are the real key part of writing and making things more balanced because money is the lubricant, and you know, when you have the opportunity to use money, you can do a lot more than when you don't have money, and I've experienced both, so I can tell you this. Laura Shin: Yes, to let the audience understand that among the companies funded under the "capital-as-a-service" model, female leaders account for 30%, while traditional venture capital companies invested in 4%, 80% of them are non-white, while traditional venture capital participates in white account for 77%. A completely different data, which is determined by algorithms. So I also want to ask some hot topics in recent weeks. In an interview with Stanford Business School in 2017, you talked about what you think social media tools are tearing apart the structure of our society. And this is after the 2016 election, and in your interview, we all know that Russia has used fake news on Facebook to some extent to interfere with the election, and it is obvious that Facebook says it won’t do fact-check politicians. It won’t delete or tag posts from politicians who promote violence, and I wonder if you agree or disagree with Mark Zuckerberg’s position to make those posts stand alone? Chamath Palihapitiya: I think it was a business decision he made, he was the CEO of the company, so he was allowed to make those decisions and he could even close the company. Laura Shin: If you were the person in charge, would you make these decisions? Chamath Palihapitiya: I might have a few different views on this issue, but the problem is, I don't know what he went through, nor what pressure he was under at the time, it's obvious that he did something that made his gang of employees feel upset, but he made the decision anyway. So, overall, I think his decision was justified because it's a for-profit company and at the end of the day, he needs to be accountable to the real stakeholders, i.e. those who expect a return on investment. The availability of the product, if you want to prioritize it, is also complicated because I don't know how much Facebook is used and reliant in cities, like in other demographics, so you see this political divide, there is more democratic intentions on Twitter and more Republicans on Facebook, which doesn't surprise me because it reinforces the idea that people have seen. It's almost impossible to stay neutral, and you know, when you talk about UGC, these are no longer neutral concepts. So it's in an impossible situation where it's basically about catering to one audience in decision making, not another, or either decide to implement some neutral algorithm that's nearly impossible. I think it will make people feel better, but the product will get worse, so I think his decision is probably the best framework in this context. Some people are very dissatisfied with Facebook, so they go to TikTok. Some people stay and grow up with TikTok, some people go to Snap, and vice versa, and in all these things, the content will generally become more and more consistent and the same. What will be different is that people will add a layer of what to say on the basis of the narrative, choose to emphasize, and describe. You can see this today because if you go to a third-party media website, there will be a lot of the same content on all of these websites, just different packaging. The explanation is different, and this is basically what happens in broadcast media today. ABC, NBC, CBS, Fox and HBO, they all act differently and cater to different audiences, and I think that's the current situation of these large networks. Laura Shin: Before asking the last question, I want to know, you mentioned before, you think you need trust to destroy big tech companies, but what you just described is like describing some kind of self-selecting process between customers. So, do you think we will see government intervention, do you think we should see government intervention, or is there no need for that? Chamath Palihapitiya: I really don't know if they should. I think they will, the reason they will, is because of money, which means, I think the first thing that happens is actually the view of taxes. The real fact is that these companies make a lot of money, and they do it now in every country in the world. So, for a state, legal government or federal government, in any country where these 6-7 big tech companies operate, it's simply too tempting. They don't look at the revenue, but just pass a law saying the tax agreement has begun, but from now on, if you're going to make money from my citizens, you're going to have to pay taxes to me, I think that's how to start, so when you can imagine this happening in 180 countries and regions around the world, the long-term yield of big tech companies will drop, which will affect market capitalization, investor sentiment and other impacts. This also leads to a large number of employees leaving their jobs, starting their own businesses, or going to smaller companies, and that’s why the company is disintegrated. The next form of trust I think is the risk and responsibility of dismantling these large distributed networks. Now they can protect themselves under the protection of Internet laws, but I think more and more governments around the world…you’ve seen that. Australia is doing this right now. Europe is doing research now, and they will attack these protections and will treat online media the same way, and then the last thing they want to do is that they will create more competition in terms of distribution. It's kind of like...you don't have to predict these because they are actually happening. So, it's not a great vision for me. It's just what I see when I see the news every day, and when people start, the next politicians get more courageous, and 10 years later, we're going to look back and it looks like, oh yes, obviously, this is what happens, and it's impossible to reload the elves back into the bottle once the politicians smell the blood. Laura Shin: What do you say in the letter when you write a 2020 investor letter? Chamath Palihapitiya: I have several topics that I have spent a lot of time thinking about. From a racist perspective, it seems to me that it is a public health issue and a financial aid issue. I think a healthy, diverse group creates the most prosperous companies and economic ecosystems and creates the most prosperous communities. So if you just want to be happier and you want to live in a wealthier, more humane, more successful society, then there will actually be a long way to go to solve this problem. This is one problem, and the other problem will be credit. I spent a lot of time in the credit market, and in fact, much more time than in the stock market, and I can say a lot of interesting things, I don't know if I can make money. But by the end of this year, I will definitely have more stories, and frankly, they help me mature, make me more focused, more focused on who I am and who I want to be. So I'll write more about this and then, obviously, it's a connection with Berkshire Hathaway. We're having a great year and I'm not sure if I can say that, we'll make another $2 billion like we did in 2019, or it'll increase our performance by 200 basis points from the start. Going into this year, we're 33% annual revenue, which is quite difficult for the $4 billion base, and I've learned a lot. So I have to keep honing and we'll see. Laura Shin: Great, thank you very much for coming to Unchained for an interview. Chamath Palihapitiya: I really appreciate it, thank you. Link to this article: https://www.8btc.com/article/614638
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