Peter Thiel Transcript

Taped July 29, 2014

Table of Contents

I: The Story of PayPal 0:15 – 18:11
II: Against Conventional Wisdom 18:11 – 36:30
III: Facebook 36:30 – 43:07
IV: An Innovation Slowdown? 43:07 – 1:04:28
V: The Need for Growth 1:04:28 – 1:13:57
VI: The Higher Education Bubble 1:13:57 – 1:36:39

I: The Story of PayPal (0:15 – 18:11)

KRISTOL: Welcome back to CONVERSATIONS. Our guest today is Peter Thiel, one of America’s leading investors and entrepreneurs and also, as you’ll see, a very interesting thinker about American – the American economy, American business, American society, American politics. Peter, thanks for being with us.

THIEL: Thanks for having me on the show.

KRISTOL: My pleasure. Peter, we met a little over 25 years ago, I guess when you were an undergraduate at Stanford, I think, and you were active in politics and looking forward to going to law school. And here you are. You’re not a politician and you’re not a lawyer. What happened?

THIEL: Well, I’m still very interested in all these sorts of questions. But, yes, I started as a very conventionally tracked career – Stanford undergrad, Stanford law school, worked in a big law firm in New York for a number – for a while, and then a big bank in New York. And sort of had this rolling quarter-life crisis where I finally concluded that I should – that it made sense to try to do something where with your life where if you wouldn’t do it, it wouldn’t happen versus these tracked careers where if you don’t do it, there are a hundred other people who will take your place, do the exact the exact same thing.

And in the late 90s, I moved back to California, got involved in the Internet boom, started a company called PayPal. Four years later, it was bought by eBay and then since 2002, I’ve been a sort of investor helping people get started with a number of different type companies. But it’s been a wild, wild 25 years.

KRISTOL: That’s great, that’s great. So talk a little bit more about you’re there in New York, you’re in the legal, financial world. And what was dissatisfying about that and what was the attraction of going to Silicon Valley and was there any particular thing that spurred the move?

THIEL: Well, it’s – it is – what’s amazing about these top U.S. institutions in the U.S., whether academic or law firms, banks is that from the outside, they’re places where everybody wants to get in. And then once you’re – once you’re in them, it turns out that it’s always fairly constricted. You have enormous numbers of very talented people. So that’s the aspect that’s very positive. But then it’s also, it ends up being – involving a ferocious amount of competition for what I think are often relatively small stakes. Where at Sullivan & Cromwell, the New York law firm I was at, you have eighty very talented people start every year, four or five might make partner after seven or eight years. And it was very unclear even for the people who became partner how much impact they would have on the broader world. So you have some of these people who are incredibly ambitious going in, and sort of gradually gets wrung out of them over time.

KRISTOL: And entrepreneurship struck you as different.

THIEL: I think, I do think that Silicon Valley, the technology industry, is still an exception to this where you know we’re living in a society, where the frontier is not as wide open as it was, was in the 19th century. Geographically, it’s maybe you can still go to Alaska but aren’t that many places one can move to where there’s sort of wide-open space left. Technology, I think, is one place where that still exists and where it is possible for a small group of people to start something new that has a big impact on the world as a whole.

KRISTOL: So how did that happen with PayPal? Did you sort of decide I want to go to Silicon Valley? And you’ve been of course to Stanford and reconnect with friends there and then figure out what you wanted to do or did you actually have the idea for PayPal first and then –

THIEL: Certainly the fact that I was at Stanford was quite helpful, since it is probably the university that’s most embedded in this and a lot of friends I had were getting involved in the Internet boom of the 90s. We had – you know, these things are always, it’s always somewhat of a process, there’s some serendipity, there’s some planning. We had this idea I think from very early on, to create new payments company. There were all sorts of questions what one would have to do to make that work. A number of these efforts had already failed by 98. And so we learned from some mistakes –

KRISTOL: And the “we” in this is?

THIEL: Myself. Max Levchin was my co-founder and there were sort of three or four other people involved early on on the team.

And it was a crazy process coming up with the right idea. Hit on the idea of linking money with email, which was a simple idea. It turned out to be very hard to implement because of all the fraud challenges one had. And then, and then you, then it gradually sort of scaled very quickly.

We started with 24 people using PayPal in October of 1999 – it was the 24 people working at our company. And it grew by about 7 to 10 percent compounding daily. So we were at a thousand people by mid-November. 2,000 by December 31, 100,000 by February 3rd, 2000. A million by mid-April. And then it kept scaling. Today, the PayPal service is probably on the order of 120 million people, people using it.

