Billions & Billionaires
Billions & Billionaires
The Unwinding of the Industry of Saving the World
Everybody had money, money went everywhere, everything became venture, all venture became about saving the world, and crypto started to power it all
In October 2008, Matthew Bishop published Philanthrocapitalism: How the Rich Can Save The World (yes, actual title). It was a sign of the times to come. While an unfolding global financial crisis would cause tumult in the months to come, it was also the beginning of the hyper-money printing era. The coming period of free money would upend our assumptions on value and impact.
An Era of Free Money
What is meant by free money? Since 2008, Central Banks have injected $25 trillion of excess quantitative easing into the world economy, which mostly flowed into the hands of leading financial institutions and lowered the price of lending further for the world’s wealthiest leading companies and individuals. From 1980 to 2007, just before the financial crisis, the real wages of the top 1% had risen by 160% (far beyond other cohorts), and the rise in asset prices further cemented the wealth of the hyper-wealthy.
If the Rich were not going to Save the World, then why were they rich? That would come into sharp focus with the Occupy Wall Street movement and new economic superstars like Thomas Piketty, who put the spotlight on inequality. Philanthrocapitalism quickly became the name of the game. From 2010 to 2020, philanthropic giving by foundations - long-term stores and vehicles for ‘rich’ giving - grew from $40 to $90 billion. This would make sense because the number of billionaires increased from about 1,000 to 2,000, going from $3.6 trillion in net worth to $8 trillion [FYI - given various datasets, different time series, and inflationary environments take numbers always as directional rather than authoritative in this article].
Wealth was accumulating not just among individuals but also among the world’s leading companies. Due to tax avoidance, dividends that would lead to reporting issues for shareholders were not preferred. Repatriating capital from places like Ireland to the United States would also lead to corporate taxes on home territory. Thus companies accumulated and hoarded cash and then borrowed against it (the subject of stock buybacks is another matter to be explored). For example, by February of this year, leading companies had $1 trillion cash on hand (now declining).
Get Rich and/or Save the World Trying
After the global financial crisis, it was not really en vogue to be gambling money on derivatives. More meaningful pursuits needed to be found. With the milieu of Obama in the White House, there was also a desire across society for a ‘different’ way of doing things. The Rich could always Save the World through their foundations, but what about everyone else? Many liberal arts graduates, already imbued with a spirit of saving the world, became Obamacrats (formally or informally). There were simply now more people wanting to do more.
As we can see, the number of people with advanced degrees has expanded rapidly in recent years. When you’re early in your career in New York, Washington DC, and San Francisco, it is acceptable in your social circle to have a low-paid entry-level glamor job in the White House or a media outlet. Yet over time, more people plateau, and then you’re the income-deprived, student loan-saddled person at the party looking at your enemy on wall street with envy. “I’m trying to save the world, and they’re making all the money.”
The epiphany for this group that hit home was that not only can the rich save the world, but you can also get rich by saving the world. Now historically, this may be true in some cases. Great ideas can lead to great impact and wealth. Take Thomas Edison, for example. However, that success is narrow, not widespread. In an era of elite overproduction, many want to participate in the spoils and feel they deserve it. In any other era, this would be a fanciful trend in society that would fall by the wayside. By 2013, with a recovered economy, the start of Obama’s second term (and many burnt-out/retired Obamacrats), there was a cadre of motivated professionals ready to save the world (especially millennials) and ready to receive capital, of which there happened to be a lot.
In addition to an overall increase in the money supply, two other phenomena expanded the pool of available capital in the ensuing years (this is simplifying a more complex global picture to distill a few leading aspects). One was the rise of technology investment from China. Venture capital from China grew from “$12 billion in 2011–13, or 6 percent of the global total, to $77 billion in 2014–16, or 19 percent of the worldwide total.” In January 2015, King Salman became Saudi Arabia’s monarch and ushered in de facto rule for his son, Mohammed bin Salman. In 2017, Saudi’s Public Investment Fund (PIF) partnered with Softbank to create the $100 billion Vision Fund that upended the notion of long-term patient capital.
From 2013 to 2014, venture capital investment in the United States rose from $49.6 billion to $73.9 billion. By 2019 this had reached $145 billion. In 2021, at the height of the pandemic and the money printing frenzy, this peaked at a mind-boggling $332 billion. Where could all this money go? The truth was everywhere, and sometimes feel-good stories, frauds, and occasionally a combination of both. Mixed in-between would be a real and solid business. Ultimately, many VCs used to returning capital after 10 years were now returning capital in 2-3 year cycles in the late 2010s due to exits and capital inflows in multiple Series rounds. Businesses that emphasized profitability over growth were seen as missing the bigger picture.
Unsurprisingly, the early companies to attract capital and grow in the early 2010s were those of the ‘shared’ economy. Are Uber or Airbnb really successful businesses, or were they simply able to subsidize asset rentals and undercut competitors? A now famous quote circulated at the time “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”
Other articles can discuss further Meta's value today, Uber’s long-term profitability, Airbnb’s pricing model, and Alibaba’s CCP problem. Suffice it to say, money plowed into these new start-ups, disregarding the bottom line. By 2017, the shared economy was plateauing and bleeding capital (and/or steamrolling into IPOs to get debt finance).
