Social Capital is a financial holding firm and formerly a prominent venture capital (VC) firm founded in 2011, that aims to tackle hard problems like cancer, space exploration, and climate change. They currently focus on backing companies through special purpose acquisition companies (SPAC), with a thesis of investing in healthcare, education, and frontier tech businesses and AI. At a time where most investors in Silicon Valley were heavily focused on investing in social networks, photo-sharing apps, and other consumer-oriented investments in 2011, they supported companies solving hard problems in frontier tech, many of whom were unable to raise money from other institutional investors. Some notable companies they’ve invested in at some of their earliest stages include Slack, Box, Brilliant, Clover Health, Remind, SurveyMonkey, Wave Financial and Yammer. The main founder of Social Capital is Chamath Palihapitiya, a Canadian University of Waterloo alumni, who is an ex-Facebook VP of Growth and Product and helped scale the social media company to 1B users.
They believe that empowering entrepreneurs who seek to improve the lives of the people around them is the best way to create more opportunities globally for humanity. At its core, Social Capital is an organization that identifies hard problems and assembles experts, IPs and experiments that allow them to learn about these problems deeply. As a firm, once they have the necessary conviction about a solution, they will then execute — by building, buying, or investing in whatever it takes to solve the problem they identified. The main investment philosophy of Social Capital is one that mirrors Berkshire Hathaway, which is to give founders the long-term patient capital they need to accomplish big things. In a time span of fewer than 7 years since launching its first fund in 2011, Social Capital has raised approximately $1.2B across 3 funds. As a venture capital firm, they employed several general partners, who also invested a certain amount of personal capital into the firm for an equity stake, as well as principals, associates, and analysts. The external investors to the fund, known as Limited Partners (LPs), are primarily family offices, non-profits (university endowments), sovereign wealth funds, funds of funds, and corporations. However, they pivoted in 2019 to become a financial holding company, choosing to close themselves to outside investment and focus on making larger, bolder bets on companies (later-stage investing), creating a mass media frenzy among the venture capital sector.
Why become a technology holding company?
According to Palihapitiya, most LPs only care about numbers and want immediate results within a couple of years. Traditional venture capital firms also tend to have strong control measures to protect their investments. These protective provisions also tend to give them unparalleled power over the company. Social Capital on the other hand realizes the barriers that these control measures set, which is why they provide long-term patient capital and help the company to make a positive impact. This culminated in the formation of multiple SPAC holdings in 2020, with companies such as Virgin Galactic, OpenDoor, and Clover Health, raising over $2.1 billion through 3 separate SPAC holdings led by Social Capital. During their time as a VC firm, they participated in 207 equity investments totalling $2.99B as of 2017.
Their portfolio strategy places an emphasis on companies in the following sectors:
Healthcare: Healthcare: Syapse is a software suite for healthcare systems to implement precision medicine programs, streamline operations, and improve clinical outcomes. Social Capital has participated in all rounds of funding to Syapse to date totaling approximately $99.6M. Syapse‘s latest investment was a $30M Series E in Q2’20. Social Capital also invested in $2.5M seed round to Sempre Health, software that collects disparate patient data to calculate a risk adjusted price of healthcare at the individual level.
Education: Education: Guild Education is an education and training platform for working adults that provides individual courses and degree programs. Social Capital participated in an $8.5M Series A that included Cowboy Ventures and Redpoint Ventures. Social Capital also invested in Remind, a communication platform that helps every student succeed. Founded in 2011, Remind allows school and district administrators to reach and engage with their communities and connects educators and families with the tools that help them teach and learn. Social Capital participated in a $3.5M Series A fundraising round.
Financial services: CommonBond is a marketplace lending platform for student loan financing. Social Capital participated in a $30M Series C investment that included August Capital, Nelnet, Neuberger Berman, Nyca Partners, Tribeca Venture Partners, and Victory Park Capital. Social Capital previously participated in CommonBond’s Series A and B (and a debt financing), along with other investors. CommonBond has raised $471.5M in disclosed funding to date.
Enterprise: Slack is enterprise software for collaborating and messaging and is Social Capital’s highest-valued portfolio company.
SPAC stands for Special Purpose Acquisition Company. Their purpose is to take companies on the stock market at an earlier stage to provide access to public funding. First, an individual or group of investors form a holding company. The next step is to get a bank to underwrite the holding company and file an IPO. After that, the holding company must declare that they’re a SPAC in their IPO filings. From here, the holding company can raise public capital because shareholders trust the investment firm behind the SPAC. Finally, form a merger with the company that the firm wanted to acquire, and the company is now on the stock market, with existing investors opting to reinstate their equity while offering much-needed liquidity to those who choose so (employees, etc). SPACs essentially are a way for companies to get public funding without getting picked apart by the public during the IPO process, as seen with Uber and WeWork, etc. So far this year, 156 SPACs have raised more than $55bn, and 76 SPACs in the US have announced acquisitions with a combined value of $95.2bn.
