Chamath Palihapitiya Wants to Rewire the Crap Out of Healthcare

6/12/13Follow @wroush

What does an ex-Facebook tycoon with a degree in electrical engineering know about fixing the U.S. healthcare system?

Well, Chamath Palihapitiya knows that healthcare is in need of some drastic reinvention, and that to some extent, this will involve training people to think and behave in new ways—in much the same way Facebook has trained us to think differently about how we spend time online and communicate with our friends.

He’s not afraid to ruffle a few feathers in the process. That’s a good thing, because many of the companies he’s investing in through his Silicon Valley-based venture fund, the Social+Capital Partnership, are out to fundamentally shift the balance of power in healthcare and upend the way diseases get diagnosed and treated—or ideally, prevented. “Empower the edges,” Palihapitiya says. “That is the way you build a multi-gajillion-dollar company.”

Palihapitiya, 36, is famous mainly for having overseen the development of the Facebook Platform, and for coming up with ways to recruit new users during a period when the Facebook community grew from 50 million people to 750 million. When the social network went public in early 2012, Palihapitiya’s shares made him “a centimillionaire several times over,” according to BusinessWeek. He’s plowed much of the money back into the Social+Capital Partnership, which has also raised funds from Silicon Valley luminaries like Reid Hoffman, John Doerr, and Peter Thiel and invests mainly in healthcare, education, and financial services.

Xconomy San Francisco editor Wade Roush interviewing Social+Capital founder Chamath Palihapitiya at Fenwick & West's 2013 Digital Health Investor Summit

The Fenwick & West interview with Chamath Palihapitiya (right).

I interviewed Palihapitiya on stage last Friday at Fenwick & West’s Digital Health Investor Summit in Mountain View, CA, organized in conjunction with Rock Health. As you’ll see below, his attitude toward the healthcare establishment falls somewhere between irreverence and contempt. “The software is crap, the services are crap, the people are crap,” he says.

So alongside their investments in classic tech startups like Treehouse Island or Survey Monkey, Palihipitiya and his partners Mamoon Hamid and Ted Maidenberg are putting money into three kinds of healthcare companies that they hope can make things less crappy. Palihipitiya (it’s pronounced Polly-hop-i-TEE-ya) labels them “crawl,” “walk,” and “run.”

In the first category are companies like medical billing tracker startup Simplee that hope to make interacting with the system a little less painful. In the second are startups like Glooko, Asthmapolis, and Neurotrack that have ambitious long-term plans to build big subscription-based businesses around better technologies for monitoring and controlling chronic conditions like diabetes, asthma, and Alzheimer’s.

Finally, there are the Hail Mary passes—the companies like nanotech-diagnostics startup Integrated Plasmonics that, if their risky and unproven technologies prove effective, could completely change the economics of the business. It’s clear from talking to Palihapitiya that he loves these “run” companies the best—perhaps because they appeal to his personality as a gambler. To attend the Fenwick & West event, Palihapitiya flew in for the day from Las Vegas, where he was in the early rounds of the World Series of Poker. (In the 2012 series, he placed 101st out of a main draw of 7,000 players.)

Here’s an edited transcript of our conversation.

Xconomy: For those in the audience who might not be completely up to speed on the Social+Capital Partnership, I wanted to start by asking you to describe the firm’s model. To what extent are you trying to fix things about the venture model that you considered to be out of date, or broken?

Chamath Palihapitiya: I think when I was leaving Facebook, my biggest realization was that the appetite for risk has changed, and the types of stuff that really intelligent people are working on has also changed, from really ambitious things to a lot of marginally stupid things. And maybe I was partly responsible for it as well. Building the Facebook Platform was supposed to be this great thing, and the first thing that happens is a bunch of people throwing shit at each other. That’s probably not the first ambition of what we were intending.

The point is, when I went to start this thing, the biggest thing I wanted to do was go back to some more interesting sides of technology—interesting things that were more technically difficult, but meaningful if they worked. So I kind of needed to rewire how everything worked.

