Part I of our interview with outspoken venture capitalist and entrepreneur Chamath Palihapitiya ruffled some feathers...consider that the pregame to today’s Part II.
Part I of our interview with outspoken venture capitalist and entrepreneur Chamath Palihapitiya ruffled some feathers...consider that the pregame to today’s Part II.
In this episode, Chamath argues his thesis that “zombie companies” need to go six feet under for the rest of the economy to stay alive and well—especially in the middle of today’s pandemic and recession. He explains...
And while he’s at it, Chamath draws apt connections between luck and hard work.
Come for the deep analysis of government intervention in companies deemed too big to fail, stay for Chamath’s assertion that the U.S. economy needs billionaires like the NBA needs LeBron James.
Listen now and let us know what you think. And if you missed Part I, go check that out, too.
Kinsey Grant, Morning Brew business editor and podcast host [00:00:05] Hey, everyone, and welcome to Business Casual, the podcast from Morning Brew answering your biggest questions in business. I'm your host and Brew business editor, Kinsey Grant. And now let's get into it.
Kinsey [00:00:18] This is part two of my conversation with venture capitalist, billionaire, and outspoken critic of capitalism [chuckles], Chamath Palihapitiya. If you haven't listened to part one of this interview with Chamath, I highly encourage you go check it out. Now to today's conversation. We just left off with Chamath explaining why companies that prioritize innovation, productivity, hiring the right people, can theoretically succeed and even contribute to shrinking some of the negative impacts of wealth disparity.
Kinsey [00:00:46] But for every company that is doing the right thing, there's a company that is not doing the right thing. So we're going to start this conversation by talking about why those companies that should fail, sometimes don't. Then we'll talk about why those zombie companies seem to get endless second chances, the role of billionaires, where the government machine might be selling us short, and so much more. Now, Chamath. Why are these companies that aren't prioritizing innovation and prioritizing productivity failing?
Chamath Palihapitiya, founder and CEO of Social Capital [00:01:13] They're not failing because there is enough debt in the world and there are enough banks in the world and there are enough buyers of this debt that will allow these companies to basically stay on life support. So meaning, when a company is sort of like losing money and hemorrhaging money, if their product is fundamentally flawed, which is a small strain, they go bankrupt, and they liquidate and then they go away and they disappear. But most companies fall into this different gray zone, the belly, which is like 80% of companies, which is sort of what I call zombie companies. And these zombie companies are ones where some quarters are break-even, some quarters, a little bit of profit, most quarters are unprofitable.
Chamath [00:01:58] And instead of saving money and investing it in the future, they become very short term because they don't have any good ideas. And this is where, you know, IBM is a perfect poster child for this. IBM is a company over the last 15 years or so, 20 years, that they spent $140 billion on buybacks. It's a $100 billion revenue company. It just printed its worst quarterly revenue since 1998. The last CEO, who just stepped down, she oversaw 24 straight quarters of revenue decline, yet saw her compensation go up. She made more than $100 million just on stock. And so that just doesn't seem right to me.
Kinsey [00:02:41] So if we think about this like, say, a game of Jenga, this system of zombie-like, IBM-like companies, what piece do we need to pull out to dismantle this corrupted version of the system that we're now engaged with? Is it, you know, removing debt from the equation? Is it—I don't know—disincentivizing buyers of [indistinct]? What can we pull on to fix this?
Chamath [00:03:06] I think that there are probably three things that are of the highest priority. The first is that I think we need to have much stricter limits on what a balance sheet needs to look like to be rated as high-quality debt. Number two is we need to disincentivize people from not investing in the future. You do that by preventing buybacks and dividends only in cases where these companies have enormous amount of profit. And then the third is you need to create positive incentives so that you can capitalize your R&D better. So that, for example, in Canada, if you hire engineers to work on cutting-edge things, you get a tax credit from the Canadian government that is up to almost three times the salary of what you pay folks.
Chamath [00:03:54] And so there is a deep incentive to focus on long-term R&D because it effectively subsidizes the cost of these people. So those kinds of positive incentives, combined with some more financial handcuffs, would go an enormously long way. Those are what I would do first. Then what you can do is, all of the participants in the market that may amplify short-term behavior—you can handcuff them a little bit more. And the way that you do that is you just don't allow these hedge funds to have as much leverage as they do. And the way that that game works is they get paid a percentage of the profits they make in any year.
Chamath [00:04:32] And so what they want to do, though, is do that in the most riskless way possible. So they figure out a strategy where, you know, maybe they can make 1% a year and you would say, Chamath, well, 1% a year is not that great. I would say, Kinsey, you're right. Well, then, what I'll do is I'll go to the bank and I'll get J.P. Morgan to lever me up 12 times. And now that 1% is 12%.