1. Social Capital Hedosophia Holdings — which is already a SPAC listed on the market — merges with Virgin Galactic and the resulting company is a publicly-traded company called Virgin Galactic Holdings raising over $480 Million.
2. Social Capital Hedosophia II Holdings — which is already a SPAC listed on the market — merges with Opendoor Inc. to take Opendoor public raising over $300 Million.
Now that they’ve transitioned to funding more growth-stage companies as a financial holding company, Social Capital competes with large banks, hedge funds, and individual backers raising SPACs. Prominent investors, such as Michael Klein, and Pershing Square Tontine Holdings (managed by billionaire hedge fund investor Bill Ackman) have each individually raised billions of dollars across dozens of SPACs. These emerging groups, many of whom are more experienced in the public markets than Social Capital led by Chamath Palihapitiya, may form a disadvantage for Social Capital in their ability to recruit companies in the future to raise SPACs.
Founders struggle with spending nearly one-third of their time going through the painful process of raising capital. Social Capital devised an experiment to eliminate this, using an operating system for early-stage investing dubbed “capital-as-a-service” (CaaS), and internal growth and data analysis tool, “Magic 8-Ball”. Social Capital forwent the traditional pitch process and rapidly evaluated thousands of companies on the basis of metrics and achievements alone. By cutting many of the biases and inefficiencies of the fundraising process, Social Capital also set out to try and solve a critical issue in the technology industry, which is a lack of funding for female founders and ethnic minorities. Only 2% of VC dollars go to female-founded companies, and members of BIPOC are also dramatically under-represented. Using metrics and quantitative data, such as monthly recurring revenue, growth rate, and customer retention, they were able to compare performance and evaluate the profitability of a potential investment/. All of this was done automatically by algorithms in under three days, a bold, controversial decision-making process for the antiquated VC industry. CaaS reported 80% of accepted companies as having non-white founders and 30% having female founders. After a year, 10 of the 76 companies approved have already raised follow-up fundraising or become acquired. Many businesses, such as Toronto-based startup Clearbanc, have devised similar capital allocation services, with application processes that take only 20 minutes.
As part of a market analysis surrounding Social Capital’s target investment sector, there were two fields that were particularly important going forward as part of their investment plan: artificial intelligence and computational biology. Over the next few decades, as more engineers are trained in artificial intelligence, we should see artificial intelligence successfully applied to problems that were previously too difficult using traditional software methods, such as self-driving cars, robotics, and drug design. AI can truly transform how we work, how we live, and even how we think. Social Capital plans to, as a result, own companies that are either directly applying these new advancements in artificial intelligence, or that are building the infrastructure that powers these companies. Examples of companies they’ve funded/acquired in the past year include AI-enabled peer-to-peer messaging platform Hustle. Another emerging market trend that the firm is bullish on is the emergence of computational biology, for solving problems with the physical world, such as the efficient design of new materials, effective drugs, and fuels. Companies are now taking the knowledge humanity has learned about building computers and transferring it to the domain of synthetic design in biology, or the automation of new tools, processes, and methods in the lab to manipulate biology and build new living systems. Social Capital aims to use this to invest in companies that work with biology in ways that increasingly resemble the way we work with software: as a platform for building tools, applications, and infrastructure.
Market Analysis: SWOT
- Strong team with direct experience: Social Capital’s team consists of seasoned leaders in tech, such as Chamath Palihapitiya (co-founder, ex-Facebook VP), and executives from DropBox, IBM, Facebook, Google and other prominent VC firms such as Kleiner Perkins.
- Transition to technology holding company: Social Capital opted to pivot from being a VC firm to becoming a technology holding company. By doing so, they are able to overcome dealing with limited partners who are obsessive only about numerical performance in the short term. Social Capital can now decrease external influences against their investing strategy. This may also result in more founders choosing to partner with Social Capital because they are not as influenced by LPs to claim short-term profits.
- Strong performance to-date: Since inception in 2011, Social Capital has compounded their money 997%, beating the S&P (with dividends reinvested) by more than three times.
- Strong liquidity and cash flow: In 2019, they generated more than $1.7 billion in cash and cash equivalents. Focus on liquidity will result in more buying opportunities in the future, which they have to date executed on, investing 100’s of millions in the SPACs they have backed to date. Additionally, as external market events seem to no longer be priced accordingly into the capital markets, having cash on hand from selling will be a prudent decision for the next couple of years.
