Adam D’Angelo could have retired when he left Facebook at the age of 23. Instead, the social network’s former chief technology officer, who saw his Facebook stake soar in value to over $100m after the company’s 2012 initial public offering, enthusiastically threw himself into a career as a tech entrepreneur. He made dozens of investments in start-ups and founded his own venture, Quora, the world’s leading question-and-answer site. As he once said in an interview: “I felt I could make a bigger impact on the world by starting something new, rather than just continuing to optimise Facebook.”
It might have been easier to sit on the cash. With D’Angelo as chief executive, Quora has established itself as a global market leader in Q&A, and is now worth almost $2bn. But it has not been without its problems, not least recent lay-offs among its 200 staff.
D’Angelo’s approach is representative of a new generation of tech executives coming to terms with financial success. The decades-long boom in technology has created riches at historically unprecedented rates, turning recent university graduates into youthful billionaires. Their sudden rise to spectacular wealth has forced these start-up founders to consider how they might spend and invest their fortunes.
Wealth advisers say that most people in the technology sector are unprepared for the changes that come with riches. But they are learning fast and developing a risk-on style that marks them out as a class apart among the rich.
Starting in the 1980s with figures such as Microsoft co-founder Bill Gates, technology had created 89 US-based billionaires by the end of 2018, including 19 in that year alone, according to an analysis by UBS, the Swiss bank.
Founders’ deputies have also shared in the wealth creation, with nearly 130,000 start-up employees in the US being millionaires based on the value of their company shares and options, according to Carta, an equity-management software provider. Of those, 15,000 are worth more than $10m, and more than 1,000 have crossed the $100m threshold.
“They go from ramen and a studio apartment to being one of the wealthiest people in the country overnight,” says Roy Bahat, head of Bloomberg Beta, a venture firm backed by the financial information company. “I don’t know if we have the precedent” for that happening to thousands of people, he adds.
Like other wealthy entrepreneurs cashing in their shareholdings via stock market flotations or other exit routes, they buy houses, luxury cars, perhaps yachts. Larry Ellison, Oracle’s billionaire co-founder, has taken that to the extreme by sponsoring a team in the America’s Cup, the world’s most expensive sailing race.
They also invest in property — especially in their home base of the US west coast — and traditional stocks and shares. Through his investment company Cascade Investment, Gates was once even a shareholder in Carpetright, a decidedly unglamorous British flooring retailer.
Family offices have been established, executive assistants have suddenly become chiefs of staff and philanthropic plans are being implemented, in ways that would look familiar to private bankers in New York, London or Zurich. But the tech generation still stands out for its willingness to pump money back into the industry. Entrepreneurs go for nascent ventures, often run by friends and acquaintances in Silicon Valley, teaming up with other cash-rich tech businesspeople and venture capitalists.
Recently, however, signs of caution have emerged, with some potential investors worried that the long tech boom may have run out of steam as valuations wobble at some of the largest start-ups. The sceptics see a loss of momentum following the boost provided by low interest rates in the wake of the 2008 financial crisis, which encouraged investors to plough in cash.
But for most, the appetite for tech is as big as ever. Investors have given more than $210bn to Silicon Valley-area start-ups in the past decade, representing nearly 30 per cent of all the money given to US start-ups during that period, according to estimates by EY, the business advisers. “People here are very comfortable with losing money on their investments,” says one Silicon Valley-based wealth adviser. “In San Francisco, this is a form of charity. It keeps the whole ecosystem working.”
When start-up executives cash out, they often base their personal investments on the venture capitalists’ model, looking for promising start-ups. These investors become “angels” writing $100,000 cheques, sometimes via special-purpose vehicles, which allow them to pool their resources.
“One of the things that happens in Silicon Valley when people make money is they want status. Angel investing is the status marker, whereas in other places it is giving,” says Bahat, noting that high-profile tech founders often end up investing in each other’s companies.
Wealth managers around San Francisco say their clients keep between 5 per cent and more than 60 per cent of their wealth in these investments. That range stands in contrast with the broader universe of family offices, which on average put 11 per cent of their capital in direct private equity investments, according to UBS.
