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Peter Thiel

This Week In Startups - Episode #525
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Background
Peter Thiel is a serial company founder (PayPal, Palantir), billionaire investor (first outside investor in Facebook, 100+ others), and author of the new book Zero to One

Peter’s first start-up was PayPal, which he co-founded in 1998 and led to a $1.5 billion acquisition by eBay in 2002. 
Key Takeaways - 3 min read
 
Top Quote:

 "All of the companies in Silicon Valley are somewhere between really badly managed to just badly managed."

- Peter Thiel

Key Takeaways:
 
On Investing

Peter’s firm, the Founders Fund, is on it’s 5th fund and he has now been a venture capitalist for 10 years.

There have been a lot of different lessons he has learned over those years.
  • Once something works people often underestimate it, and when things aren’t working people underestimate how much trouble they are in.
It’s always dangerous to have absolute investing rules because at Founder’s Fund they once went through their list of absolute rules and there were about 20-30 of them, and they add up and eventually you don’t look at anything anymore. 

Peter’s single overarching idea in his book Zero to One, and in terms of investing, is that most business books are about being better at competing, whereas Peter’s belief is the key is to not compete at all by doing something that no one else is doing. 

Peter invested in Facebook at a $5 million valuation in 2004. 

On Monopolies and Governments

There is some point where monopolies are bad.
  • They are bad when they become static like a troll collecting a toll at a bridge.
This is when you are preventing anything from changing.
 
If you have a monopoly where nothing changes in 100 years that is probably just a tax and creates artificial scarcity.

On Tesla and SpaceX

Tesla and SpaceX were both companies where the competition was really weak.
  • You were competing with decrepit car companies in the US who had barely innovated in 50 years.
  • You were also competing with bad aerospace half-government half-military industrial complex type entities that were very inefficient and bad at innovating.
There were a lot of challenges in building these companies, but that part of the strategy is very underrated. 

Peter would never bet against Elon in anything.

Tesla and SpaceX use a modality of innovation not often used that Peter describes as complex coordination, which is where you take a lot of different innovative pieces and combine them in a new way.

On the PayPal Mafia

The high talent level of people at PayPal was a combination of things.
 
It was a relatively entrepreneurial and somewhat chaotic culture with very strong personalities.
  • A lot of companies are biased towards people who just “drink the Kool-Aid”.
PayPal was less smoothly functioning, but there were a lot of people who felt ownership of the product and would raise their voices quite a bit if they thought things were off track.

Peter would also say that the overarching lesson you learn going through a business like PayPal that had a lot of challenges, but ended up succeeding is that you can build a great company but it’s hard.
  • The lesson you learn at most startups is quite different (where it is either too easy or impossible). 
On Artificial Intelligence

The AI fears are a little overdone at this point.
  • Full and strong AI is somewhat further away than what people think.
It is hard to know what is going to happen, but the future is not fixed.

If we decide to work on it then it will get built, and if we don’t decide to work on it – it will never get built.

Peter is not a technology utopian, as he doesn’t believe technology automatically makes the world a better place.
  • He is hopeful that the really crazy people are too incompetent to accomplish things, but it is not absolute.
On Future Trends

Peter is always skeptical of sectors and trends.
  • People always ask him what trends he sees for the future, and he never likes the question because he is not a prophet and doesn’t think the future is fixed in that sort of way.
All trends are overrated
  • For example - healthcare, IT, location software, etc – these are all somewhat overrated.
  • SAAS is pretty badly overrated.
  • And if you hear the words big data and cloud computing you need to run away as fast as you possibly can.
Conversely, the things that are underrated are the things that have no buzzwords and don’t fit in to any pre-existing categories.

On Young Entrepreneurs

If he could go back and do it again, Peter would still go to college because he didn’t have any ideas of what to do instead.
  • However, he would think a lot harder about why he was going to college, instead of simply going as a default.
There is no right time to start a company. The critical thing is to at least have a kernel of a really good idea.

The formulation of a company is a talented team that works well together, a good product / technology, and a good business strategy.

