Peter Thiel,
Co-founder & CEO of PayPal

Cameo appearances: Darryl Woodson (USATF Track Coach), Natasha Hastings (Olympic champion), Umber Ahmad (Ma Zeh Dar Bakery), Brian Chesky (Airbnb)

Photography By Christopher Schodt


PayPal's Peter Thiel knows: Your goal isn’t to beat the competition — it’s to escape the competition altogether. Thiel is a former colleague, frequent co-investor and long-time intellectual sparring partner with Host Reid Hoffman. Enjoy the sparks. Transcript below.

"Achieve escape velocity. Grow so quickly it discourages anybody from even trying to compete."


"Don’t try to beat the competitors at their own game. You have to invent a new game—and master it."





Peter Thiel

Peter Thiel co-founded the revolutionary payment-processing site PayPal in 1999 and served as CEO until its $1.5 billion sale to eBay in 2002. He is chairman of Palantir Technologies, president of Clarium Capital, a partner of Founders Fund, chairman of Valar Ventures, and chair of Mithril Capital.


Darryl Woodson is an Olympic track coach whose clients have broken one world record, three national records, and won 10 national titles.


Natasha Hastings is a track-and-field athlete and two-time Olympic gold medalist.

“If you want to ask what kind of future is going to happen in a given company, you just ask the people—and they will tell you.”

- Peter Thiel


DARRYL WOODSON: Speed is not manufactured by how fast your feet move. It’s how much force per step.


REID HOFFMAN: That’s Darryl Woodson, a personal coach to some of the fastest runners in the world. He trains Olympic athletes who have broken 1 world record, 3 national records and claimed 10 national titles. Darryl doesn’t have a single training regimen for these Olympic medalists. Each runner has unique strengths. Some runners, for example, seem to explode off of the blocks. When Darryl sees that explosive quality, he lights a match under them.


WOODSON: It starts in your head. The brain controls 100% of your muscle capacity. Sometimes a runner’s brain functions a lot quicker than other people. It’s more natural for them to just be explosive….


HOFFMAN: Now if any runner embodies this “explosive” quality it’s Natasha Hastings. She’s a two-time Olympic gold medalist. They call her the “400 meter diva.” And when it comes to starting off of the blocks, she’s a powder keg.


NATASHA HASTINGS: My start is pretty explosive. I’ve even been asked, well why do you start so fast?


HOFFMAN: Natasha and Darryl spend a lot of time thinking about that first stride.


WOODSON: The most important aspect of acceleration are the first two steps.That’s what’s going to generate the greatest power output.


HASTINGS: One of the things I always think about is those first few seconds there’s an energy system that you’re never go ingto get back,so why waste it?


HOFFMAN: Now that’s the plan that gets Natasha ahead of the competition. It takes natural talent, and training — yes. But also a very specific mindset. And I would argue a similar plan applies to Silicon Valley’s fast – growing companies.They’re built for explosive starts.


Peter Thiel the founding CEO of PayPal and one of the Valley’s sharpest investors — won’t back a company if they don’t have this kind of potential. He has to believe they cannot only get a head of the competition, but break free from it entirely.


PETER THIEL:​ ​I do think that for a really valuable business you have at some point try to achieve escape from the competition, And so if you, if you could scale incredibly fast, on the one hand you have to race really hard to scale fast, but the benefit is that you’re achieving escape velocity from the black hole that is, that is hyper competition.


HOFFMAN:​ ​I​ ​rarely​ ​agree​ ​with​ ​Peter.​ ​But​ ​in​ ​start-ups,​ ​we​ ​find​ ​common​ ​ground.​ ​I​ ​believe​ ​that if​ ​you​ ​want​ ​your​ ​company​ ​to​ ​scale,​ ​it’s​ ​not​ ​enough​ ​to​ ​beat​ ​the​ ​competition.​ ​You​ ​have​ ​to break​ ​free​ ​of​ ​the​ ​competition​ ​altogether.




I’m​ ​Reid​ ​Hoffman,​ ​co-founder​ ​of​ ​LinkedIn,​ ​investing​ partner​ ​at​ ​Greylock,​ ​and​ ​your​ ​host.​ ​ ​I believe​ ​if​ ​you​ ​want​ ​your​ ​company​ ​to​ ​scale,​ ​your​ ​goal​ ​is​ ​not​ ​to​ ​beat​ ​the​ ​competition.​ ​Your​ ​goal is​ ​to​ ​break​ ​free​ ​of​ ​competition​ ​entirely.