John China, president of SVB Capital, a Californian investment company, says he has seen angels with upwards of 50 investments, discovered largely through their Silicon Valley networks. “They tend to take more risk with angel portfolios and don’t really track them or worry about them,” says China, whose company is part of Silicon Valley Bank, a big lender to start-ups and venture capital funds.
The portfolios can be lucrative. Amazon chief executive Jeff Bezos, for instance, was one of the first investors in Google, putting in $250,000 in 1998. His stake, purchased for four cents a share, would have been worth more than $500m at Google’s IPO in 2004. Another huge second-generation bet to have made it to a public listing is electric car maker Tesla, whose chief executive and biggest investor is the audacious Elon Musk. He made his first tech fortune from the 2002 sale of payments group PayPal for $1.5bn to eBay (Musk held 11.7 per cent of the shares). Musk’s risk-on approach to investment has been as much a part of the Tesla story as its technology, exemplified by the pledge he once made in an interview: “Optimism, pessimism, f*** that; we’re going to make it happen.”
Many of the tech elite have their sights set on the sky and beyond, including Musk with rocket-maker SpaceX. Bezos founded aerospace company Blue Origin; Paul Allen, the late Microsoft co-founder, started Seattle-based Stratolaunch, a space transport venture; Sergey Brin has put his weight behind a Zeppelin-like airship; and Larry Page, who co-founded Google with Brin, has backed Planetary Resources, an asteroid-mining venture, and electric aircraft maker Kitty Hawk.
The tech super-rich naturally spread their bets, investing through family offices with their own investment teams. Vulcan Capital, Allen’s family office, counts 57 private investments on its website, including early stakes in Chinese ecommerce group Alibaba. Bezos’s investment group, Bezos Expeditions, has made 26 disclosed venture investments, including stakes in holiday-let company Airbnb and car-hailing app Uber.
Some bets are already paying off and some are a gamble on the distant future, while others have already run into difficulties. The family office of Oracle’s Ellison made headlines in 2017 with an investment in Japanese conglomerate SoftBank Group’s $100bn Vision Fund, the largest tech venture investor. But, more recently, the fund’s approach has been questioned in light of financial difficulties at one of its biggest investments, the co-working group WeWork.
Multi-family offices, which manage investments for multiple wealthy individuals, also provide capital for start-ups. Iconiq Capital manages $13.9bn of assets and advises on another $18.8bn for Facebook co-founder Mark Zuckerberg and fellow executives, according to filings from the end of 2018. The firm has invested in private tech companies through an unconventional structure combining a traditional family office with separate registered funds that are open to external investors such as sovereign funds. The firm has also introduced these external investors and start-up founders to tech executives.
Some investments are difficult to distinguish from charitable grants, blurring the lines between profit and philanthropy. Zuckerberg pledged up to $1bn a year to a controversial organisation spreading money across grants, political donations and start-up investments. The Chan Zuckerberg Initiative, co-founded with his wife Priscilla Chan, has called itself “a new kind of philanthropy”, registering as a limited liability company. When Zuckerberg committed 99 per cent of his Facebook stake to the group in 2015, those shares amounted to more than $45bn in value.
Laurene Powell Jobs, the widow of late Apple co-founder Steve Jobs, has also organised her “social change organisation” Emerson Collective as an LLC. Its investments range from the magazine The Atlantic to the supersonic jet start-up Boom. According to data provider PitchBook, Emerson Collective has made 48 venture capital investments since 2013, alongside its other philanthropic work.
Powell Jobs is only one of several tech billionaires who have invested in the media, at least partially to ensure press freedoms. Bezos, who bought the Washington Post in 2013, has said he believes the newspaper “has an incredibly important role to play in this democracy”, though the arrangement has been criticised by press watchers wary of the influence he could exert over the institution’s output.
Bahat of Bloomberg Beta says traditional non-profits have lamented the difficulty of raising funds from wealthy tech executives, so they need to try new approaches. He has begun hosting events where millionaires from recent IPOs discuss productive ways to grow and disburse their wealth. “In a way, it’s really nice because they don’t put on airs,” says Bahat. “And in a way, it’s really weird because they don’t know what to do.”
