What went wrong at Social Capital | Hacker News Reader

What went wrong at Social Capital

axios.com

185 pointskaboro89 comments

"Maidenberg was frustrated by Palihapitiya's push to prioritize data in the VC investment process, which is traditionally based on a more high-touch, personal approach."

I think that is a telling line. There are certain decisions that can be improved with data, and many others where data can be your only criteria, but, in business, there are also a whole class of problems where data is basically a pipe dream.

Don't get me wrong, I am not saying that wanting to make decisions with data is wrong, but, there is a lot of what goes into an investment that is "unknowable" in the sense that your "data" is very sparse or anecdotal, or, you simply have more unknown unknowns. It is this fact that causes many VCs to invest in good teams, that they feel will be able to handle the uncertainty, rather than investing in purely data backed opportunities.

Remember when the stock market was considered an art, dependent on your ability to make a deal? I'm sure a lot of those folks insisted the quants would never eat their lunch, because the data is a pipe dream.

Personally, no, I don't remember that, but, I know it did exist. I'm also not saying that data won't ever exist. but, the stock market, as a market, produces the data needed for the quant funds. there is enough "price information" in the market to generate the data that a quant fund needs within the market itself. OTOH, startups are opaque, and most of the relevant data is kept out of the the hands of anyone that might aggregate it. instrumentation of the startup market does not benefit people the way that trading on existing data streams benefits the public ones.

Again, not saying don't try to get more data, but, given the status quo, it is not a lot of data to go on right now.

Even the people saying the stock market was an art assumed you already had the data. Quants didn't master data, they mastered latency.

Index funds have beaten most active management over the long run. If you think about it, YC is a huge index fund in startups. The problem is not data-based prediction - just that it is impossible to pick winners a priori, no matter how much data you have. Ergo the clearly viable long run strategy is to invest in as many as you can. This is why YC is maximizing volume, with the latest being the Startup School.

The other option of course is to invest large amounts into startups that are well on their way, but Sequoia and AH have a corner on that market. And now YC wants to play there as well, with their larger fund.

So there's no oxygen left for a lot of the VC firms in the valley. There's no shortage of money looking for VC funds, as returns are low in general asset classes. So you have this imbalanced situation, where dinky startups get incredible valuations, and there are too few genuine investment opportunities to go around. SC are one of the marquee victims, but other walking dead abound, though they dress snappy so it's hard to tell they're really dead.

For startup investing the pure math explanation to invest in 1,000 companies makes more sense than in public markets. If you have 1 out of 1,000 startups return 1000%, 99 companies break even, and 900 companies go bust, you still make money due to the asymmetric one company generates. In public markets, two deviations of risk is satisfied with 20ish companies where three deviations being around 80 companies assuming a log-normal distribution. Adding more companies does not greatly lower the risk when the outcome isn't so binomial.

I assume you meant 1000x not 1000% (since the latter would only be 10x.

Is there any evidence that even as many as 1/1000 startups provide a 1000x return to VCs, considering that the return is only a fraction of a total exit?

Even then, assuming all investments were equal, that's a very meager return of 1099 on 1000. For a 10-year fund, that wouldn't even beat inflation, let alone compete with something like Treasuries.

An article that delves into more details (although there's some glossing-over, still):

https://news.ycombinator.com/item?id=17874278 https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

Up to a certain point I agree, but I do wonder about the problem that startups can appear out of nowhere if they think there is investment money to be had just for showing up. In other words, your very willingness to fund many startups, may cause the quality of startups to decline. The analogy to stock picking is not complete here because you buying stocks in many different companies (an index fund) doesn't cause more companies to go public. But, if it doesn't take much more than a slide deck and a good talker to take your money, you will easily have 1,000 startups show up that each have 0% chance of succeeding.

Not saying this is currently a problem, just that it could be if most VC's tried to take a "place chips on all the numbers" kind of strategy.

YC is anything but an index fund in startups. They take a very active view on which startups to fund and which not to. They don't simply hand invest in all startups that fit externally set, (mostly) transparent criteria.

