Palihapitiya was born in Sri Lanka and, at the age of six, moved with his family to Canada. After graduating from the University of Waterloo in 1999 with a degree in electrical engineering, he worked for a year as a derivatives trader at the investment bank BMO Nesbitt Burns. In 2000, Palihapitiya moved to California with his girlfriend.

Palihapitiya joined AOL and rose through the ranks to become the head of AOL's instant messaging division in 2004. In 2005, he left AOL and joined Mayfield Fund; a few months later he left that job and joined Facebook, which was then a little more than a year old. Palihapitiya's work at Facebook involved trying to increase its userbase.

Palihapitiya has three World Series of Poker (WSOP) and two World Poker Tour (WPT) cashes for a total of $175,801. In 2011, he finished 101st out of 6,865 entries in the World Series of Poker’s Main Event.

Palihapitiya was listed as one of the "Founders" of the lobbying group FWD.us. The group launched on April 11, 2013, and its goals include immigration reform, improving education, and enabling technological innovation, all in a United States context. An article in The New Republic stated that Palihapitiya received a weekly report about FWD.us and also quoted him as saying, in response to controversy around the FWD.us political lobbying strategy: "The folks that are actually people that run that day to day are sophisticated and understand the nuances of how to affect it... It's a really gnarly, gnarly thing having to deal with Washington. And to be honest with you, my perspective was, it's a really good investment because it's a good way to pay it forward, and I'm really glad there are other people other than me who are dealing with it who have the patience and resolve to figure it out."

In October 2015, Palihapitiya and Social Capital worked with the Technology industry publication The Information to publish a report on diversity in venture capital. The study found that 92% of senior investment teams at top-tier venture firms are male and 78% are white. Based on the report, Palihapitiya wrote an op-ed calling for a “wake-up call” among venture capital firms that would “recapture our potential and open doors” in order to “surround ourselves with a more diverse set of experiences and…prioritize a diverse set of things.”

In November 2017, Palihapitiya revealed that, for ethical reasons, he regrets having helped Facebook to become the largest social media platform. He said, “[t]he short-term, dopamine-driven feedback loops that we have created are destroying how society works: no civil discourse, no cooperation, misinformation, mistruth. This is not about Russian ads. This is a global Problem. It is eroding the core foundations of how people behave by and between each other. I can’t control them. I can control my decision, which is that I don’t use that shit. I can control my kids’ decisions, which is that they’re not allowed to use that shit”. Following criticism from Facebook for his remarks, Palihapitiya subsequently clarified, "I genuinely believe that Facebook is a force for good in the world, so I'd like to expand on my comments...My comments were meant to start an important conversation, not to criticize one company — particularly one I love. In 2017, many of us have grappled with the unintended consequences of the products we've built. Social media platforms in particular have been used and abused in ways that we, their Architects, never imagined. Much blame has been thrown and guilt felt, but the important thing is what we as an industry do now to ensure that our impact on society continues to be a positive one."