Generation Z, meanwhile, was increasingly in the world of crypto. With much of Web2 now establishment (S&P500 listed) companies, crypto - and specifically blockchain - offered a new pathway for budding entrepreneurs. Many VCs began to look earnestly at crypto in 2017, but it was still quite a nascent sector to invest in. And before the infusion of VC funding that began to accumulate by the late 2010s, crypto was far more skeptical of financing, was more libertarian-leaning, and the broader notions of ‘impact’ were not central since the idea was that crypto adoption in and of itself was the social good.
Many other sectors were also receiving attention, such as the future of food, AI, and beyond.
Amidst the uptick in venture funding, by the late 2010s, many elites were trying to get rich to save the world. In 2017 - when Trump came to power - there was another influx into the world of capital-seeking from the elite class, who saw the world needing saving now more than ever. From 2017 to 2019, the size of the ‘impact’ investing market tripled to $715 billion (not just ventures, of course). With governments worldwide subsidizing climate-related investments, ESG investing - environmental, social, and governance - into ESG-integrated funds would reach $285 billion in 2019.
Pandemic Pandemonium
Headed into the pandemic, the Industry of Saving the World was rising, consolidating, and intersecting. ESG was on the uptick. Impact investing was now a real thing. There was a search for new asset classes for individuals and institutions with too much cash. This combined with the brand effect of saving the world to become a powerful force.
And - it was apparently profitable, albeit misleadingly so. A VC could make money with subsequent rounds with greater valuations and, ultimately, an IPO without the underlying company turning a profit. A $1 million investment in a company you invested in on a valuation of $10 million could be worth $5 million, simply if someone invested $100,000 in the same company on a valuation of $50 million. That in and of itself raises many questions in a sector where many people know each other (and further questions when the ‘start-up’ a fund invests in, invests back in the VC itself like happened between FTX and Sequoia - see below).
Everything also gets jumbled. One of the classic cases is Andela, which raised $200 million from Softbank (on a $1.5 billion) at the height of the pandemic and was a prominent early investment for the Chan Zuckerberg Initiative. It’s been the recipient of significant impact investing. It started as a talent development engine for Africa, grew into an African outsourcing company, and now is simply a global tech outsourcing platform. Good for them, but is it truly impact investment? And should anyone care? The question then is, what will become of impact investing, especially when the subsidized money waters recede and profitable business models take precedence? Overall, when real business models take a backseat to speculative investments, broader entrepreneurship and employment outside the elite suffer and decline (which is what happened from 2010-2019 in the United States, as seen in the linked study).
The pandemic, rather than bringing an end to all these trends, led instead to a grand metastasis and the exponential growth and intersection of everything. Everybody had money, money went everywhere, everything became venture, all venture became about saving the world, and crypto started to power it all. Over $10 trillion of money printing in one year can do that. It gave way to what Michael Burry would call the all-asset bubble.
By now, we all know the story, but as late as early 2022, everyone was still in permanent euphoria about this never-ending story of ubiquitous utopian unicorns. Significant investments were going into mainstream equities and real estate. Yet once wealth ran out of places to go, alternative asset classes - especially those heavily subsidized by money printing - became the only places to go. Enter impact, ESG, crypto, and the grand metastasis.
Remember that $285 billion ESG figure in 2019? It reached over $650 billion in 2021. Impact investing? Now $1.1 trillion in AUM. While philanthropy has plateaued - and in 2023, will likely decline given huge wealth markdowns - many family offices, foundations, and elites have become enamored with impact investing. Why not get a double return on your investment, social and business? Finally, in crypto world, where it all comes together, funding for ‘Web3’ start-ups went from $3.1 billion in 2019 to over $25 billion in 2021.
It’s easy to get carried away and get caught up in all the hype, especially when it’s yours. There’s nothing wrong with making money. And there certainly shouldn’t be anything wrong with making an impact while making money. Yet, businesses in and of themselves should be serving a market need and sustainably so. With the rise in the West of a dominant financial services industry in the economy, and a skewing of the monetary system and economic incentives, this got lost; fewer businesses are seen as solving ‘needs’ and have become just vehicles for making money and transferring wealth. Hence, an industry with the role of saving the world has filled a void - to meet perceived needs in society.
Ineffective Altruism
But now the waters are receding. And as they do, a lot will be exposed, and people will need to adjust. This past week saw the total implosion of the crypto exchange FTX founded by Sam Bankman-Fried (otherwise known as SBF). In retrospect, people are asking themselves why they weren’t more circumspect. At his height during the pantheon of the crypto craze the last two years, SBF’s net worth peaked at $26 billion, and he was referred to as this era’s JP Morgan and Warren Buffett.
