Chamath Palihapitiya: Trump opens the door for discussion

At Post Seed, the Social Capital CEO spoke about which companies will thrive in a Trump presidency

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As expected, the effect of the upcoming Donald Trump presidency on the tech world was a big topic of conversation at our Post Seed conference this past Thursday.

While most in Silicon Valley were not happy about the outcome of the election, some, like Bambi Francisco Roizen, founder and CEO of Vator, could see the positive in Trump's win.

Sitting down with Semil Shah, General Partner at Haystack, Chamath Palihapitiya, founder and CEO of Social Capital LP, also expressed positive views on what President Trump will mean for the country. 

"I think, broad based, I would say it's actually quite good. It's probably the best thing that probably could have happened to us, for the following reason, which is that there's a type of conversation that I think is happening that probably wouldn't have happened if Hillary had won. Part of it centers around this idea that we cocooned ourselves into this nice, beautiful, little existence that's, frankly, just detached from reality," he said.

"Separately, we were never forced to really understand the scope of the problems that we should have been working on. The real implication of that is that you're going to see this, probably in two or three years, where the capital cycle starts to change. There's been so many really poorly constructed businesses, and business models, that are going to be under pressure. So, I think all of conversations can now happen because of the election. So, in many ways, I think it's probably the most useful thing that could have happened."

On a "moral and ethical level," Palihapitiya expressed more doubt about Trump, saying that, "For a lot of people I think it creates a lot of doubt and fear, and that's unfortunate, but I think the net balances can be positive."

Trump's effect on Silicon Valley

When looking specifically at how Trump would effect Silicon Valley, Palihapitiya identified three different types of tech companies, two of which he belives will be able to thrive under Trump, while the third, and largest, group will have a much tougher time. 

The first type are what he called "bits to atoms," or companies that are "building software that then gets translated and manifested in the real world, in physical atoms."

This includes Amazon, which started as virtual e-commerce, and is now building robots, along with Tesla, whose software manifested in batteries, engines and cars. Apple and SpaceX fit in here as well.

"We've done a lot of these bits to atoms companies, and what I'll tell you about these companies is they're fundamentally defensible, because they are hard, they're non-obvious and most founders don't have patience or the wherewithal or the sources of capital to actually go build them. So, as a result, they're quite unique," he said.

"Those businesses, in this new administration will absolutely thrive. Because you're going to have an administration that is going to be very pro-United States, and they're going to seek out companies and markets and businesses that basically promote American's excellence in things."

The second category of companies are what Palihapitiya calls "sticky bits," which include marketplaces, network effects, and, in enterprise, top down system of record sales companies. Examples include Facebook, Snapchat and Slack.

"Those are really, really interesting kinds of businesses. Why? Because they're very hard to disrupt once they get going. There's an inherent flywheel and momentum that creates a useability mode, or an acquisition mode, or some kind of a mode that you can't just necessarily just overcome with capital."

The third category of tech company he identifies is "everything in the middle, which is everything else."

Some of Social Capital's own enterprise investments fall into that category, he said, and he hadn't realized it because their revenue, traction and ARR, but eventually they "hit a wall."

"I think the reason is because those companies benefited from the fact that you can sell software with a credit card. But it was naive for us to believe that, all of the sudden, somebody else couldn't come in behind us, with the same strategy to disrupt us," he said.

"So, before, you had 10 to 15 years to build a business. Now you have four to five years to build a business, and it's not enough time. You have to load your business up with sales and marketing and HR and PR and product marketing and customer success. All this infrastructure that is secondary to what you really have to do, which is fundamental, core product market fit. Those businesses, I think, are in real trouble."

That, according to Palihapitiya, is related to what is going to happen over the next five or six years thanks to Trump's policies. 

"This administration has made clear, which I think is a fantastic thing, they're going to pump trillions of dollars into the economy. Trillions of dollars. Literally, with a 'T.' Infrastructure spending, massive capital projects, that is going to be renaissance of, I think, middle income job growth. But what it's also going to do is inflate equities to a degree we probably haven't seen in a while. So, if you can get 15, 16, 17 percent IRR in the public market, why would you ever put your money into 10 year, illiquid venture capital for the same IRR? It doesn't make sense," said Palihapitiya. 

In that scenario, the bits to atoms companies will thrive "because there's a manufacturing, a U.S.-first message." The sticky bits companies will be ok "because they're capital-lite, highly sticky." The businesses in the middle, on the other hand, "must get very precise, very quick, because those companies will need to go and raise capital."

"We have as much public market exposure as we do privates, and I struggle every day now to think about how I deploy an incremental dollar into the privates for the same effective return when I should be putting it into the publics because know the publics are going to rip. Because when President Elect Trump pours $2 trillion of money into the public markets, I'm telling you, the Dow is going to go up, the S&P is going to go up, and it's liquid," said Palihapitiya.

"So, those dynamics need to be understood. We typically don't even think about what does Washington do, or what could New York do, to affect us? But that is what it's going to do. It's going to change the capital cycle. It is going to change the risk reward.”

While, for the last seven years the only perceived return has been in in private illiquid investing, he believes that the public markets are going to catching up, and that debt is going to catch up, due to rising interest rates.

"All of these things have an effect in the real rate of return you can generate in our asset class, which, by the way, is not going up. it's actually flat and going down. The reason is because, for the last eight years, we've had all this money flood in, and what used to be a $5 million A is now a $10 million A. What do you think happens? It's not as if the outcomes are also doubling. The outcomes stay the same, the prices go up, which means the return shrinks," said Palihapitiya.

"So, these dynamics, I think, are now going to come to the fore, and the next four to five years is how all of this stuff plays out. That's what I think Trump means to Silicon Valley.  It is a wake up call, a sobriety check, on rational company building, thoughtful business model construction, strategic operational guidance of a business, and that is in short supply."