The most important thing you have to rewire is your incentives. A lot of your incentives are driven by the people who are giving you money. So I made sure I put the most money [into the fund], so that I’m most at risk if this thing doesn’t work. And the second thing was, I went to individuals and really eschewed the traditional limited [partners], because I think that they are well meaning, but a pension is grinding it out trying to get 7 or 8 percent to meet an obligation for a bunch of people that are about to retire. And so their incentives to take a bunch of risk are very different from my own appetite to take risk, and I just didn’t want to be affected by those people. And so I just went to individuals, except in the case of a couple of specific limiteds. And my passion for healthcare came from one of our specific limited investors, which is the Mayo Clinic.

So that’s what we did—we rewired how the economics work, we rewired who the money comes from, we rewired everything, even our offices. We all sort of work in a bullpen the way we used to work at Facebook, and it’s just about building stuff. We don’t hire traditional business people. We only hire engineers. For EIRs, we only have engineers in residence, we don’t have executives. So it’s just going back to a more technically biased form of ambitious product building.

X: Does the firm work differently from other venture firms? Are you able to move faster, close deals faster?

CP: That’s my understanding, based on people I’ve talked to. It’s only myself and three other partners. We spend enough time together that we’re always in sync. We’ve made really big decisions in a matter of days, like $20, $30, $40 million checks in a couple of days. That’s potentially neither good nor bad, but it’s at least fast.

And I think often times what you can do is, you can basically get things done quickly. The model of venture right now is just a pain in the ass. Anybody who is any good will try to create an auction, because they don’t really understand what the asset class at its best can really do for people. And that’s because most people in the asset class are not actually very value-add. They are basically value-useless. They are just hyper-educated. They don’t really know what they’re doing. So they can’t do anything. We have to make sure we are cutting things off at the pass before it gets into those kinds of situations.

And so the by-product of that is that we act quickly with very big opportunities. But we also incubate stuff, just germinating our own ideas. And everyone says, oh, you can’t incubate, but that’s because most people aren’t very good entrepreneurs. I tell myself every day when I wake up, I built three of the top Internet products in the world, I’m not that bad. So I’m just going to go and build stuff.

X: The stuff you built, though, was mostly on the Internet/software side. It was consumer facing Web software. So when you were deciding which areas you were going to invest in at Social+Capital, how did you decide to focus in on healthcare as one of those areas?

CP: [The earlier products were ] really about figuring out consumer behavior and figuring out the psychology of an individual person, and driving the behavioral dynamics that you wanted to see in the world. So, with Winamp and even with ICQ and Facebook, they are all very different products, but ultimately you are creating behavior change and you are getting people to adapt and behave in ways that they’ve never done before. Some start out incredibly uncomfortably, but then it becomes second nature. So that’s the skill.

If you take that skill and you say where can you apply that skill in areas that have massive potential upside, one of the top areas for me was healthcare, just because every interaction in every area related to health is just so shitty. The software is crap, the services are crap, the people are crap. So there is a lot of value that people like us can add because you have a very different perspective on how the system should work.

And so, a lot of my motivation was to say, if we take the principles of how we build great products, and we apply it to industries that have not, frankly, benefited from that kind of insight, and you still marry it up with people who understand healthcare in very specific circumstances but you isolate them, you can probably create really interesting things.

X: I want to go back to a quote from one of your recent interviews. You were talking about Gnutella and Winamp and the whole disruption of the music industry, and you said you were trying to do the same kinds of things through Social+Capital. You said that the fund is about “deconstructing calcified centers of power” and hopefully being rewarded for doing that, for coming up with more equitable, useful models.

CP: The business model of the future is to serve individuals, because individuals are now relatively smarter. That’s not correlated with education, by the way—they are smarter because they have access to tons more information. And so we are all more connected, we are all more engaged, and as a result we are all more cynical. And we all see that the emperor has no clothes. All these things that you thought were important—you just realize, man, these people just played the game longer than I did to get to the top of that mountain, but they are just as stupid as anyone else, so why would you trust these people? That’s true of banking, that is true of people who run educational institutions, it’s true of healthcare. So the model of the future is is to basically deconstruct all of that and empower the edges. That is the way you build a multi-gajillion-dollar company. Give people individual power.