On Polarization of Wealth

Polarization of wealth is not a good thing, and you can debate whether or not it has happened globally.
  • You could argue inequality has gone down globally over the last 40 years, but it has gone up within certain countries.
Polarization of wealth is not a good thing for the US.
  • It is much more debatable what the causes are and what the remedies are.
As a libertarian, Peter thinks it is a lot of the regulations that make things so expensive and unaffordable, which puts pressure on lower-middle class and poor people.
Table of Contents (Full Notes) - 15 min read 

*You can use the table of contents links below to jump to that section only on laptop and desktop.*
Top Show Links

Peter Companies  People
On Facebook
Peter invested in Facebook at a $5 million valuation in 2004.
  • They had 100,000 users at the time, and it was growing really fast.
They only needed money to buy more computers because there was so much demand for the service.
  • That’s always a good sign.
Sean Parker and Reid Hoffman both introduced Peter to Mark Zuckerburg, so there were a couple different points of contact.
  • The first meeting was not like a show on Shark Tank.
Mark was still 19-years-old and pretty introverted, and Sean Parker did most of the talking.
  • People always exaggerate how important these pitch meetings are.
Reid Hoffman and Peter had spent about one year looking at all these social networking sites before that, so they were ready to write the check before that.
  • It didn’t really matter what people were going to say.
What convinced them to invest was there was an intensity of usage that was already very big and very promising.
  • There were also lots of network effects, which should never be underestimated.
  • There was also something about the college market that was being underestimated.
Investors always have a bias to invest in things that they themselves use, and they undervalue things they don’t use.
  • So there aren’t many investors in the college market. 
Anything just on college campuses will be somewhat underrated systematically.
On Palantir
Palantir is worth somewhere north of $10 billion, and Peter is an angel investor and co-founder of it.
  • The first angel round was at about an $800,000 valuation.
On Investing Rules
It’s always dangerous to have absolute rules because at Founder’s Fund they once went through their list of absolute rules and there were about 20-30 of them, and they add up and eventually you don’t look at anything anymore.
 
You always hope that companies like Palantir and Facebook would have made it through those rules in retrospect.
  • Facebook would have made it through regardless because a company like Facebook today would be valued not at $5 million but more like $100 million (with having the same metrics as when Peter invested back in 2004).
On Investing
Peter’s firm, the Founders Fund, is on it’s 5th fund and he has now been a venture capitalist for 10 years.
  • There have been a lot of different lessons he has learned over those years.
Once something works people often underestimate it, and when things aren’t working people underestimate how much trouble they are in.
 
Momentum is not that good of a way to invest in most areas of investing.
  • For example, if a stock has gone up you don’t necessarily want to chase it.
When Peter has back-tested their portfolio he found that every time a company had a big up-round led by a smart investor it was always a good idea to do your pro-rata investment.
  • With a flat-round/down-round it was almost always a bad idea to do your pro-rata investment.
The steeper the up-round the cheaper it was.
 
Their biggest miss of the last decade was not doing the pro-rata on the full Series B round at Facebook.
  • It was a 12x up-round in 8 months.
  • It was the steepest up-round of any company they had been involved in, and in retrospect that was perhaps also the cheapest.
One of the reasons it was so underpriced was that investors don’t want to step up that much, but also people on the inside don’t realize how much things are changing.
  • Facebook was still 8-9 people at the company at that time, and still had horrible graffiti art on the wall.
Even though they had these abstract charts that were going exponential, on the inside it didn’t feel like things were changing that much and that’s why people underestimate it.
  • You have these subtle, but very important points where the power dynamics shift and they tend to get underestimated.
There isn’t a bright line between what company stages Founder’s Fund will invest at.
  • Founder’s Fund does everything from seed to series A, B, C, and D all the way up the spectrum.
Peter’s single overarching idea in his book Zero to One, and in terms of investing, is that most business books are about being better at competing, whereas Peter’s belief is the key is to not compete at all by doing something that no one else is doing.
  • The politically incorrect word referred to is having a “monopoly.”
We can debate at what points monopolies are good or bad for society.
  • But from the inside, if you are a founder, early investor, or employee at a company you always want to have a monopoly.
Peter is ready to invest at whatever point he is convinced it will be a monopoly. 
 
Peter would like to say he knew Facebook would be a monopoly, but he did think it would be dominant on college campuses, which would make it worth a lot more than $5 million.
  • He didn’t think it would be quite as big as it turned out to be.
On Monopolies and Governments
There is some point where monopolies are bad.
 