In​ ​an​ ​ideal​ ​world,​ ​you​ ​do​ ​this​ ​by​ ​going​ ​where​ ​the​ ​competition​ ​isn’t.​ ​You​ ​invent​ ​your​ ​own game​ ​and​ ​master​ ​it.​ ​But​ ​to​ ​be​ ​clear,​ ​this​ ​ ​is​ ​more​ ​of​ ​an​ ​aspiration​ ​than​ ​a​ ​feasible​ ​goal.​ ​At​ ​best, you’ll​ ​get​ ​a​ ​grace​ ​period​ ​—​ ​a​ ​fleeting​ ​moment​ ​when​ ​no​ ​one​ ​believes​ ​in​ ​your​ ​idea.​ ​And​ ​as​ ​soon as​ ​your​ ​idea​ ​takes​ ​off,​ ​watch​ ​your​ ​back.​ ​Before​ ​long,​ ​you’ll​ ​find​ ​yourself​ ​where​ ​most businesses​ ​start:​ ​Facing​ ​competition.​ ​Your​ ​goal:​ ​To​ ​break​ free.


That’s​ ​what​ ​happened​ ​to​ ​PayPal,​ ​and​ ​I​ ​want​ ​to​ ​share​ that​ ​story​ ​with​ ​you,​ ​because​ ​it’s​ ​easy​ ​to say,​ ​“I’ll​ ​break​ ​free​ ​of​ ​the​ ​competition.”​ ​It’s​ ​quite​ ​another​ ​thing​ ​to​ ​be​ ​in​ ​the​ ​heat​ ​of​ ​the​ ​race, unaware​ ​of​ ​where​ ​your​ ​competition​ ​stands​ ​or​ ​whether​ ​you’re​ ​truly​ ​breaking​ ​ahead.


I​ ​wanted​ ​to​ ​talk​ ​to​ ​Peter​ ​Thiel​ ​about​ ​this,​ ​not​ ​only​ because​ ​he​ ​guided​ ​PayPal​ ​through​ ​those precarious​ ​early​ ​days​ ​—​ ​and​ ​went​ ​on​ ​to​ ​invest​ ​in​ ​company​ ​after​ ​company​ ​that​ ​embodied​ ​this idea.​ ​But​ ​also​ because​ ​he​ ​has​ ​some​ ​of​ ​the​ ​strongest​ ​opinions​ ​on​ ​competition​ ​—​ ​and,​ ​well,​ ​on almost​ ​anything​ ​—​ ​of​ ​anyone​ ​I​ ​know.


I​ ​first​ ​met​ ​Peter​ ​at​ ​Stanford,​ ​and​ ​right​ ​from​ ​the​ ​start,​ ​we​ ​clashed​ ​on​ ​a​ ​lot​ ​of​ ​issues.


THIEL: It’s always the joke we have Reid. Where you’re the socialist and I’m the capitalist.


HOFFMAN:​ ​We​ ​were​ ​fierce​ ​young​ ​men​ ​back​ then.​ ​I’m​ ​pretty​ ​sure​ ​he​ ​saw​ ​me​ ​as​ ​a​ ​bleeding heart​ ​pinko​ ​commie.​ ​And​ ​I’m​ ​absolutely​ ​certain​ ​I​ ​saw​ ​him​ ​as​ ​a​ ​libertarian​ ​wacko​ ​who​ ​seemed to​ have​ ​sprung​ ​out​ ​of​ ​Ayn​ ​Rand’s​ ​book,​ ​The​ ​Fountainhead​,​ ​fully​ ​formed.


Our​ ​first​ ​dorm​ ​room​ ​debate​ ​pretty​ ​much​ ​consisted​ ​of​ ​us​ ​saying​ ​to​ ​each​ ​other,​ ​“You​ ​can’t possibly​ ​believe​ ​that.”​ ​And​ ​that​ ​feisty​ ​exchange​ ​continued​ ​throughout​ ​college​ ​through​ ​the founding​ ​of​ PayPal​ ​—​ ​and​ ​yes,​ ​as​ ​some​ ​of​ ​you​ ​might​ ​know,​ ​through​ ​the​ ​2016​ ​presidential campaign.


