Social Capital’s limited partners should have intervened, insiders say

Chamath
Palihapitiya

Flickr/JD
Lasica

• Social Capital’s rupture has largely been blamed on the
  firm’s charismatic co-founder, early Facebook executive Chamath
  Palihapitiya.
• However, some insiders speculate that the firm’s
  troubles could have been avoided, had its limited partners
  intervened early on. 
• They also said that it’s unlikely that Social Capital’s
  investors will re-invest if they’re given the opportunity in
  the future.

It’s been several months since Social Capital, the high-profile
Silicon Valley VC firm, began to unravel. And now, the finger
pointing has begun.

The venture firm’s abrupt and still unexplained strategic belly
flop, at a time when it seemed poised to reach new heights, has
become one of Silicon Valley’s biggest mysteries.

Hints of discord began in August of last year, when the firm’s
co-founder, Mamoon Hamid, left for a partner position at Kleiner
Perkins Caulfield & Byer. In the year since Hamid’s
departure, Social Capital has lost seven members,
subsequently resulting in the removal of its team profile page
from the firm’s website. Insiders suggest that there
will be still more departures from Social Capital in the upcoming
months.

In past conversations with Business Insider, a number of people
close to the firm blamed Palihapitiya as the reason for the
firm’s departures. Palihapitiya, insiders said, was a dynamic
leader who was prone to changing the firm’s agenda only to
seemingly lose interest later on. 

It was only about a year ago when Palihapitiya pitched the
idea of transforming Social Capital from a venture capital firm
into a data-driven asset management firm that could play in
everything from public equities to real estate. Now, the future
of the venture fund itself is a question mark.

But who’s to blame?

Despite grumbles on the part of Social Capital’s investors early
on, one person familiar with matters suggested that the
numerous departures could have been checked, had Social Capital’s
limited partners (LPs) effectively voiced their concerns.

“The LPs did nothing,” the person said. “They have their voting
rights, their ability to call a team in. It comes down to bad
board governance, and the governance at Social was poor…Shame
on the LPs for not figuring it out and fixing it.”

While the power of Social Capital’s investors was effectively
limited by Fund III’s lack of a “no-fault divorce” clause, which
would have allowed them to vote to remove its general partners,
multiple people maintained that by the time the firm began to
unravel, investors were ready to cut their
losses. “It all happened
over such a quick period of time,” one person said. “A lot of
funds were close to being deployed and they wondered what is the
point of fighting it.”

Most insiders agreed that one takeaway remains clear about
Palihapitiya’s approach to venture capital. It wasn’t that he had
suddenly lost interest, they said; it was that he was never
really interested in the first place. At best, they suggested, he
was distracted. 

“You’d question his true
intentions…He didn’t want to be a venture capitalist,” a source
said. “He found it limiting. It put him into too small of a box.”
Over the years, Palihapitiya’s interest has alit on everything
from poker championships to basketball teams (he’s
a co-owner of the Golden State Warriors). One person who has
known Palihapitiya for many years suggested that his interest lay
more in making financial bets than discovering and funding new
technologies. 

‘He was not interested in
anything venture since day one’

Palihapitiya’s involvement in the
firm was inconsistent, insiders agreed. These signs were apparent
from the firm’s very beginnings, they said. One source said that
Palihapitiya didn’t contribute to the decision making process in
investing in two of the firm’s hallmark deals, Slack and
Carta. “He was never involved,” one person said. “He was not
interested in anything venture since day one. “

A third person said that
Palihapitiya became difficult to reach after February, and
speculated that his absence might have been related to rumors of
a new romance with Nathalie Dompé, whose family owns a successful
Italian pharmaceutical  company.
Dompé and Palihapitiya’s acquaintance began when her family
expressed interest in becoming limited partners of the fund
earlier this year, another person said. 
(Palihapitiya and his wife Brigette Lau, who
was also a partner at Social Capital, filed for divorce in
February.) Neither Palihapitiya, Dompé, nor a spokesperson for
Social Capital returned requests for comment.

What happens next is anyone’s
guess.

The firm’s past troubles could
make it difficult to raise a new fund, many suggested. While
people close to the firm said that Social Capital is still
pouring more money into its existing portfolio companies, some
expressed doubt that the firm’s existing investors would be
backing any future efforts on the behalf of either Social Capital
or Palihapitiya.

“There is not a single LP…not a
single professional institutional endowment that will return,”
one person said.