They are bad when they become static like a troll collecting a toll at a bridge.
  • This is when you are preventing anything from changing.
If you have a monopoly where nothing changes in 100 years that is probably just a tax and creates artificial scarcity.
  • This is why we have anti-trust laws.
On the other hand we have IP laws, copyright laws, and patent laws.
  • These laws are often poorly designed, but they reflect the intuition we want to give people a reward for innovating and coming up with new things.
If you come up with something new, but can’t have a monopoly around it you will never be able to monetize that invention.
  • If something is perfectly competitive you will never be able to make any money from it.
On some levels these monopolies are a reward for innovation.
 
The IT industry (generally) is one that is unusually monopoly prone because the marginal costs of software tend to be zero so you have incredible economies of scale, you can often get people to adopt something new quickly, and the customers are relatively sticky.
  • That combination of elements makes software very monopoly prone, and extremely lucrative.
This is why so many talented people are going in to it, and why there is so much innovation in software.
 
There are many other sectors where it would be good for society if there was more innovation, but it is hard to get the microeconomics to work.
  • For example, clean energy could use more innovation.
On Future Trends
Peter is always skeptical of sectors and trends.
 
People always ask him what trends he sees for the future, and he never likes the question because he is not a prophet and doesn’t think the future is fixed in that sort of way.
 
All trends are overrated
 
For example - healthcare, IT, location software, etc – these are all somewhat overrated.
 
SAAS is pretty badly overrated.
 
And if you hear the words big data and cloud computing you need to run away as fast as you possibly can.
 
The reason you want to be really careful about these buzzwords is because they are a tell (like in poker) that the company is bluffing and they are actually undifferentiated.
 
If you are the nth company in a category that is well established, that is problematic.
 
You don’t want to be the 4th online pet food company, or the 10th solar panel company, or the 1,000th restaurant in San Francisco.
 
Jason mentioned that if it is harder to describe because there is no buzzword it is actually a good thing. 
Conversely, the things that are underrated are the things that have no buzzwords and don’t fit in to any pre-existing categories.
 
You have to always be open to listening to those.
 
The challenge is even the people who are running these companies will describe them in terms of these existing categories because it is so much easier to do.
 
Figuring out the correct way to think about things in categories where we don’t even have the proper language is really critical to do.
On Young Entrepreneurs
If he could go back and do it again, Peter would still go to college because he didn’t have any ideas of what to do instead.
  • However, he would think a lot harder about why he was going to college, instead of simply going as a default.
There is no right time to start a company. The critical thing is to at least have a kernel of a really good idea.
 
The formulation of a company is a talented team that works well together, a good product / technology, and a good business strategy.
  • All three of those need to line up, and if you have those you can have a great company even if you screw up a lot of stuff.
All of the companies in Silicon Valley are somewhere between really badly managed to just badly managed.
 
If you look at these companies from an MBA or Harvard Business School process, there are all these things that are being screwed up in enormous ways and it often doesn’t matter because you have this kernel of a good idea.
 
The more pessimistic version of this is if you don’t have this kernel of a good idea then it is really hard to make up for that even if you get a lot of other details right.
On Android Vs. iOS
iOS is pretty core to Apple, while Android is not that core to Google. 
 
Google is fundamentally a search company. 98% of the revenue comes from search.
 
Google always likes to brand itself as an all-purpose technology company with things like self-driving cars, Google glasses, phone operating systems, balloons in outer space, etc.
  • But really 98% of Google is the search engine, and everything else is probably a distraction.
On Conflict
It’s always complicated – sometimes you have to fight (when it’s existential and you have no choice), but we are too prone to want to fight.
  • We are too prone to find conflicts with other people and other companies.
We are too prone to thinking that whatever is valuable is what the other person is doing, and want to take that away from them.
  • That is a much less constructive approach.
On Being Contrarian and Right
  • Jason mentioned that the other core tenant of his book Zero to One is believing things that you believe that to be true that nobody else believes to be true. 
People always characterize Peter as contrarian, but really it is the combination of being contrarian and right.
  • 1+1 = 3 is a contrarian belief, but it’s not interesting, untrue, and won’t get you anywhere.
It’s always important for it to be unconventional and something no one has thought of, but also is either intellectually true or has some merit to it in a business context.
On Tesla and SpaceX
Tesla and SpaceX were both companies where the competition was really weak.
  • You were competing with decrepit car companies in the US who had barely innovated in 50 years.
  • You were also competing with bad aerospace half-government half-military industrial complex type entities that were very inefficient and bad at innovating.
Starting a search company would be tough because Google is a really tough company to go up against.
 