So you, I think Einstein apocryphally said that compound interest was the most powerful force in the universe. And if you can get something that has this snowballing effect going, it’s very powerful, whether it’s in technology or culture, politics, all sorts of aspects. You want to get positive feedback, things like that, not things where as you make progress, every incremental step gets much harder. You don’t want to have sort of trench warfare on the Western front in World War I where you can make a push for maybe a hundred feet. You want to do something where as you make progress, it cascades.

KRISTOL: And what was at the core insight was people are going to want to pay for things, obviously. But that was already happening or not really?

THIEL: The core insight was that most people are not set up to accept credit card payments. In the US, there about three million people who have – are set up to accept credit cards, there were about 150 or 200 million people with email addresses. So if you could link money to email, then anyone with an email could receive the payment. And it was a way to start a payment system from scratch. Normally, there’s an enormous counter-party challenge where you need to get both sides involved simultaneously. So by linking money to email, you could send money to someone with email who has not yet signed up with PayPal and then they click on various links and then there would be incentive to sign up so they could collect their money. And so you want to have sort of a one-way payment system where it could go to people who are not yet officially part of it.

KRISTOL: Those are people selling things on eBay mostly or at first or?

THIEL: It took off on eBay and then we sort of directed a lot of the focus on the product towards eBay very, very quickly. There were a lot of competitive challenges. One we ran into – eBay had its own competing service which is an uncomfortable thing. So it was like this giant store that couldn’t get its own cash register machines to work. And we had a competing service, ours, that was offering the cash register machines that worked better. There were fraud challenges, there were regulatory challenges. But there was the underlying need for the product was very great and that enabled us to sort of power through a lot of that stuff.

KRISTOL: And defeating other competitors. I mean, how does that work? Surely, other people thought gee I can do that too. Do you just have to get the snowball going fast enough that you become dominant in the field? I don’t say just, but is that the key?

THIEL: Well, I do think in business one of the critical things is that you don’t want excess competition. So if you have lots of people doing the same thing, it’s very hard for you to have a good business. If you’re the 20th person selling pet food on the Internet, it’s unlikely you will have a fantastic business. Or opening a restaurant in DC or San Francisco is a terrible business.

And, so, good businesses, I think, always have this extremely unique character. You can certainly get it by being sort of a first mover where you grow incredibly fast. And so if you are the first one and you grow quickly enough that no one can catch up, that can work. And that was, I think that was our original plan, was just to have this exponential growth. And so even people copied us six months or a year later, they would never catch up.

In practice, I think it’s more important to be the last mover than the first mover. Sort of the Capablanca line in chess that to begin, you must study the end game because that’s – you win if you’re the last mover, not if you’re the first mover is a tactic, the last mover is what really matters.

And I think the key – a key component there is often to have some kind of technological edge. It was not obvious what that was initially with PayPal. It turned out there was an enormous amount of fraud on the Internet and there were some technological solutions we came up with. And the existence of this fraud deterred a lot of large competitors from entering the space – large banks, large institutions where the consultants would tell them there’s too much fraud, you can’t do this. And they ended up launching products that just didn’t work.

KRISTOL: I mean, I don’t know much about it but just stepping back and thinking about it, do you think that the credit card companies and/or the banks I guess whom hold the credit cards, would have thought, yeah, we can do this, we’re pretty used to processing payments, why should we let some upstart company seize a huge market here.

THIEL: You know, it’s large – large corporations are probably better than the government, but in many cases are quite dysfunctional. So, yes, in theory, if the large corporation were a monolithic institution with a single-ness of purpose, that’s how you’d respond. And the CEO of Visa might say, you know, why is this happening? But then in practice, you have incredibly – incredibly many bureaucratic levels on the inside.

There was – Citigroup tried to launch a competing service but the people inside it sort of sensed this was unlikely to work, and so you end up with less talented people working on it. The smarter people in these organizations always know not to work on things that are unlikely to succeed. And so you have all these complex internal politics that make it surprisingly possible for small companies to emerge and not to be just squashed by larger organizations.

KRISTOL: Did you all envision it? You sort of envisioned, obviously, exponential growth, and you understood that would give you success. But you pretty much envisioned filling the niche it filled or was it something you adjusted in a big way as you went forward?

You read these business books and people say, “Oh, it was totally unanticipated, it worked out totally differently. I was very agile and had to adapt to circumstances.”

THIEL: Yes. I always – you know, there was definitely a lot of adaptation. At the same time, I think there was this founding vision of creating a new payment system on the Internet and that sort of drove it all the way through. And so I’m a little bit more partial to the side of having a long-term plan and using that as something you build around versus the sort of random walk theory that dominates where you iterate very quickly and you have no overarching vision.

When I was a chess player, an intermediate level chess lesson was always that a bad plan was better than no plan. And I think something like this is true in business. We always say that you can’t have a plan, you can’t have a plan especially in technology because things will be so different in five or ten years, who’s to know what it’s going to be like? But I think it’s always worth asking those questions.