They are active investors, even with startup school.

YC minimizes risk by spreading money across as many startups as possible using research and and gut instincts to find good deals.

Index funds minimize risk by distributing funds across stocks in an index using research and gut instincts to find good deals.

YC is different only in that it has a more direct impact on the performance of its portfolio through active participation and the ability to influence its management. Both are still similar forms of capital management with different degrees of freedom.

YC is much closer to an index fund than typical VC (or even other accelerators - due to YC's much larger scale), but there's a big difference as index funds don't use any "gut instincts" - the criteria for a stock to be included in an index are fixed rules.

A better (though less succinct) analogy for YC in the public markets would be an "actively managed mutual fund investing in a broad range of early stage companies with a long-term time horizon."

with the technical exception of a new breed of `index funds' that happen to follow their own proprietary indices!

> as index funds don't use any "gut instincts"

Of course fund managers rely on this when relying on computer-assissted recommendations when deciding how much of each stock to buy. If you don't think someone opinion & gut instinct is involved, you're going to be disappointed.

Startup school, what are you talking about? They accepted all 15,000 that applied.

You might be right in general, but this time not for Startup School.

An "index fund" means something specific -- a fund designed to track the performance of a standard index like the S&P 500. Index funds don't actively decide which companies to invest in, and they don't help their portfolio companies. While index funds and YC both have large portfolios, otherwise they're not similar.

In Palihapitiya's defense, he presented a logical argument of how this could work when I heard him speak in person. Essentially:

1. More SaaS products like using Stripe for payments, AppAnnie, etc. can audit and monitor revenue.

2. Small, seed stage investments up to 250k and placing a lot of bets.

3. Companies could apply online allowing for startups in non-traditional and underserved areas like Mexico City to receive funding. Ditto as well for removing potential human biases like founder gender, race, etc.

I don't believe he ever proposed using a completely data driven decision for a $200M Series C round. Personally, it seems like an unfortunate situation as I like when someone undertakes a new approach to an old problem, but it sounds like he stopped showing up to do the work needed for this to happen.

I don't believe such a data-driven approach could avoid the bias of age, socio-economic background, gender... the list goes on.

Start-up "Disruptors" have a lot more immeasurable hustle.

Anecdotally, I'd say that the issues outlined here led to an even worse problem: the experience of founders pitching to them was poor.

Interesting. My only data point is a founder who said they were very hands off post-investment.

Any details?

>Sources said they had come to believe that Palihapitiya was no longer putting the firm first in his life

This guy's bad behavior aside, that's a ridiculous bar to hold someone to. Sounds like he hardly cared at all.

It's a ridiculous bar for many jobs.

But "head of a billion dollar VC firm" is not really a position that allows for much work-life balance.

> But "head of a billion dollar VC firm" is not really a position that allows for much work-life balance.

Maybe playing devil's advocate a little, but why not? I admittedly don't know what a "head of a billion dollar VC firm" does all day, but what critical business actually won't get done because he takes 2 hours to go to his kid's little league game?

>what critical business actually won't get done because he takes 2 hours to go to his kid's little league game?

Who said that was the issue? I imagine it was a pattern, not a one off life event.

jetting with his new girlfriend to Italy for weeks at a time != taking 2 hours to go to his kid's little league game

>that's a ridiculous bar to hold someone to

"The bar" moves around depending on position. Sure, it's ridiculous to expect a secretary to put the company above all else, but the CEO? A high ranking government official? The head of a high profile medical department? Not so ridiculous at all.

Really? I can't think of how it's good for society to ask anyone outside public service not to put their job ahead of (for example) their family. I don't see why the CEO of WidgetCo should put widgets "first in their life."

I might have even respected Obama saying "Joe's in charge today, I need to take care of some family stuff." I think that a position needing total dedication of a person is an indicator that the position doesn't have enough support.

Do you have an extraneous not in your first sentence? Didn't you mean to say "It's not good for society to ask anyone to put their job first"?