Chamath [00:04:52] And that's what happens all day long. Again, these incentives are set up for the bigger you are, the less likely you are to fail because nobody can afford for you to fail. So the incentive is to get us incrementally valuable to the system as it is, because then somebody will bail you out. It's this old adage: if I owe the bank a $1,000, it's my problem. But if I owe the bank a $1 billion, that's their problem. And so you're incentivized to have massive obligations and massive leverage because you know somebody will be forced to come to your rescue.
Kinsey [00:05:29] So if you grow large enough, you can theoretically outgrow risk.
Chamath [00:05:33] Correct. You really do become too big to fail.
Kinsey [00:05:37] OK. Chamath, big question. But first, we're going to take a quick break to hear from our partner. —
Kinsey [00:05:45] And now back to the conversation with Chamath Palihapitiya. How does the government inject itself into these companies?
Chamath Palihapitiya, founder and CEO of Social Capital [00:05:52] Well, if it were up to me, what I would say is the following. The first thing that we need is an entire wave of spending on the next generation set of things that we would all expect. I think you and I deserve—it doesn't mean whether we're good people or bad people—but, you know, you and me and everybody else, we deserve best-in-class healthcare. We deserve the best-in-class education system. We deserve, you know, a military apparatus that's setup for the next generation. We deserve a bunch of things. And what that requires is money.
Chamath [00:06:30] The U.S. government has just proven that they're willing to spend enormous amounts of money, so we should spend it on this kind of stuff because it gets people working, it focuses on productivity and innovation, and it will force the money to go downstream to people. That's what I think we need to do in the long term. In the medium term, we need to be a bridge. And without quibbling about what's happened now, because that money has already been spent, what I will say is a disproportionately larger piece of the next dollar that gets spent by the U.S. government should go to people's pockets because I think that the damage to individuals is much worse than is understood or forecasted.
Chamath [00:07:09] I think it's ripping apart the working class and the middle class in a way that we will figure out only in a quarter or two from now. And it'll be savage. And I think that they need direct payments.
Kinsey [00:07:21] Right. And I've heard you say before that this is basically our experience in the last—I don't know—two months has been the metaphorical ripping of the Band-Aid that we now feel a little bit more comfortable ramping up a $2.2 trillion-relief package to send money to Americans. Do you see this happening, realistically? Do you see this happening again? Do you see us getting another check in the mail?
Chamath [00:07:44] I can see it. So just to put it in perspective: it's $2.2 trillion, and which is now $2.6 trillion, of fiscal stimulus. But it's been, I think, $8 or $9 trillion of monetary stimulus by the Fed. So, you know, we've spent $10 or $11 trillion. So if you think about the totality of that, we have spent more buying bonds of companies, meaning you and I through the Fed, than we have in giving economic support to our brothers and sisters. So, you know, I think it's like three or four cents of every dollar has gone into individual pockets. So we could probably do better than that in a non-controversial way.
Kinsey [00:08:24] So is it safe to say that this billionaire owner class has gotten more of those cents on the dollar than I have as like a hard middle class [laughs]?
Chamath [00:08:33] Yeah, I mean, like, look, to be honest with you, I have really, in this kind of weird way, been decently effective through this whole thing. I've kind of thrived. I hate to say that, because I feel guilty about it. I mean, to be honest with you, like I have these massive bouts of anxiety because I haven't lived in the shoes of my current self long enough. And so, I bring too much baggage of my old self. And my old self was the kid that, you know, saw their parents really struggling. And it's pretty devastating for me. So what I will tell you is, yeah, I have disproportionately benefited.
Chamath [00:09:07] Should I? No. I know the game and nobody was going to step in for me when I was trying to, you know, climbing up, and I knew that and I was OK with it. And now that I'm here, I just think it's—I don't know—it's like it's not—doesn't have to be this way. Yeah, I would rather the younger version of me get taken care of before the older version [chuckles] of me; 43-year-old Chamath is OK. He's fine. I don't need the help. You know, 20-year-old Chamath needs the help. 16-year-old Chamath really needs help. So there should just be more of that.
Kinsey [00:09:43] So there's the conversation of who needs help first. The billionaire class or the working class. But I think there's also a conversation around should that billionaire owner class even exist in the first place. And I'm gonna ask you if you think billionaires should exist, shortly. But first, let's take a quick break to hear from our partner. — And now back to the conversation with Chamath Palihapitiya. So, Chamath, should billionaires exist?
