Chamath Palihapitiya on Insane Burn Rates, IPOs — And Raising A New Real Estate Fund

Last night, at a StrictlyVC event in San Francisco, startup investor Chamath Palihapitiya of Social + Capital had some harsh words for what’s become the standard startup set-up in San Francisco: the nice office, the well-stocked kitchen, and (inserting our own personal observation here), the increasingly ubiquitous bookcase door that leads to a secret room.

All that window dressing costs money, noted Palihapitiya, sounding very much like he’s had it with supporting such excess —  and suggesting that other investors should be just as indignant.

“It’s fine to fail,” Palihapitiya told attendees. “But if you fail because you didn’t have the courage to move to Oakland and instead you burned 30 percent of your cash on Kind bars and exposed brick walls in the office, you’re a f_cking moron.”

During his appearance, Palihapitiya didn’t just rail against poor spending decisions. He also argued that real companies go public, and he let drop that Social + Capital may be getting into the real estate business. Excerpts from that chat, led by his fellow investor, Semil Shah, follow. You can also view video of the session here.

On the general glut of capital sloshing around the startup industry:

If you think about it, there’s way too much money in the system ultimately chasing few really great companies. The problem with that is you have a bunch of imposter companies get funded for a lot longer than [is] traditionally the case.

With one-tenth the capital, the mortality rate is higher, faster. The curves are sharper. Without it, you get long decay, where you’re feeding capital into startups that shouldn’t exist anymore but are using it to take up space, and hire other employees — and all these people spend a lot more time wasting their time.

That’s problematic. If you don’t have that churn, the few [breakout companies] that can really reach escape velocity are forced to figure out how to get it sooner. So what do they do? They pay people more. They start to spend more on all these things that they think attract people. And [those actions have their] own negative byproduct.

The cost of everything goes up. And you get this really vicious cycle where that top engineer can’t even afford to come here in the first place because he can’t afford one bedroom in a five-bedroom place because it’s $2,000 [a month]. . . It’s this vicious cycle that helps no one.

On whether it still makes sense for entrepreneurs to set up shop in San Francisco:

If we’re really going to [support] San Francisco and startups and Silicon Valley, we have to do a bunch of stuff privately and publicly.

The city has to be doing more, around transportation, around housing . . .You have to get rid of the Nimbyism and you need to quadruple, if not quintuple, the amount of housing. You need to tell that engineer from the University of Michigan that he can live here on a salary of $80,000.

[In the meantime], we look at our startups, and the minute that they start to spend more than 15 percent of their burn – good money that we give them – on rent, a huge red flag goes up. When they, on a per-head-count basis, are spending so much, we start looking at the productivity of the technical team. And if it’s good but not great and they’re spending this insane amount of money [versus] a different team in Redwood City, we start to ask ourselves: “Are you so convinced that success is going to happen in this city at 1.5x the cost?”

Because for every dollar that someone in Mountain View or Redwood City is raising, you have to raise one-and-a-half to two times that just to get the same point. So you’re cutting your [runway] in half. To prove that you can take an Uber from some fuckin’ shitty bar to another shitty bar? Like, I don’t understand.

Who makes the money? [Commercial real estate giant] Cushman & Wakefield makes the money? If at the end of this cycle, whenever it ends, we look back at who made all the money, and it’s not Sequoia or Social + Capital or Andreessen, but it’s Cushman & Wakefield, WeWork, and ZeroCater, something is wrong.

On other private solutions to the problem of a now overcrowded and highly expensive San Francisco scene:

We made a big decision with our last fund to build an organization that looks really different than a venture firm, and that organization is going to be this hybrid, bastard stepchild of Berkshire Hathaway and Blackstone and BlackRock.

What I mean by this is that we want to have a large permanent capital base and we want to make really long, discontinuous bets on companies and sectors and trends.

And one of the things we talked about was having a real estate fund . . .[because] we owe it to our companies to alleviate some of these problems when no one else is going to. If we went and built one million square feet somewhere of mixed use, where you work and live, and we rethink what it means to have a modular living environment for a millennial cohort that wants to work at companies and doesn’t necessarily have kids, we can do that in a way and give that back to our CEOs as a benefit of working with us.

And you can probably make the economics work. Because we only really care about the equity of the company anyways. And the equity in the real estate will take care of itself if you take the 30-year view. So we’re at the point now where we’re like, wow, we should raise a few billion dollars and get into the real estate business and solve this problem systematically for our companies. And maybe in that, it becomes a blueprint for how others should do it. We’re just basically going to act as our own city-state and decide how to do it ourselves.

On whether or not it makes sense for companies to stay private longer:

It is the most rationalizing thing in the world, because you cannot hide behind bravado and nonsense. And you are forced to show that you have articulated a strategy and a game plan and a set of metrics and a narrative, and you have to explain that to people who may not necessarily care emotionally – and that’s not a bad thing. It’s an act of discipline.

As an example, look at Amazon, which has barely generated a dollar of profit. Bezos has created an envelope of trust in the public markets — which are extremely fickle, and we claim them to be incredibly short-sighted — and they’ve taken a 20-year bet on this guy. So I think that line of reasoning is just flawed. It’s an excuse that prevents you from being accountable in ways that make you uncomfortable.

Photo by Brittany Powell.