High turnover of key partners and talent. Key partners and executives have left the firm as a result of misaligning views over the use of the data-driven investing strategy and conversion from a VC firm to a financial holding company. Co-founders Mamoon Hamid and Ted Maidenberg, have left and joined other rival firms such as Kleiner Perkins. Additionally, venture capital partner Arjun Sethi resigned and created his own firm called Tribe Capital, which has poached many employees from Social Capital. As a result, the firm now is essentially closer to a family office/hedge fund, as the majority of the funds belong to Chamath himself. This attracted a lot of external scrutiny, as the leadership style has evolved from being a more democratic system (revolving around limited partners, general partners and a voting system) to a more authoritarian system employed by Chamath, likely by design.
- Social Capital is now a leader in SPAC-based investment vehicles, alongside Pershing Square Management. Both have raised billions of dollars from multiple SPACs in 2020 alone. Social Capital can continue to capitalize on their reputation for SPACs and partner with more promising growth-stage companies, netting them equity and fees in each successful IPO.
- The majority of their investments are in emerging technology. This leaves incredibly high prospects for long-term growth. The companies which Social Capital backs are the future monopolies of 2040. Examples of this include their $500M investment into Virgin Galactic, creating the first publicly traded commercial spaceflight company.
- Many tech-enabled hybrid companies are seeing massive resets in valuation models as they go public. Public markets rationalize and enforce a valuation that won’t allow these hybrid companies to be valued like pure tech companies. As we’ve seen with WeWork and Uber, massive valuation resets are occurring as these companies choose to stay private longer, or have poor unit economics to prove further growth. Briefly, private overcapitalization is destroying companies. Social Capital benefits from this trend, as new tech startups wish to avoid the mistakes made by previous companies that waited too long to go public. They may do so by looking to reduce private investments and go public at an earlier stage via SPAC.
- SPACs are unproven as a long-term investment vehicle for taking companies public. As a result, there is a lot of attention from federal regulators about their trustworthiness and risk to shareholders. The promotion of SPACs has caught the attention of Jay Clayton, the chairman of the US Securities and Exchange Commission, who expressed concern about making sure individual investors obtain the same rigorous disclosure which happens in a standard IPO procedure.
Social Capital attracts employees with a morally/ethically sound investing ethos (‘raising money for companies that make a difference’) and strong employee compensation. Rather than providing an abundance of illiquid options, Social Capital, and its portfolio companies, provide strong cash compensation. Palihapitiya in his shareholder’s letter revealed that “We asked what the salary surveys for each role in the company were and proceeded to pay everyone at the 100th percentile.” Social Capital believes paying people a high current income is what is most useful to most people, not vested equity. It allows the company to buck the trend of poor retention rates typical of most early-stage startups. Palihapitiya’s philosophy is sound with what we learned in class because the concept of relying on startup equity as a means to underpay employees is analogous to precarious employment, in some sense. Employees become bound by the hope that eventually the company will scale to become a billion-dollar company, and their shares will after many years become liquid through an acquisition or IPO. However, for frontier technology, the timeline for this can be 10+ years, and only a fraction succeed.
Looking at the future.
The fund took a full 360 in 2018–19, becoming a financial holding company that operates like Berkshire Hathaway. Given recent patterns in technology with older private tech companies struggling to maintain their valuations in the public markets (AirBnB, Uber, WeWork, etc), the SPAC model which Social Capital and Chamath are pioneering will help drive forward change in how tech companies go public. As the SPAC model grows in popularity, Social Capital is set to become one of the leading firms backing ‘moonshot companies’. Many investors have compared their pioneering approach as a holding company to Berkshire Hathaway in the 1960s-70s, including Chamath, who jokingly refers to a graph of their IRR compared to Berkshire in its first eight years. Additionally, Social Capital is an anomaly in how they operate, selectively investing in emerging technology companies working in industries that are in need of disruption. These aren’t companies with the shortest and fastest ROI, but ones that in the long run can solve important problems in society. Because of this, corporate social responsibility and sustainability are built into the investment philosophy of the firm. It’s going to be incredibly interesting seeing what new companies Social Capital drive forward onto the public markets in the years to come!
- Social Capital 2019 + 2018 Annual Shareholder Letters (link)
Thanks for taking the time to read through this report on Social Capital! If you have any questions or comments, or just want to chat about ML, biotech, startups, or anything, feel free to DM me on Twitter. I often post about new projects, research, or updates I’m working on!
🔭 What I’m currently doing: I currently work on democratizing deep learning for the life sciences with DeepChem. I work on developing sequence and graph-based models for understanding structural biology and chemistry. At the same time, I develop research at the intersection of computational drug discovery and machine learning as a Research Intern in the Aspuru-Guzik Group at the University of Toronto and Vector Institute. Besides that, I’m wrapping up my final year of high school in Toronto, while applying to university!