A Summary of Chamath Palihapitiya’s 2020 Annual Letter for Social Capital

Adam Miller
4 min readMay 27, 2021

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Being a big fan of Chamath Palihapitiya, I’ve been waiting for his 2020 annual letter with quiet enthusiasm for a long time. I’ve summarised the critical points of the letter in this Medium article and you can check out the full letter here.

Background of Social Capital

Social Capital “partners with entrepreneurs to build hard, useful, additive products towards a better world”. They invest across a broad spectrum of companies that include space travel, 3D printing, cybersecurity, chips for machine learning and bioinformatics. Their objective is to “contribute in some small way to advancing our vision of a world with an even starting line for everyone; where regardless of religion, gender, location or socioeconomic status, every human being has the ability to achieve their potential”.

The Stats, so far

Since 2011, they have invested over $1b into private technology companies, with a gross IRR of 33%. This has outperformed the S&P 500 by 19.1%, on a yearly basis.

Since 2017, they have also been investing into SPAC’s and PIPE’s (both are public market investments) and have sponsored over $4b into those two types of investment vehicles. This has given them a remarkable 64.4% gross IRR since then.

Progress for some of their portfolio companies

Social Capital often is the first investor in startups and many have gone on to drastically improve their valuations and gain greater levels of financing from better known VC’s. Here are some examples:

  • Relativity Space: 3D printing of rockets and engines, with the goal of launching its first rocket this year. $500m investment in 2020 from Tiger Global and others.
  • Netskope: providing real-time data protection for network and cloud security. $340m in 2020 from Sequoia.
  • Groq: building chips for machine learning. $300m in 2020 from Tiger Global and others.
  • Syapse: improving care for cancer patients. Raised $68m in 2020.
  • MeMed: developed tests that allow us to distinguish between viral and bacterial infections. Increased regulatory support from the FDA.

Themes of 2020, as written in the annual letter

“Globalisation as we know it is over”: A bit of context. In 1994 in China there was a significant devaluation of the RMB, which helped lead to Chinese manufacturing becoming incredibly more internationally competitive. This changed the trade deficit/surplus between the West and the East and allowed China to invest heavily in its infrastructure. Furthermore, in 2001 China became admitted to the WTO. This allowed them to become even more internationally competitive in trade.

What did these two events lead to? An acceleration of globalisation. Also, to a cultural and economic decline of the American middle Class. Those two points are large issues that Donald Trump attempted to take on when he became President in 2016. The Pandemic showed us vulnerabilities in globalisation, especially in global supply chains. This has now become a theme in Chamath’s investing. Investing in critical supply chain components such as rare earths, battery metals and semiconductors etc.

Obesity: The pandemic also forced the USA to reckon with its obesity problem. In 2020, 42.4% of Americans were obese. This caused problems with COVID-19, as the virus seemed to exploit health vulnerabilities, with 78% of hospitalised patients with COVID-19 being overweight or obese. The mortality rate for this cohort was 20%, with the whole of population cohort having a mortality rate of around 1.8% (John Hopkins). It is important to improve the American food supply chain, in a healthy and sustainable way, so as to combat obesity over the long term.

Inequality: Whilst unemployment increased and GDP went negative, the S&P 500 returned 17.88% in 2020, partially driven by the trillions of dollars printed from the Fed. Whilst owners of equities significantly benefitted in 2020, it is difficult to say that the average person would have.

Climate change and racial equality: The world has also been forced to think about climate change and racial equality. Whilst global emissions went down from lack of production and demand generally, 2020 was still the warmest year on record. BLM protests forced everyone to reflect on racial equality, in all different ways, and what the solutions might be to promote better equality of opportunity to all.

Media: Social media has now increasingly allowed outsiders to sit on the same level playing field as insiders. Content creation is becoming increasingly decentralised and democratised, and people now rely on many alternative forms of media for information, rather than just a couple of TV channels.

Markets

Chamath predicts that 2020–2060 will entail a moderation of globalisation, due to reasons already mentioned. One other reason for this is demographic changes: whilst the median age in America is staying roughly the same, every two years, the median age in China increases by around 1 year. This ageing of the Chinese population means fewer younger workers, increased consumption by older people and increased demand for aged-care infrastructure. Intuitively, this leads to imbalances between people that are working and people that are consuming. A by-product of this, Chamath thinks, is that we are likely to see a pickup in the inflation rate (due to lesser supply of goods and increased demand).

If inflation goes up, interest rates will likely increase in the future, which decreases the Net Present Value of Investments, especially for companies with long-term time horizons, such as Technology companies. Chamath says that the only way to be somewhat immune to rising interest rates and inflation is to grow really fast, so as to grow faster than the rate of rising costs.

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Adam Miller
Adam Miller

Written by Adam Miller

I write about the great books I read and about idea’s that I believe are worth sharing

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