I’ve​ ​known​ ​Peter​ ​for​ ​three​ ​decades,​ ​and​ ​I​ ​respect​ ​him​ ​deeply.​ ​And​ ​although​ ​we​ ​often​ ​spar, he’s​ ​right​ ​more​ ​often​ ​than​ ​I​ ​find​ ​comfortable.​ ​But​ ​I​ ​still​ ​can’t​ ​predict​ ​where​ ​he’ll​ ​land​ ​on​ ​many issues.​ ​Who​ ​would’ve​ ​imagined​ ​that​ ​my​ ​former​ ​PayPal​ ​colleague​ ​would​ ​back​ ​Donald​ ​Trump? Not​ ​me.​ ​Yet​ ​there​ ​he​ ​was​ ​at​ ​the​ ​Republican​ ​National​ ​Convention.​ ​Go​ ​figure.


I​ ​met​ ​Peter​ ​in​ ​August,​ ​and​ ​we​ ​sidestepped​ ​our​ ​political​ ​differences.​ If​ ​you​ ​really​ ​want​ ​to​ ​hear us​ ​duke​ ​it​ ​out,​ ​tweet​ ​us​ ​at​ ​Masters​ ​of​ ​Scale.​ ​We​ ​just​ ​might​ ​be​ ​able​ ​to​ ​arrange​ ​a​ ​follow-up interview.​ ​Peter,​ ​consider​ ​yourself​ ​on​ ​notice.


On​ ​today’s​ ​show,​ ​we’re​ ​going​ ​to​ ​shelve​ ​our​ ​political​ ​disagreements​ ​and​ ​consider​ ​one​ ​rare point​ ​of​ ​consensus​ ​— that​ ​the​ ​whole​ ​point​ ​of​ ​scaling​ ​fast​ ​is​ ​to​ ​ESCAPE​ ​your​ ​competition.


But​ ​Peter​ ​didn’t​ ​always​ ​try​ ​to​ ​avoid​ ​competition.​ ​For​ ​most​ ​of​ ​his​ ​life,​ ​he​ ​THRIVED​ ​on competition​.​ ​As​ ​he​ ​himself​ ​will​ ​tell​ ​you.


THIEL:​ ​“I was incredibly competitive in elementary school, junior high school, I remember in eighth grade one of my friends wrote in my eighth grade yearbook I know you’re going to get into Stanford four years from now. Four years later I went to Stanford and then I got into Stanford Law School. I ended up at a top law firm in Manhattan and it was. And it was sort of winning one competition after another.”


HOFFMAN:​ ​So​ ​Peter​ ​has​ ​always​ ​had​ ​this​ ​competitive​ ​streak.​ ​But​ ​another​ ​thing​ ​you​ ​should know​ ​about​ ​Peter​ ​is​ ​that​ ​he​ ​also​ ​has​ ​a​ ​very​ ​serious​ ​contrarian​ ​streak.​ ​And​ ​those​ ​two​ ​qualities don’t​ ​sit​ ​comfortably​ ​together.​ ​On​ ​the​ ​one​ ​hand,​ ​he​ ​wants​ ​to​ ​race​ ​against​ ​his​ ​peers.​ ​On​ ​the other​ ​hand,​ ​he​ ​wants​ ​to​ ​stand​ ​apart​ ​from​ ​them​ ​entirely.​ ​For​ ​most​ ​of​ ​his​ ​childhood,​ ​he​ ​let​ ​his competitive​ ​nature​ ​get​ ​the​ ​best​ ​of​ ​him.


He​ ​was​ ​a​ ​champion​ ​chess​ ​player.​ ​He​ ​trounced​ ​his​ ​peers​ ​in​ ​class​ ​rankings​ ​and​ ​LSAT​ ​scores.​ ​At last,​ ​he​ ​had​ ​reached​ ​his​ ​competitive​ ​nirvana:​ ​law​ ​school.​ ​And​ ​then?


THIEL: Well maybe I was attracted to law school because it was very precisely rank ordered. It was a thing you could go to next after undergraduate. And the paradoxical thing that, when you when you compete very intensely you do get to be very good at the thing you’re competing on. But then you often don’t ask enough critical questions about whether the thing you are competing on is really worth doing?