X: I get your skepticism toward power. But the healthcare establishment is so deeply embedded in our whole economy, and there are so many people working in it. I’m wondering how direct a parallel you see to other industries like the music business. You can go down to Los Angeles and pull the rug out from under the music or movie industries, and it doesn’t cause a cultural crisis. But something like 17 percent of our whole economy goes into healthcare, so it’s a much bigger deal. I wonder if you think it’s as easy to disrupt.

CP: Yeah, it’s easier, because the stakes are higher. You are talking about life and death. Before, it was “Can I listen to Alanis Morissette without paying?” Who gives a shit? This is about whether you are going to live or die.

You see this today, where every time there is a clinical trial of a product in Germany, a drug that the FDA is dry-humping to death in the United States, people get on a plane because they want to live! Right? People say, oh my gosh, I will do whatever it takes.

So I think if you are building stuff, first you need to take a global view of things. If it’s the inherent infrastructure of the United States that’s stopping you, people will find ways to work around it. They’re doing it already in therapeutics. They’ll do it around services. They’ll just do it. Or they’ll download Tor and they’ll download your product and they’ll be IP-masked and you won’t know.

X: You guys sat down and studied Obamacare while it was crystallizing and then around the time of the Supreme Court challenge. You looked inside the act and you probably read it more carefully than most. What makes you think that the atmosphere for investment and entrepreneurship in healthcare is going to improve under the Affordable Care Act?

CP: It’s not that that enables this to happen. It’s that the few people who have taken the time to understand where the bodies will be buried because of it, will shine a path for a bunch of other people who will come after. Much like how in product adoption there is the notion of fast followers, I think in entrepreneurship there is a notion of fast followers. When you look at the N+1st photo app, those people are doing it because they looked at Instagram and said there is value here. Similarly, there are going to be a few pioneers who show that there is a ton of money available [in healthcare], and a bunch of people will follow. That’s what I think will happen.

The few that succeed today, it will be because they understand the nuances of where there are going to be massive pots of money and how to extract, how to use it, and how to think globally, not just U.S. specific. So that when you run into the FDA or someone else, you will be clever enough to work around it. Meaning, go direct to consumer, in subtle or nefarious ways. It may mean going to a different country, it may mean landing something with a CE mark in Europe and having people adopt it. There’s going to be all kinds of ways to figure out how to do it. You just can’t think traditionally about it. You can’t be like, I went to MBA school and here’s my SWOT analysis and bop bop bop. No. You have to build crazy good product.

X: Can you tell us a little bit about some of the companies you guys have invested in, on the digital health side, and how they relate to this thesis?

CP: The way that we think about it is that we have three discrete buckets of things that we do. I would characterize them, using a very simple framework, as crawl, walk, and run. So with crawl, the idea is, let’s find things that work within the existing system, and the idea is to improve it. Even if you are extremely skeptical of it, there are ways that existing things can be improved and there are opportunities to make a lot of change and as a by-product to create a lot of value. We invested in a company called Breakthrough that does a lot of telemedicine stuff around mental health. We helped get a company off the ground called Simplee which is now becoming a really interesting company in healthcare payments. So that’s that category, which is about how to improve the status quo.

Then there is the second bucket, walk, which is stuff that’s slightly aggressive, that will take a few years to figure out, but we know that the puck is going there, and we know that the revenue models are going there. So specifically in that middle bucket, PMPM [per member per month] is like the new SaaS. Everyone spent the last five years investing in SaaS, and in three years I guarantee you everyone is going to be running around talking about PMPM. So there, we have stuff like Glooko, which is about diabetes management; Asthmapolis, which is about asthma and respiratory disease management; and Neurotrack, which Peter Thiel and I just did, which is around Alzheimer’s detection and prevention. So there is a bunch of stuff in that category.

And then there’s run, which is basically just stuff that’s crazy science, and we do it because we think it’s interesting and we do it because we think it can be disruptive. Things like Integrated Plasmonics, which is about using a pinprick of blood and being able to do up to 200 biomarkers on a single $1 disposable in under three minutes. Things like that.