It is <i>amazingly</i> good for society when people put their jobs first. That's how you get people sacrificing their lives as police officers, their twenties as doctors, their privacy as President, their chance to have kids as mathematicians.

It's not great for the people, and we should feel bad for tricking them into such an unfair distribution of society's costs.

Yup. That "not" was a typo from before I rearranged that sentence. I spotted it too late to edit :-\

You're right that it's good for some parts of society when other parts make sacrifices. But those people are part of society too, and it's bad for them. I personally would rather live in a society where everyone works to live, not lives to work.

It’s unclear if putting the company ahead of all else is good for the company too. It’s clearly bad for the individual.

Purely hypothetical idea I just made up, just throwing it up here as a trial balloon: maybe the reason this VC exec (and others working for him) actually got disinterested, is that they don't see many good opportunities for investment appearing. Which would mean the real reason they are winding things down because they think the bubble is popping soon.

No idea if it's true, just putting it up for comment.

You would read the same article about every VC firm then

What is it with executives who feel above showing up to work? I worked at a company where the CEO worked 2 half days a week and the other execs were on cruise control, then they got angry that all the employees weren’t killing it (“this is startup! Work like one!”). Hard to enforce that culture when no one is ever there.

> "Palihapitiya in February filed for divorce from his wife Brigette Lau, a partner with Social Capital and co-owner of its management company. Soon he began showing up less often to the office, ..."

The disadvantage to not having a boundary between your personal life and work life, I suppose.

What are the advantages? Seems like a terrible idea all around.

Some husband and wife startups are both very successful financially and greatly enjoyable for the couple. Voicestream for example.

YCombo as another.

Houzz as well

Definitely not a "startup" CEO, nor do we have employees yet, but my wife and I own a small business together and we really enjoy spending all of our time together. It's a giant advantage for us to be able to casually discuss business when we want, and for us to both have the same schedule around big launches or industry event type things.

When we both had our own jobs, we felt like we hardly saw each other and like we had nothing in common. Now that we have kids, it's much easier to have the kids around while we're working because we can both do more or less as the kids need us.

Obviously if we got divorced it would be a disaster, but that doesn't negate that these are currently very real advantages.

It's great... until it isn't. Then it's terrible.

You like your coworker, you have a shared interest with your spouse, you succeed together

An incredible amount of small businesses have female owners to due tax benefits. So husband-wife pairs are not uncommon.

What are the tax benefits?

I don't know about tax benefits, but I know it is pretty common around DC for a husband to have his wife be the legal owner of his business for contract bidding purposes. The govt has to award a certain amount of contracts per year to smaller groups, so making the wife the owner allows the business to legally be a "woman owned, small business", even though the wife has no actual role in the company.

It's also very common for these contractors to sub-contract all of their contracts to the big companies who actually do the work. So the government contracts to a one-man Veteran Alaskan Native owned "company", who has a pre-arranged agreement to sub all incoming work out to the actual contractor. The prime contractor's only job is to be the prime contractor and forward communication back and forth. He can do that from home without even going into an office. Sweet gig, and on the taxpayer's dime!

Tax benefits for female owners?

I'm a founder working with my fiance who is CEO.

Advantages: Complete trust. We have a lot of experience with difficult conversations. We have complementary skills and personality traits. We have both bet our future on this company and thus are equally dedicated. We're also aligned on motivation to succeed.

If you are willing to entangle your life with someone financially, romantically, and domestically, you may as well start a business with them :)

If you can make it work then all the $$ stays in the family

To be fair, if a CEO of a startup is sitting in her office 5 days a week, she's not doing her job properly. She should be out there finding funding or finding customers.

It was beach house and yacht trips, considering we had zero customers (B2B).

What does "out there" mean? Walking down the street in SF and giving out leaflets? I'm having a bit of trouble imagining how this out there looks like for most of those startup companies - especially considering how a lot of CEOs in larger companies work as long-distance communicators.

> What does "out there" mean?

Asking your network for introductions, cold emailing, et cetera. If you can’t do this you shouldn’t be a start-up CEO.

