AI will disrupt VCs, aid founders: Chamath Palihapitiya

But VCs themselves might get disrupted, according to billionaire investor Chamath Palihapitiya, a former Facebook executive and the CEO of VC firm Social Capital.

“We talk about AI as a big disruptor to the big companies and this and that, but AI may be the biggest disruptor to VC in the end,” Palihapitiya said on the All-In Podcast this week.

A “world where AI proliferates,” he said, is “positive for founders,” who will be able to own more of their companies rather than give away too much equity to VCs.

In the past, he said, a tech startup with $2 million in seed funding might hire seven people and have enough capital to survive for a year and half, after which it hopefully gained enough traction so that investors would pony up $10 million or $15 million in Series A funding. The downside, of course, is that in exchange for capital, VCs want equity in the company.

But AI tools give founders more leverage, Palihapitiya said, mentioning GitHub Copilot, which makes creating and fixing code much easier. Startups can now hire programmers, perhaps in other countries with lower pay rates, to use such tools to get more done faster, he noted.

The upshot is that, today, a tech startup with the same amount of seed funding might have a three- or four-person team and survive on that $2 million for four years rather than a year a half. Founders could then end up owning 80% of their company with the potential to exit for $50 million or $100 million, “and they’ve made more money than in a traditional outcome” he said.

“It’s only a matter of time,” Palihapitiya added, “until they can put two and two together in an Excel spreadsheet to figure out that owning 50% of a $100 million company is greater than owning 18% of some other company when you’re massively diluted, or 8% or whatever.”

Jason Calacanis, an angel investor, responded that now, instead of founders of a particular cohort competing on who can raise the most money at the highest valuation, he’s seen them shifting to, “how do I get to profitability and how do I own as much of my company as possible?” 

Palihapitiya became the face of the SPAC boom-and-bust a few years back due to his involvement with special purpose acquisition companies—shell corporations listed on a stock exchange that acquire a private company, thereby making it public sans the rigors of the IPO process.   

This isn’t the first time he has mulled the role of VCs in an AI-altered world.

It “seems pretty reasonable and logical,” he said last month on the podcast, that AI productivity gains will lead to tens or hundreds of millions of startups made up of only one or two people.

“There’s a lot of sort of financial engineering that kind of goes away in that world,” he said. “I think the job of the venture capitalist changes really profoundly. I think there’s a reasonable case to make that it doesn’t exist.”