X: You guys have been pretty fearless about this so far. A lot of investors, when they look at the healthcare sector, they’re really asking understandable questions, like what are the potential exits for companies in this area, and as companies mature, how are they going to get products to market. Why are you guys not afraid about these things?

CP: Well, one, I’m rich, so I don’t give a shit, just to be totally blunt. That’s the benefit of having worked at a place like Facebook. I’m just going to keep firing. Fire, fire, fire. It doesn’t matter.

X: And your LPs?

CP: They’re rich too! We’re going to create change. It can take 10 years, it’s fine. It can take 15 years, that’s fine. It’s about creating a lasting, positive legacy, and not putting time constraints on it. I have the time. My partners have the time. My investors have the time. We are in enough stuff that is already working and making money, that we just know it will be fine.

X: But what do you say to the investors here in the room who aren’t necessarily in the same position, and are actually trying to figure out these risks and how to show returns to their LPs?

CP: Listen, I am actually the best-compounding fund of the last three years, so this is all about return. So copy it! Be a fast follower! The last three years, our IRR was 80 percent a year. Money is raining from the clouds.

X: So you feel like exits will create themselves.

CP: In the public markets, they love SaaS right now. They love predictability. They love what looks like a compounding, growing annuity stream. That is a revenue model they understand from insurance and a bunch of other businesses that is now demonstrating itself on the enterprise side. So they love it. These companies go out on the SaaS side and they just grow like maniacs. They are great, great names to own.

Similarly, that same revenue model and business model of Software-as-a-Service, that is healthcare-oriented, that is driven by PMPM dollars, will become a category like that. I suspect in the next couple of years, you are going to see some of these big companies emerge. Of course they will be able to go out, because people will basically have seen why SaaS is so interesting, they will also be slightly fatigued—there are not that many great SaaS names out there that have yet to go public, there are only handful left, Zendesk, Box, a couple of others—and now they will be looking for the next great thing. And in that time, they will see that healthcare has really changed, there are all these companies compounding dollars. For example, as Asthmapolis goes and raises their C [round], most investors won’t look at it as a healthcare company, they’ll look at it as an enterprise cloud company that’s involved in healthcare. That kind of shift in their mentality will be what it takes. So there are going to be a bunch of outcomes like this. It’s about being patient and building stuff that has great value.

Q [from an audience member]: I’m interested in these three categories of crawl, walk, and run. Are the entrepreneurs you want to see in these categories different from each other? Who do you want to see in each category?

CP: Run tends to be folks that are in hard-core science who stumbled into the biology side. Physicists, EE guys or girls, and they’re like “Oh, here is an application for this thing I’ve been working on for years.” So at Integrated Plasmonics, the three guys are PhD postdocs from Caltech who were working on plasmonics and didn’t want to do something in telcom, and we refactored the whole thing toward healthcare and said wow, we can take this thing and build a mass spectrometer on a CMOS chip. A lab on a chip. It’s just a cool application. In the middle, walk category, it tends to be frustrated healthcare entrepreneurs who have been married up with a bunch of Internet folks. And in the first category, crawl, it tends to be more Internet folks, who are okay, here is a tractable thing that is improving the status quo. That’s generally what we have seen in terms of the types of individuals.

X: Okay, my last question is, how are you doing in the poker tournament? Are you feeling confident?

CP: I’ve been knocking on the door for two years here. So I gotta close the door.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • Bob

    Great energy, ego a tad on the supersized, good luck with changing the entrenched world. The real novelty in his thinking is to put risk capital to work against a meaningful objective.

  • Dan Munro

    Encouraged by any investor putting money at risk in healthcare. Discouraged by the portfolio list so far (which is really around the edges – at best).

    It’s definitely become vogue to “disrupt” healthcare – but many (if not most) have no real understanding of the dynamics involved – mostly around really expensive costs and treatments – aging populations – and actuarial science (the only countervailing force to offset the huge imbalance between supply and demand of healthcare).

    History also has an amazing way of repeating itself. Steve Case had the same “vision” after cashing out AOL. He poured about $100M into a startup called Revolution Health. After a number of years – it got rolled into EverydayHealth – a web portal for consumer healthcare information. Pretty sure that wasn’t the intended disruption.