Most of the value of these businesses accrues over the very long-term. There was a financial model we did on PayPal in March of 2001. We had been in business for 27 months and we included that about 80 percent of the value of the company came from profits in years 2011 and beyond. And that’s sort of – that’s analytically true of almost all these businesses – the value exists far in the future.

And so one of the critical questions is really will you still be around ten, fifteen years from now because that’s where most of the value exists. And so it is – you know the long-term questions have a qualitative nature. Durability is at least as important as growth.

KRISTOL: I’ve heard you talk about business in the past. You used the term founders and co-founders maybe a little more than most people do and maybe the term entrepreneur a little less. I guess entrepreneur has a certain – it needn’t be this way I suppose – but has a certain feel of making it up as you go along, right. You know and founder has a little more of a feel of setting up an institution that’s there to last.

THIEL: Yeah, so, I definitely like founder more than entrepreneur. I think entrepreneur has – it’s a bit of an over-used term. So it’s a – I had a conversation with a friend a number of years ago and asked him, “What do you really want to be doing in 5 or 10 years?” And “It’s very clear, I want to be entrepreneur.”

And so it has sort of the same quality as “I want to rich, I want to be famous.” And I think a better mindset for these businesses is that there are some very important problems that you’re trying to solve. And it turns out that a new business is a form in which you solve that problem. You could also solve it perhaps in a large corporation, if it’s not too dysfunctional, you could solve it in a government context, in a nonprofit context. But that it’s driven by important problems you’re trying to solve, rather than, say, having a line item on your résumé that says entrepreneur.

KRISTOL: And once you found it, then I guess as you say, the continuity is so important or the durability, I guess. And that you hadn’t – it’s amazing you did this – did you all have much experience with managing people, things. I mean, you had been a lawyer and you’d been a –

THIEL: In practice, in practice, most of the founders in Silicon Valley have shockingly little previous experience. The dynamic that tends to be very important is whether the initial teams work together really well. So there’s often some sort of pre-history where the people had known each other, had worked together for a while. That was certainly the case at PayPal.

There’s – but there is – there is sort of this very strange element where talent often seems to beat experience, that when people are experienced, there are certain things they know better but they’ve also learned many mistaken lessons. They’ve developed a lot of anti-theories, e.g., theories on why things can’t be done, why certain ways can’t be done.

When we started PayPal, we were told that the fraud problem was going to be overwhelming and we sort of ignored that to advice. It turned out to be very big but then you could sort of get on top of it, whereas someone who had come from a traditional payments background would have said something like this was never going to work and you would not even try.

So I do think there’s an element – an element of that that’s very big. I do think, you know, I think the founding moments of these businesses are quite important because there’s a degree of freedom you have at a founding moment that you do not have later.

So you can say that the founders of the United States, the Constitutional Convention, had a degree of freedom deciding what to do that is not clear whether we have later. So you know, you have, Alaska has the same number of senators as California, even though California has 50 times as many people. And we can sort of debate whether that’s a feature or a bug. But it’s not going to change.

And I think something very – the – sort of the – a lot of the key DNA in these companies gets set very early. And so there is an extraordinary degree of freedom around these founding moments. And then sort of, and then years later, if you set it up well, it can last for a long time. If not, it probably won’t.

KRISTOL: I’m struck, in things I’ve been involved in which are the government and magazines, The Weekly Standard, that hiring the right people is the single most important thing, I think one of the very most important things one does. It’s not something that people focus on much, though. And often it’s almost considered the tenth most – you know, you focus much more on all kinds of other things. And then incidentally you have an interview, a job interview, which you put off until 5:30 in the afternoon because you’re so busy all day. I mean –

THIEL: Yeah, people pay lip service to talent being important but certainly, certainly it is probably the all-important thing in these early organizations. And what I think is quite different from say an academic context where it’s always individual talent and it actually – in a corporation or when you’re founding a new institution, it’s often very critical that people be able to work together reasonably well. And so it’s not good enough to have a group of brilliant, professional people who all intensely dislike each other. Maybe that can work in a law firm, but it probably does not work in something where you need sort of a very intense cooperation to do something.

I think the only, you know, the only rough analog is something like team sports. But that’s sort of you know the rules are very set and that’s sort of a much more controlled context. So getting a group of very talented people to work together is quite important. I think the prehistory ends up being –

A very important question I like to focus on is how long have the people known each other, how often have they worked together in the past? You know, if you decide to start a company with someone you met a week earlier, it would be like getting married to the first person you met at the slot machines in Las Vegas. You know, you might hit the jackpot but it’s probably a bad idea.

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