Chamath [00:10:07] Of course they should. Of course they should. It's an embodiment of the fact that people can be successful. And you want that. I think you want to have things and people and objectives you can aspire to because, you know, a label of money for most people that get there was a byproduct of something they did. You know, all the people I've ever met that have been obsessed about getting rich never became rich. You know, at least the people that I know—and now I know enough folks that have done things across many industries—we were all just really insecure [chuckles] people trying to do something. And to varying degrees, we were rewarded.
Chamath [00:10:49] And I think you want that example for your kids and your kids' kids, because that's healthy. It would kind of be like saying, you know, let's have an NBA where if you're as good as LeBron James, you're only allowed to play five minutes a game. I mean, that would make the NBA brutal. You wouldn't watch the NBA. So an America where you say the smartest people, you know, can't do what they're naturally inclined to do because they may accidentally make a ton of money is kind of ludicrous.
Kinsey [00:11:18] So we've talked at length about equality of opportunity in this conversation. But what about the role of luck in this? You can be a hard worker, but there is something to be said for [chuckles] the harder you work, the luckier you get. But also, like lightning struck, you know?
Chamath [00:11:32] Yeah, I agree with this. Let's just say there's a cloud above you. And that cloud has a magic drop of rain. And when it hits you, you become successful. Your goal is to make sure that you are as large as possible so that when that drop of rain falls down, it has the best chances of hitting you.
Kinsey [00:11:51] OK.
Chamath [00:11:52] Versus the person beside you. That's what I liken to hard work. Hard work kind of makes your surface area as big as possible so that raindrop can hit you. Luck is a very strange beast. But what is true is that if you are kind of in the grind and putting in the time, you improve your chances of luck being by your side.
Kinsey [00:12:15] OK.
Chamath [00:12:15] Now in that analogy, let's assume that in this area where this cloud is, you can't get big. OK, well, that is a problem because then, you know, I agree with that idea because that's kind of like saying, wow, no matter how hard you work, you can't increase your surface area. So I think we have to fix that versus shooting the cloud in the head and saying, get the cloud out of here.
Kinsey [00:12:36] [laughs] It's not the cloud at fault.
Chamath [00:12:37] So instead of anointing winners and losers, it's how do we allow ourselves to get a little bit more elbow room so that we can get bigger?
Kinsey [00:12:46] I want to first thank you for your transparency in this conversation. Before I let you go, we are going to bring out our Business Casual wheel quickly and play some rapid-fire questions. Get to know you a little bit, a little more insight into [indistinct], so we are doing this remotely.
Kinsey [00:13:00] I'm going to spin the wheel for you and I'll let you know what it lands on. All right. Day in the life. So what is a day in the life like for you right now?
Chamath [00:13:10] In the COVID era?
Kinsey [00:13:10] In the COVID era.
[00:13:13] I wake up at 7:00, basically. Quickly, quickly, I looked through my email. I look at the public markets. And then I go downstairs. I make breakfast. I come back upstairs. I eat it in bed. I spend a few more minutes kind of thinking about what I need to get done. I get ready.
Chamath [00:13:31] I mean, this is very detailed. But —.
Kinsey [00:13:33] Love it.
Chamath [00:13:35] And then I get ready. For a while, it was so brutal. It's like, I mean, I was kind of like a bit of a dandy before. And I used to dress really well. And, you know, I used to take care of myself and I really saw it degrading. I was like, my gosh, like, this is brutal. So I'm trying to, you know, shower every day. It's like it's a real pain in the ass because sometimes I don't.
Kinsey [00:13:57] A respectable goal. [laughs]
Chamath [00:13:58] Yeah. And then, like, you know, not wear the same thing two days in a row. But then the problem is, I have to do my laundry and then I'm like [indistinct]. So, anyway, so I get through that conundrum and then I come into this room. Usually I use it for poker with my friends.
Chamath [00:14:15] But then I'm typically here until about 12:30 and then I have lunch, and then I come back and I'm here until 6:00, and then I go for a walk. And between the [indistinct], you know, somewhere in there, if I'm doing conference calls, I walk around my house because I live in the suburbs of San Francisco. So I have a little bit of space. I try to get 10,000 steps. Twice a week I do yoga via Zoom. Dinner is typically at 7:00. And then I try to basically be in bed by 9:00 and I watch some TV shows. So right now I'm watching "Billions." Season 3 of "Billions." I've never watched it before. People have told me to watch before, so I've been watching it. It's fabulous.
Kinsey [00:14:57] Nice.
Chamath [00:14:57] And then read Twitter, catch up on email. And I'm in bed by 11:30, 12:00.
Kinsey [00:15:05] That's a pretty good routine.