HOFFMAN:​ ​Good​ ​question.​ ​Peter​ ​didn’t​ ​have​ an​ ​answer,​ ​so​ ​he​ ​just​ ​kept​ ​competing.​ ​He clawed​ ​his​ ​way​ ​to​ ​the​ ​top​ ​of​ ​his​ ​class.​ ​Then​ ​he​ ​landed​ ​a​ ​job​ ​at​ ​a​ ​prestigious​ ​law​ ​firm.


All​ ​the​ ​while,​ ​that​ ​question​ ​—​ ​is​ ​this​ ​worth​ ​it?​ ​— still​ ​gnawed​ ​at​ ​him.​ ​And​ ​as​ ​his​ ​career reached​ ​new​ ​heights,​ ​he​ ​had​ ​a​ ​sinking​ ​feeling:​ ​He​ ​wasn’t​ ​winning.​ ​In​ ​fact,​ ​he​ ​felt​ ​trapped.


THIEL:​ ​“It was a very strange place, the law firms, from the outside it was a place where everybody wanted to get in, on the inside it was a place where everybody wanted to get out. When I left after seven months and three days one of the people down the hall from me said he had no idea anyone could leave this quickly and it was possible to escape from Alcatraz.”


HOFFMAN:​ ​All​ ​that​ ​work…​ ​All​ ​that​ ​winning​ ​had​ ​landed​ ​Peter​ ​in​ ​a​ ​prison​ ​of​ ​his​ ​own​ ​making. And​ ​like​ ​any​ ​inmate,​ ​he​ ​began​ ​to​ ​question​ ​his​ ​life​ ​choices.​ ​Then​ ​it​ ​dawned​ ​on​ ​him,​ ​the​ ​root​ ​of his​ ​problem​ ​was​ ​an​ ​obsession​ ​with​ ​winning.​ ​Who​ ​cares​ ​how​ ​anyone​ ​measures​ ​up​ ​to​ ​their peers?​ ​Competition,​ ​he​ ​decided,​ ​is​ ​for​ ​losers​.


I’m​ ​not​ ​overstating​ ​his​ ​argument.​ ​He​ ​really​ ​says​ ​that.


Google​ ​the​ ​phrase​ ​“competition​ ​is​ ​for​ ​losers,”​ ​and​ ​the​ ​top​ ​results​ ​all​ ​point​ ​back​ ​to​ ​Peter​ ​Thiel. There’s​ ​his​ ​Wall​ ​Street​ ​Journal​ ​op-ed,​ ​headlined:​ ​Competition​ ​is​ ​for​ ​losers.​ ​He​ ​said​ ​it​ ​to​ ​me too.


THIEL:​ “By the time I was at Sullivan and Cromwell, about five years before we started Pay-Pal, I came to question conventional competition. I thought that a lot of the conventional ways people competed resulted in too many people doing conventional things, and then you end up in very competitive dynamics and then even when you win it’s not quite worth it. So you might get a slightly better paying job than you otherwise would but you sort of have to sell your soul. And so that doesn’t seem like a very good you know economic or moral tradeoff.” And the kinds of things like that that happen with conventional competition.


By the time we started PayPal, I was focused on: How do we compete very intensely maybe to avoid competition altogether.


HOFFMAN:​ ​I​ ​often​ ​disagree​ ​with​ ​Peter,​ ​but​ ​I​ ​have​ ​to​ ​say,​ ​on​ ​this​ ​point,​ ​he’s​ ​spot​ ​on. Competition​ ​will​ ​make​ ​you,​ ​at​ ​best,​ ​a​ ​winner​ ​in​ ​a​ ​losing​ ​game.​ ​If​ ​you​ ​really​ ​want​ ​to​ ​scale​ ​a business,​ ​escape​ ​the​ ​competition.​ ​Change​ ​the​ ​playing​ ​field.​ ​Hang​ ​up​ ​your​ ​jersey.​ ​This​ ​applies to​ ​businesses​ ​as​ ​well​ ​as​ ​individuals.​ ​Don’t​ ​try​ ​to​ ​beat​ ​competitors​ ​at​ ​their​ ​own​ ​game.​ ​You have​ ​to​ ​invent​ ​a​ ​new​ ​game​ ​—​ ​and​ ​master​ ​it.


