VCs are fleeing ex-Facebook exec Chamath Palihapitiya's firm to launch an offshoot fund: 'It's like Social Capital without Chamath'

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Investors are fleeing Social Capital, the young venture firm founded by early Facebook executive Chamath Palihapitiya, to start a fund of their own.
Ted Maidenberg, a founding partner of Social Capital, is leaving the firm to join former colleagues Arjun Sethi and Jonathan Hsu at the new fund.

Social Capital, one of Silicon Valley's most buzzworthy tech investing firms to emerge in recent years, is unraveling amid a wave of departures — and many of the departing team members are regrouping to launch a fund of their own.

Ted Maidenberg, a founding partner of Social Capital, is joining a new firm being launched by Arjun Sethi, who left Social Capital in June, Business Insider has learned.

The move represents another blow to Social Capital, which was founded by early Facebook executive Chamath Palihapitiya, whose tech pedigree and iconoclastic pronouncements about investing made Social Capital one of the most closely-watched VC firms in the industry.

But after a tumultuous first half of 2018, in which Palihapitiya has made a series of abrupt and jarring changes in strategy, top investment partners are jumping ship. And for some, the landing spot looks very familiar.

"It's like Social Capital, but without Chamath," one source told Business Insider about the new firm being launched by Sethi.

Maidenberg is the second Social Capital partner to defect from Palihapitiya's firm for Sethi's offshoot in the past week. Axios reported on Tuesday that Jonathan Hsu, a partner and head of data science, is also leaving to launch the new fund with Sethi.

There may be more shoes to drop

We don't know much about Sethi's new fund. It was rumored to focus on cryptocurrency investments, but another source familiar with the matter tells Business Insider that's incorrect.

The firm will have Sethi, Hsu, and Maidenberg as founding partners.

Maidenberg was a founding partner at Social Capital, but he left in the fall of 2017. Although he is still listed a "board partner" at Social Capital, he did not invest in the last fund — a sign that he was phasing out his involvement, Bloomberg reported.

Maidenberg and Social Capital did not immediately return requests for comment.

His exit brings the number of departures at Social Capital to five partners in less than a month. Multiple sources told Business Insider there may be more to come.

Mamoon Hamid, another founding partner of the firm, left suddenly in August 2017 to join Kleiner Perkins Caufield & Byers after the rival VC firm poached him away.

In June, Social Capital lost partners Tony Bates, a longtime tech executive who was most recently president of GoPro, and Marc Mezvinsky, a former hedge fund manager who happens to be Chelsea Clinton's husband. The pair were hired in 2017 to lead a growth-stage fund that's since been cancelled.

Palihapitiya is tough to work with, but what VC isn't?

Business Insider spoke with several people — a mix of entrepreneurs, investors from other firms, and tech industry insiders — who pointed to Palihapitiya as one of the factors driving the exodus.

They described Palihapitiya, 41, as a dynamic but erratic investor who is notoriously difficult to work with. Others however, said he's tough, but what successful VC isn't?

Multiple sources said some partners may be defecting from the firm because they don't agree with the direction that Palihapitiya is taking at Social Capital.

In 2017, Social Capital began building an automated system that uses an algorithm to invest in startups. Companies apply through a glorified Google Form and let the AI decide whether or not they're worth backing. The firm has said it plans to use the system — called CaaS (capital as a service) — to make 1,000 investments in 2018.

Sources familiar with the matter said some partners are leaving because of the pivot to data-driven investing. Others said Sethi left Social Capital on good terms, and he even plans to team up with Social Capital for one of the fund's first investments.

One person in Silicon Valley said the most successful VCs evaluate a company based on its people, not just its metrics. This person worried for Social Capital's future.

"As soon as you move to algorithms and you're just purely data-driven, you're going to lose the sensibility of a company," this person said. "I don't care if you're the founder of a tech startup or a VC. Being disconnected from the touch is damaging."

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