Chamath [00:15:06] Yeah. I was I was told by somebody—he said it in an offhanded way, but then I saw it on Twitter—where an astronaut who lived on the space station for a year basically said the most important thing if you're going to shelter in place, which is like being, you know, in space, is to have a very strict routine and follow it because it will minimize your anxiety. And then, you know, in between the day, there's a part of my day where I allocate to calling my friends.
Kinsey [00:15:39] Well, that's good. I like that. I think we could all do well to do that a little more.
Chamath [00:15:43] Have a little checklist.
Kinsey [00:15:45] [laughs] Oh, nice! That's awesome. I like the checklist too. I know the establishing your routine has been particularly difficult. I'm at home—like home, home with my parents. So I feel like I'm reverting back to my routine when I was 17 years old, which is very interesting. OK. We're going take another spin.
Chamath [00:16:01] OK.
Kinsey [00:16:02] It lands on—call me crazy. So what's a hot take that you've had that either [laughs]—this is a good one for you, huh?
Chamath [00:16:10] I mean, I've been called crazy for a long time.
Kinsey [00:16:12] Yeah. But let's say your hottest take that we haven't talked about in this conversation, either that you've been right about or you think you will be right about?
Chamath [00:16:21] Hah. Well, I hope this isn't true. But I think that we are headed towards kind of a depression. And I think that there is a very strong possibility that in it, there's a lot of chaos and geopolitically, my crazy take would be that China invades Taiwan. My other crazy take is that the Middle East basically goes from however many countries that they are to 10 times that number of countries because, you know, when you stop pumping oil and you don't have a dictator or, you know, a strong person, strong man that can pump petrodollars into the economy, people get skittish in.
Chamath [00:17:12] There's enough cultural and language differences in the Middle East that things could—there's a powder keg. So that would be my hot take. My crazy hot take is that China invades Taiwan mostly to get access to technology and capability. The U.S. has done some crazy stuff by not allowing China to get access to certain key technologies, and that the Middle East becomes completely fragmented.
Kinsey [00:17:33] OK. Well, no offense, but I hope you're wrong.
Chamath [00:17:36] I totally hope I'm wrong too. This is all I'm saying—it's the crazy that's —
Kinsey [00:17:40] They definitely [indistinct] call me crazy one. We'll have to check back on that in four to six months and see where we are. All right. One last [indistinct]. And it's gonna land on, in or out. So I already know your take on this, but I want you to share it with the audience who might not know, but in or out on bitcoin.
Chamath [00:17:59] In.
Kinsey [00:18:01] And maybe just explain to us how in.
Chamath [00:18:03] Well, I started buying in 2012 or 13, so I was a pretty early participant. I was buying coins at 85 bucks a coin. So what do I think of bitcoin. I think that if we don't fix the ingredients, so if we don't fix this combination of capitalism and democracy and make the product taste better again, we will go through kind of a financial cataclysm. So for decades and decades, we've seen that when things get really tough, you want to have a backstop where you can go and trade between people.
Chamath [00:18:44] And I think that there is a risk that if we can't get our act together, people lose faith in the U.S. system. And it's a small risk. Very small risk. And so I view bitcoin as insurance. So you buy a very small amount—and what I've said before publicly is kind of like 1% of your net worth or less—and then don't ever look at it. Like, Kinsey, I couldn't tell you the price. I don't know what it's done last week or last year. I do not look at it. And every time somebody tries to tell me to look at it, I fight my basic instinct to do it. I don't want to know because I want it to be worthless. I wanted to be left with the other 99% of my assets.
Chamath [00:19:26] But, if it doesn't, that 1% will save you. It'll give you really needed liquidity in a moment that matters. And, you know, kind of like having a 1% insurance policy isn't such a bad idea if you think the ingredients are tasting worse and worse.
Kinsey [00:19:43] OK. That checks out. Makes sense to me. All right. Well, Chamath, thank you so much for coming on Business Casual. I really enjoyed this conversation and I would love to revisit this. I'm sure at some point, when we have more information about how this recipe is changing. But thank you and I appreciate your time.
Chamath [00:20:03] Thanks. Thanks for taking the time. Bye, Kinsey.
Kinsey [00:20:12] Thank you so much for listening to this episode of Business Casual. So as you probably can tell by now, we're testing out this new format of interviews with big names split into two separate parts. We first did it with Ray Dalio and now with Chamath Palihapitiya. But we want to know what you think about these new, two-part interviews.
Kinsey [00:20:31] Let us know by emailing me at Kinzie@morningbrew.com. That's k i n s e y at morningbrew.com to share your thoughts. And I'll see you next time.