Going up against General Motors and up against Lockheed Martin – you are at least picking pretty weak competition, and that was an important strategic thing to get right early on.
  • There were a lot of challenges in building these companies, but that part of the strategy is very underrated.
Jason mentioned that nobody believed electric cars would be viable. 

Peter remembers a conversation he had with Elon in 2008, and he asked him when the last successful car company started in the US.
  • Elon said Jeep in 1941, and he thought it was about time again after 67 years.
Tesla has been an incredible success, and Peter would never bet against Elon in anything.
  • That’s hard rule #1.
We could look at what has been the main innovation with SpaceX or Tesla.
 
There are many different forms of innovation.
  • The most common is you launch something and then iteratively improve it over time continuously.
  • There are also occasional big breakthrough innovations like Bitcoin, where someone worked on it in a closet for 10-years and then released it to the world.
However, there’s another modality of innovation that Peter describes as complex coordination, which is where you take a lot of different innovative pieces and combine them in a new way.
 
If you ask what is new about SpaceX rockets or Tesla cars – all of the components already existed at least in initial designs. The critical thing was to pull them all together in a new form.
  • That’s vertical integration. It is somewhat capital intensive, which is why it is hard to get it financed, and this modality is done very little.
Once it is done, it is something that tends to be underrated.
 
Having built this vertically integrated rocket company, it is now possible to innovate on top of that structure, which is much harder if you have this incredibly complicated sub-contractor system where all of the components are bespoke and you can’t innovate on the whole thing.
  • Getting to re-usable rockets would be an enormous breakthrough because it would cut costs by 70% - 80% to get to space. 
On the PayPal Mafia
Peter was 31 when he started PayPal and 35 when eBay bought it.
  • The PayPal period were very compressed four years from start to the eBay acquisition.
The high talent level of people at PayPal was a combination of things.
 
It was a relatively entrepreneurial and somewhat chaotic culture with very strong personalities.
  • A lot of companies are biased towards people who just “drink the Kool-Aid”.
There are pluses and minuses to both hiring methods.
 
You will have a more smoothly functioning company, and less descent when things are going wrong, when hiring people who drink the Kool-Aid.
  • PayPal was less smoothly functioning, but there were a lot of people who felt ownership of the product and would raise their voices quite a bit if they thought things were off track.
In retrospect, 2003 – 2005 were very good years to start a company.
  • It was a contrarian time to start an internet company, and the macro timing was very good.
Peter would also say that the overarching lesson you learn going through a business like PayPal that had a lot of challenges, but ended up succeeding is that you can build a great company but it’s hard.
  • The lesson you learn at most startups is quite different.
If you are at a startup that fails you will learn the lesson that it’s impossible to grow a great company, and you should try something less ambitious the next time around.
 
If you are at a startup where things work too easily (which is what people at Microsoft and Google experienced) then you learn the lesson that it’s easy to build a great company and you don’t have to try that hard.
 
Learning the lesson that it’s hard is better than learning it is easy or impossible because with easy you don’t need to work hard and if it’s impossible there is no point to working hard.
  • Easy and impossible converge to not working hard.
Hard tells you that you have to work hard.
 
Of the PayPal group, Elon is extremely impressive because he has done something outside of the IT space.
 
We are in a world dominated by IT with innovation in bits, but much less so in the world of atoms.
  • This is what makes Elon uniquely charismatic.
However, it is very hard to do things in the world of atoms.     
 
At Founders Fund back in 2007 they were thinking about investing more in things like biotech and transportation technologies.
  • Maybe 20% - 25% of the capital has been invested in that since that time.
  • 75% - 80% is still IT.
There are a lot of deep reasons why IT businesses tend to work better, and why it is rationale for most people to work on those.
On Artificial Intelligence
Founder’s Fund was seed investors in DeepMind.
  • The AI fears are a little overdone at this point.
Full and strong AI is somewhat further away than what people think.
  • However, it does represent a shift that is really drastic for which we don’t have a great conception.
When people talk about computers taking human jobs that represents the strangeness of AI.
 