Perhaps it has always been easy for investors to be Theranos-ed, but over the last decade, it seemed to be pulled off far more blatantly. SBF/FTX is the epitome of the confluence of blatant excess of this era. He is the son of two Stanford professors who cut his chops in the capital markets at Jane Street after meandering through MIT. It was, however, an organization called Effective Altruism (EA) that shaped his stated worldview. We may never know his actual perspective as he could have just been a Madoff in disguise looking to party in the Bahamas. Nevertheless, in interview after interview, his stated purpose in creating FTX and earning billions was to give it all away.
Tapping into the millennial inheritance of the spirit of philanthrocapitalism was EA’s founder, Will MacAskill (who also channeled his inner Peter Singer). There’s a lot there, but ultimately a strong theme emerges around directing technology and your career to generate a positive impact. According to him, if you have 80,000 hours in your life dedicated to your career, perhaps that is the best vehicle through which you can impact the world. It sounds good on paper. In the era of free paper, it was an idea that was music to the ears of the rising philanthrocapitalists: tech billionaires. And the restless white-collar working class of the over-produced elite.
No one was more drawn to this than SBF. Below is a screenshot of the headline in a now-deleted post on the VC fund Sequoia’s website.
Sequoia had invested several hundred million dollars into SBF, which it has now marked down to zero. What was previously not as well known is that FTX (through Alameda Research, its sister company) had cycled hundreds of millions back into various funds of Sequoia. A now-deleted article (or at least moved) on Sequoia’s website extols the virtues of the EA-SBF origin story.
SBF was not just on a mission to change crypto but also to save the world. And it would also be venture-backed. The full manifestation of the crypto-impact-philanthropy-venture convergence whose bubble was about to pop was likely the Crypto Bahamas Summit in April 2022. Anthony Scaramucci’s SALT organized it (let’s see what happens to Skybridge’s crypto fund, which FTX bailed out).
Bitcoin - and modern crypto - had started with the pseudonymous paper by Satoshi Nakamoto published in 2008 with a core premise of decentralization: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” Yet by the time the Bahamas Summit in 2022 rolled around, crypto was teeming with centralized financial institutions and funds of all types and stripes. At its height in 2021, the sector reached a total market capitalization of just over $3 trillion (last November), which is remarkable considering the global market capitalization for gold is a bit north of $10 trillion.
Who would not want in on that type of coin? And what better time than the peak of free money? Oh, and by the way, the newly anointed leader of this industry, SBF, is doing all this to…save the world! Crypto Bahamas opened with Sunrise Yoga (obviously), and à propos, its opening session was non-ironically moderated by Michael Lewis (author of The Big Short). The various hawkers of crypto sector industrialization were all there, such as Cathie Wood (ARK), Mike Novogratz, and Katie Haun. Much more can be written about the underground Crypto civil war, Changpeng Zhao (Binance) and other things, and people who were not there.
What was remarkable, though, about this event was who else was on stage. Bill Clinton. Tony Blair. Gisele Bundchen (FTX’s social and environmental advisor - because, why not?). The FTX Foundation team was also in the background. SBF had seeded that team with EA’s MacAskill at the helm of its Future Fund. That, of course, has now imploded. But not before it had solidly embedded itself into all areas of impact. SBF had joined the Giving Pledge. He ended up as the number 2 - yes, you read that right - donor to the Democratic Party. He was as much feted for his philanthropy and desire to save the world in media article after article. Saving the world and being rich were flip sides of the coin. In the end, SBF, 14 years later, may be seen as the poster child for the end of the philanthrocapitalism narrative.
2023 & Beyond
With the money waters finally receding, further afield asset classes will need to show real returns, and the tradeoffs between (the pageantry of) impact and business profit will be very real. Startups will not be able to raise rounds with ease, and ventures will not be able to go to the bank for a top-up of free funds. Assuredly some remaining pools of capital will be called upon, either those already committed and called within funds like a16z or from the Gulf’s $1 trillion energy dividend.
Similarly, global concessional finance will allow some ESG funds to flap their wings, albeit with less fervor. Whether it’s Goldman Sach’s under SEC investigation for its ESG funds or Blackrock under scrutiny for its interesting investment decisions, the free pass, however, will be less easy to come by. We will find out the extent to which capital recedes in 2023.
This is not necessarily bad news. The supersized combining of bottom lines - social and business - reduced the clarity of both. Is it a business that earns money? Is it a social initiative dedicated to its mission? With clearer business mindsets, capital may find solutions that have better traction with the targeted beneficiaries of a service rather than trying to meet the preference of donors or investors. Ultimately, private enterprises can continue to meet market demands, and philanthropy can step in to meet gaps when the public and private sectors fail.
The messianic drive to save the world has become the lingua franca from Harvard to Davos and everywhere in between. Perhaps the moment has come for a return to a spirit for individuals rooted more in meeting everyday needs - through philanthropy or business - in a sustainable, meaningful, and incremental way.
Or you could buy Bitcoin.