All of which happens in your office...

> All of which happens in your office

Not necessarily. Particularly when it comes to early stage work, a lot of trust building must happen face to face.

In any case, "out there" means being "out" in the awareness of the people on whose radars you want to be. (Versus twittering about in a corner unnoticed.)

Meeting with clients and investors often but not always involves travel.

In the offices of your clients, suppliers, partners, and regulators.

We have replaced Lords with Executives in the modern world.

Lords stuck around until, if ever, violently deposed. Executives are accountable for producing something people will part with money to get.

Lords were responsible for defending the land and raising an army. Executives probably delegate way more than lords did.

I am always flabbergasted on how Marxist-minded people find solace in feudalism.

How do you know the CEO was not working the other times they were out of the office?

He wasn’t, mostly yachting and partying, very wealthy man. But the company was lighting VC dollars on fire. Someday I’ll write an expose of that place, such an odd culture. We had a burn of something like $2mil a month, 75 employees, and no product or customers to speak of.

Sounds like a B2B startup I worked for in the late 90's. The CEO had "rockstar" qualities, raised a bunch of cash, over-hired, delegated everything... It didn't end well.

Nice if you're the one partying. Pretty sad for everyone else though. Life's not fair. Lots of talented people out there who could build a business and turn a profit, and instead the VC money always chases the smooth talking B-school bro's with Ivy League pedigree, and other big-network phonies.

> delegated everything

Did one thing correctly.

Wealthy family or self-made?

Facebook

Self made from previous IPO

Do you happen to know the name of the Italian pharma exec he is dating?

Why would this be relevant in this conversation? Sounds more like gossip than prime HN material to me.

We call those idiots.

They're executives, dude. All the hard work has been delegated, so they just need to check in from the yacht once a week. /s

The 4-Hour Workweek

And leadership at portfolio companies want to comment?

If a VC leads your round and then goes radio silent it can really hurt the company.

Many execs appreciate the freedom. Some VCs have great advice, but not all are helpful.

Freedom from constant meddling is appreciated. Not having your lead investor cheerlead for you externally is not great signaling though.

hired: "Wall Street veteran Marc Mezvinsky (husband to Chelsea Clinton) as vice chairman."

who had already lost a bunch of money on Greece and enjoys skiing. An example of failing upwards. Same with Chelsea Clinton who seems like a decently intelligent, nice person, who has had to put up with lots of ugly attacks...but who has had positions handed to her, not unlike other connected kids of Washington/NYC elite.

Not people you want in SV if you are assessing tech startups. Now pulling off a BioTech scam? Then yes.

Semi-related but all I remember the founder for is pitching TSLA converts at Ira Sohn and just thinking, "I don't think people go to this to hear TSLA pitches..."

https://twitter.com/chamath/status/1038096940372619264

He also owns 25,000 bitcoins. Made a huge bet in the space.

ref: https://www.cnbc.com/2017/12/05/winklevoss-twins-head-the-li...

Title doesn't make sense to me. Sounds like Chamath is retiring because he's made a ton of money. Though his style of communication is clearly horrible.

I still don't understand why this matters.

Axios style of reporting is unique. Their articles are concise with clear paragraphs and bulleted points. It is welcome change and I wish more sites adopt a similar approach.

I like it too, but the use of bolding is a bit excessive and distracting. I feel like it makes sense sometimes, but then other times it feels random, like the bolding of

> By early June, Axios heard that Tony Bates and Marc Mezvinsky

> But even the core business

I feel like if they want to do this bolding to enable skimming, they should bold entire independent clauses.

I agree. It is a refreshing, easy to digest format. I hadn't really noticed until you mentioned it. Which is a testament to good design :)

I agree, it was great to read their “about” page - though ironically a tad verbose haha:

https://www.axios.com/about

Wow, you're right. I just noticed that. It's like the Skimm for men.

Businesses fail and life goes on.

You shouldn't be sad by articles like this, but it can prove a valuable lesson for why things actually fail in practice (rather than in theory), which is why you shouldn't ignore it.

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