The wealthy and their investments
Fortune from: Amazon
Has invested in: Blue Origin (aerospace), Uber, Washington Post
Fortune from: Google
Has invested in: Tesla, ‘Lighter Than Air’ airship
Laurene Powell Jobs
Fortune from: Apple
Has invested in: Disney, Emerson Collective (social impact), Boom (aerospace), The Atlantic (publishing)
Fortune from: PayPal
Has invested in: SpaceX, Tesla
Fortune from: Facebook
Has invested in: Vicarious (artificial intelligence), Asana (software), Iconiq Capital
Fortune from: Microsoft
Has invested in: Beyond Meat (plant-based food), Four Seasons Hotels, TerraPower (nuclear energy)
After amassing $3.6bn from selling WhatsApp to Facebook for $22bn, co-founder Brian Acton opted to funnel money into another encrypted messaging app, the non-profit Signal. He did, however, walk away from stock options worth $850m following a disagreement over the monetisation of WhatsApp; he also joined the “#deletefacebook” campaign. Jan Koum, the other WhatsApp co-founder, shifted his focus to more conventional super-rich pastimes after the 2014 sale, posting that he would be “collecting rare aircooled Porsches, working on my cars and playing ultimate Frisbee”.
Gates’s Cascade has also taken a more conventional route — in investment terms — and has compiled an active stock portfolio reminiscent of hedge funds, alongside out-of-favour property holdings. Iconiq has become a significant investor in data centres, which, though high tech, are relatively low-risk infrastructure investments.
This more cautious investment approach, where wealth preservation takes priority over investment growth, is becoming more common in Silicon Valley. Wealth advisers say tech multimillionaires have begun asking pointed questions about the long bull run for US stocks, including the tech companies from which they made their fortunes. Start-up founders are also starting to cash out increasing sums from their businesses earlier in their life cycles, fearing that the flood of capital into the industry may not last if the likes of SoftBank and sovereign funds beat a retreat.
Melissa Bender, a San Francisco-based partner at law firm Ropes & Gray, says special-purpose vehicle structures used by angel investors might even contravene securities regulations, noting that high-profile angels sometimes charge fees to arrange deals. US Securities and Exchange Commission rules require that investment managers charging fees are registered with the regulator. Bender says many young tech entrepreneurs are used to their industry’s relative lack of regulation compared with asset management. “These are also folk who have been rewarded for being willing to take on a lot of risk,” she adds.
One wealth adviser has observed a shift away by tech founders from angel investments. Instead they are putting money into more mature companies alongside blue-chip venture capital firms such as Benchmark Capital and Sequoia Capital. Jennifer Forster, a partner at San Francisco-based wealth manager Epiq Capital Group, says investors recently have been able to sell shares at high prices in secondary markets, allowing them to cash out significant portions of their stakes. “After a 10-year bull market, there is a feeling that ‘maybe I should monetise while I can’,” she says. “But the flip side is you have people who are building these tremendous companies that are growing at 150 per cent a year. There aren’t many assets like that where you’re able to invest.”
Epiq, which was spun off from Iconiq in 2018, manages more than $2bn for about 50 wealthy families, including tech founders in the San Francisco area. The firm tends to accept families with at least $50m-100m of investable wealth and becomes involved in their lives, handling matters such as the privacy of their donations and home purchases, Forster says. She says Epiq aims to be a long-term investor and thinks there is still more “alpha”, or outperformance, available to investors in private markets.
Helen Dietz, a principal in Mountain View, California, for the financial adviser Aspiriant, says some of her clients reserve as much as a quarter of their portfolios for investment in start-ups and other speculative ventures. But one of her younger tech founders has set aside only about 10 per cent for such stakes, she says, noting that her clients tend to view such personal investments as profitmaking opportunities, rather than primarily about status or altruism.
Tom DeFilipps, a lawyer at Covington & Burling in Palo Alto who advises start-up founders, says he has seen little decline in Silicon Valley’s appetite for risky investments. “You have all of this wealth, and there’s just a limited amount you can do with it within the confines of the way people behave in Silicon Valley,” he says. “There’s not a lot of outsized demonstrations of wealth here.” He notes that his clients still ask him: “What else am I going to do with my money?”