2023 Annual Letter
๐ Abstract
The article is a performance summary from Chamath Palihapitiya, the founder and CEO of Social Capital, covering the key economic and technological trends that shaped their investment portfolio and thinking in 2023. It discusses:
- The impact of the Federal Reserve's aggressive rate hikes, leading to a shift in focus for tech companies from "growth at any cost" to more prudent capital allocation
- The emergence of generative AI as a transformative technology, lowering barriers to entry for startups and challenging incumbent businesses
- The trend of deglobalization and the resulting industrial renaissance in the U.S., creating opportunities for companies that can leverage government funding and incentives
๐ Q&A
[01] Rate Tightening to Powell's Capitulation
1. What were the two equally likely scenarios that Chamath Palihapitiya thought could happen at the beginning of 2023 based on the Federal Reserve's aggressive rate hikes?
- A recession due to the speed and magnitude of the rate hikes
- Persistent or out-of-control inflation resulting in a period of stagflation
2. What actually happened instead?
- CPI decreased in response to the rate hikes, but GDP continued to grow driven by resilient consumer spending
- At the end of 2023, the Federal Reserve signaled three rate cuts for the second half of 2024, after previously indicating they may not be done with tightening
3. What challenges does the Federal Reserve still face despite the improved economic conditions?
- Inflation is still above the 2% target, with the last three inflation prints higher than expected
- The Federal Reserve must balance keeping rates high to control inflation while also avoiding economic contraction due to the high interest payments on government debt and the difficulty for banks to profitably lend
[02] AI Has its Watershed Moment
1. What key themes have emerged from the rapid advancements in generative AI?
- Generative AI has significantly lowered the barriers to entry for starting software companies, enabling entrepreneurs and non-technical founders to bootstrap new ventures
- Generative AI is also empowering new entrants to challenge incumbent businesses by being more efficient and cost-effective
- Two clear areas of long-term value creation are proprietary data and the underlying infrastructure to run AI applications
2. How does Chamath Palihapitiya suggest capital allocators and founders should approach the rapidly evolving AI ecosystem?
- It is premature to declare winners, so the emphasis should be on deeply understanding the underlying mechanisms responsible for value creation rather than prematurely picking winners
[03] Deglobalization Continues to Fuel an Industrial Renaissance
1. What key legislative initiatives has the U.S. government passed to bolster domestic production and reduce foreign dependencies?
- The CHIPS Act to incentivize the semiconductor industry to build domestic operations
- The Infrastructure Investment and Jobs Act to fund U.S. physical and digital infrastructure
- The Inflation Reduction Act to encourage investment in domestic EVs, manufacturing, and renewable energy
2. What opportunities does Chamath Palihapitiya see for capital allocators and founders from the shift towards reshoring?
- Companies that can creatively and strategically tap into different pools of capital - debt, equity, and government funding - may represent some of the biggest winners over the next decade
[04] A look at some of our recent bets
1. What key problems are the highlighted portfolio companies (Relativity Space, Palmetto, Mitra Chem) trying to solve?
- Relativity Space is building a reusable launch system to enable cost-effective deployment of satellite constellations for global connectivity
- Palmetto is helping consumers become their own mini-utilities through rooftop solar, storage, and energy management
- Mitra Chem is using machine learning to accelerate the development of lithium-ion battery materials, reducing reliance on Chinese production
2. What broader trends or tailwinds are these companies positioned to capitalize on?
- The need for uninterrupted global connectivity
- The aging U.S. grid infrastructure and the push for electrification and renewable energy
- The critical need to localize battery materials production outside of China to support the energy transition