It would be like if aliens landed on this planet, the first question wouldn’t be “what does this mean for the economy?”
  • The first question would be political and if they are friendly or not friendly.
If you have full on strong AI it would be like aliens landing on this planet.
 
The premise is there is this future out there where these things will happen inevitably.
  • Sort of like the Ray Kurzweil the singularity is near and there are these exponential curves, and all that we should be doing is eating popcorn and watching the movie of the future unfold.
  • It is hard to know what is going to happen, but the future is not fixed.
The question should be about agency.
 
If we decide to work on it then it will get built, and if we don’t decide to work on it – it will never get built.
  • Jason said that it is going to get built. 
If everyone feels like it’s going to get built then nobody will feel the need to do it, and it won’t get built.
  • As an entrepreneur you should think, “What is the future I want to build?” That is the future you should then work to try and make happen.
Peter is not a technology utopian, as he doesn’t believe technology automatically makes the world a better place.
 
Peter is hopeful that the really crazy people are too incompetent to accomplish things, but it is not absolute.
On Technology Replacing Jobs
People have been too worried about technology replacing jobs for a long time, going all the way back to the luddites in the 19th century who were worried there wouldn’t be anyone needed to work in textile factories so they tried to break the machinery.
  • It turned out that a lot of the automation and productivity gains freed people up to do other and more productive sorts of things.
If we had enormous productivity gains and enormous GDP growth it might not be perfectly evenly distributed, but if you had GDP grow by 4% per year just about everyone would be better off most likely.
 
The challenge is that in most sectors we are not having anywhere near those levels of productivity gains.
  • There has been a lot of automation in manufacturing, but you have to keep in mind that is a smaller and smaller part of the economy.
Even if we are improving manufacturing at the same rate we were 100 years ago (let’s say 10% per year), that makes less of a difference if manufacturing is 15% of GDP now instead of 50% of GDP as it might have been 100 years ago.
 
What our economy is more dominated by today are service sector jobs, which haven’t changed that much.
  • These are people working in restaurants, as kindergarten teachers, nurses, medical technicians, etc.
This is why there is less economic growth than we think because we have not actually figured out ways to increase productivity in so many other sectors.
 
In general, people always frame the worry about technology that it’s happening too quickly, it’s too disruptive, and it’s too dangerous.
 
What Peter worries about is much more the stagnation and we aren’t changing fast enough, and there isn’t enough growth.
  • When you don’t have enough growth that’s where there are real challenges.
In a world without growth everything becomes a zero-sum game, “I will only get ahead by you falling further behind.”
  • That becomes a much nastier world.
On Drug Reform
Peter is libertarian on issues like legalization of pot, gay marriage, etc.
 
Pot should be legalized and it will be eventually.
 
Founder’s Fund has done its first investment in a marijuana-linked set of companies.
 
Everyone said this is really crazy and courageous and out of the box, and Peter does not even think it is that controversial anymore.
  • There isn’t anything unusual about it anymore.
Even if this is a trend that is true, it doesn’t automatically translate to figuring out the business.
  • For example, it’s not clear how you make money by farming sugar.
  • Maybe the trend towards legalization of marijuana will mean there will actually be less money in it, and all the money in it was due to the illegality of it.
We can identify really big trends, but how that translates in to a successful business is quite tricky.
On Polarization of Wealth
Polarization of wealth is not a good thing, and you can debate whether or not it has happened globally.
  • You could argue inequality has gone down globally over the last 40 years, but it has gone up within certain countries.
Polarization of wealth is not a good thing for the US.
  • It is much more debatable what the causes are and what the remedies are.
It is always three parts – descriptive (has it happened – yes), prescriptive (why has it happened – this is hard to answer), and remedy (what do you do about it – very hard to answer).
 
As a libertarian, Peter thinks it is a lot of the regulations that make things so expensive and unaffordable, which puts pressure on lower-middle class and poor people.
 
In a place like San Francisco, Peter would not blame the tech industry, he would blame the weird coalition of urban slumlords and the Board of Supervisors that is refusing to build more housing in San Francisco.
 
San Francisco would not be that hard of a place to make a living if it were not for the rents.
  • Everything else you could probably get by on somewhere a little above minimum wage.
  • The affordable housing issue is where the focus should be.
The zoning laws are an example of a bad monopoly.
  • Monopolies get very bad when the government reinforces them.
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