Social Capital has started investing in startups, sight unseen

Social Capital has started investing in startups, sight unseen

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There’s little question that former Facebook executive and venture capitalist Chamath Palihapitiya thoroughly enjoys challenging the way that startups are funded. Because he has the hot hand, so to speak, he’s able to get away with it, too.

Last month, for example, Palihapitiya’s firm, Social Capital, took the unusual step of raising $600 million in an IPO for a SPAC called Social Capital Hedosophia. The shell company will use the money to acquire all or part of a privately held tech company, thereby taking it public and circumventing what Palihapitiya sees as the unnecessarily long, expensive and distracting process of going public.

Now, Social Capital has another trick up its sleeve. It’s beginning to invest in far-flung startups, sight unseen.

Entrepreneurs from anywhere in the world can fill out a questionnaire, then submit to Social Capital revenue figures and either raw engagement or transaction logs (or both), including sometimes by granting the firm direct access to the cloud services they use. It’s entirely self-serve. If Social Capital likes what it sees, it will write a check of up to $250,000. If it doesn’t, it will at least deliver feedback to the startup regarding tweaks it might make to its business model. (Entrepreneurs interested in applying can let the firm know here.)

How can Social Capital possibly know how to improve a company’s business model when it hasn’t even met its founders? Palihapitiya and Ashley Carroll, the firm’s partner who oversees the program — dubbed “capital-as-a-service” — explain that Social Capital has already built up an enormous database of information over time with the help of its more traditional venture portfolio companies.

Its own internal platform team — members of which came from the Facebook Growth team, including Ray Ko, who reported to Palihapitiya at Facebook, and Jonathan Hsu, who helped start the data science practice at Facebook — uses this information to help the firm’s companies figure out their growth strategies. Now Social Capital is simply using this same platform to find and fuel companies in harder-to-reach places.

“VC has always been this high-touch, in-your-face-type business,” says Palihapitiya. “When the talent was concentrated in Silicon Valley, that worked. But a negative byproduct [of that way of doing business] is that for every business that got funded, [other worthy startups did not] because of biases that didn’t pattern match.”

Now, adds Palihapitiya, “We can run A/B tests. We can say, here’s how we think about cohorts, or here’s how you optimize how you spend money on Google and Facebook. This data is [precious]. If a company can tell us how it’s doing, we know how to help them, and how they look relative to all the other companies we’ve ever seen. Now, we can see a business in Africa or South America or Southeast Asia … and algorithmically fund them at hyperspeed.”

Stepping stone

Certainly the founders it has funded through the still-in-beta program think it’s a great initiative, and there have been a few dozen to date. One of them is Vera Makarov, the co-founder of Apli, a 42-person, 15-month-old, Mexico City-based startup that aims to connect workers with flexible job opportunities.

Makarov has an undergraduate and business degree from Harvard. She has worked for Bain Capital. She has worked as an investor. She co-founded and was CEO of Carmudi, one of Latin America’s biggest auto classifieds sites. As a result, she says that raising an initial $640,000 from local investors for Apli wasn’t terribly challenging.

Things got tougher when the company started seeking out a Series A round, however

“Mexico has made a lot of progress in the last four years,” says Makarov. “We have some very good local funds funding innovative Mexican companies. But the fund sizes are still small, and their numbers are limited. Even with Silicon Valley connections,” which Makarov says she has, “if you’re based in an emerging market, forget about [attracting attention from Silicon Valley venture firms].”

Makarov calls her experience with Social Capital “very refreshing” in contrast. “It literally took a phone call, then they asked me to upload a questionnaire and data so they could look at our traction. I didn’t have to fly to San Francisco to meet them. It took less than a month from [the call] to receiving money in the bank.” Specifically, she says, Social Capital participated in a $1.5 million seed round, providing the company with a convertible note.

She adds that she sees the firm’s participation as a “stepping stone” to Silicon Valley. Her understanding is that the firm will “continue receiving data from Apli and watching our evolution, and they’ll be contenders to lead our Series A” in exchange for its help.

Photo: David Paul Morris/Bloomberg via Getty Images

Unsurprisingly, Social Capital’s plan has skeptics. Among them is Ian Sigalow, a New York-based partner and co-founder of Greycroft Partners, who doesn’t put too much stock in sheer data analytics.

Greycroft maintains its own database, including startup ratings created by its partners that address a spectrum of factors. “When we look at our own data here,” Sigalow says, “the most successful outcomes we’ve seen are correlated to the people we meet and their presentations.”

Early-stage investing is “really betting on people,” he adds. “People have tried to build an algorithm that [trumps this], but none exists that can replace the degree of pattern recognition involved. It defies putting a bunch of data into a computer and running a regression on it.”

It isn’t clear that Palihapitiya’s co-founders at Social Capital approve of Palihapitiya’s thinking, either. Co-founder Mamoon Hamid left last month to join Kleiner Perkins Caufield & Byers. A third co-founder, Ted Maidenberg, also plans to leave the firm before it raises its next fund.

There’ve also been grumblings by some of the firm’s investors, who worry that Palihapitiya may just innovate his way into trouble.

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