And​ ​that’s​ ​precisely​ ​what​ ​drew​ ​Peter​ ​to​ ​the​ ​idea​ ​of​ ​online​ ​payments.​ ​It​ ​was​ ​1998.​ ​Everyone wanted​ ​to​ ​sell​ ​stuff​ ​online,​ ​but​ ​no​ ​one​ ​had​ ​an​ ​easy​ ​way​ ​to​ ​PAY​ ​for​ ​that​ ​stuff.​ ​Peter​ ​saw​ ​an opportunity​ ​to​ ​essentially​ ​invent​ ​the​ ​internet’s​ ​cash​ ​registers.


THIEL: by the time we started Pay-Pal when I was you know 30, 31 in I was focused on doing something entrepreneurial, doing something that strictly speaking other people were not doing.


There’s this question about financial cryptography. Could you start a new currency? Could you start some new secure financial product? And so that was sort of the intellectual set of ideas that we were you know very interested in exploring. We were also very focused on getting to scale as quickly as possible. How do you get it to grow by word of mouth. Reid you and I had many sort of late night conversations about virality and exponential marketing.


HOFFMAN:​ ​After​ ​talking​ ​with​ ​Peter,​ ​I​ ​realized​ ​that​ ​his​ ​memory​ ​of​ ​PayPal’s​ ​early, experimental​ ​days​ ​was​ ​of​ ​a​ ​solitary,​ ​heroic​ ​struggle​ ​to​ ​make​ ​online​ ​payments​ ​a​ ​reality.​ ​ ​But the​ ​fact​ ​is:​ ​We​ ​weren’t​ ​alone​ ​for​ ​long.


EBay​ ​had​ ​emerged​ ​as​ ​the​ ​leading​ ​online​ ​marketplace​ ​for​ ​selling,​ ​well,​ ​everything.​ ​ ​Their power-sellers​ ​flocked​ ​to​ ​PayPal,​ ​and​ ​they​ ​caught​ ​us​ ​by​ ​surprise.​ ​ ​Who​ ​were​ ​these​ ​users?​ ​ ​Not the​ ​ones​ ​we​ ​imagined.


THIEL: The way I remember it was the initial reaction was quite negative. It’s like wow this is like the junkiest stuff being sold on the Internet and it’s so bad for our brand to be affiliated with all of this.


HOFFMAN: Entrepreneurs: ​Take​ ​note!​ ​Your​ ​first​ ​users​ ​are​ ​often​ ​not​ ​at​ ​ALL​ ​what​ ​you imagined.​ ​They’re​ ​often​ ​less​ ​glamorous​ ​and​ ​fewer​ ​in​ ​number.​ ​Don’t​ ​be​ ​too​ ​quick​ ​to​ ​judge them.​ ​They​ ​may​ ​prove​ ​more​ ​valuable​ ​than​ ​they​ ​initially​ ​seem.​ ​ ​And​ ​Peter​ ​changed​ ​his​ ​tune​ ​on the​ ​EBay​ ​sellers​ ​very​ ​quickly.


THIEL:​ In retrospect it turned out to be this incredibly tight community, a new use case where the alternatives were much worse, the alternatives were typically using a check which would take seven days to clear. And because people were both buyers and sellers on ebay it had a natural sort of fluidity to the whole thing where the money went from one Paypal user to another and stayed inside the system. And it turned out to be quite powerful, I’d say within three to four months of it being used on ebay, we were probably at something like 30 percent of the ebay power sellers were using Paypal.


HOFFMAN:​ ​Ebay​ ​executives​ ​were​ ​miffed​ ​to​ ​see​ ​us​ ​ambushing​ ​their​ ​checkout​ ​counter. Granted,​ ​we​ ​made​ ​their​ ​users​ ​happy​ ​and​ ​accelerated​ ​the​ ​sales​ ​cycle​ ​on​ ​the​ ​site.​ ​But,​ ​who were​ ​we​ ​to​ ​siphon​ ​off​ ​Ebay’s​ ​business?​ ​So​ ​began​ ​a​ ​very​ ​strange​ ​dance​ ​between​ ​frenemies.


It​ ​kind​ ​of​ ​reminds​ ​me​ ​of​ ​those​ ​unusual​ ​animal​ ​pairings​ ​that​ ​you​ ​see​ ​on​ ​a​ ​nature​ ​show.​ ​It’s​ ​an old​ ​story.​ ​I​ ​can​ ​almost​ ​hear​ ​David​ ​Attenborough​ ​narrating​ ​the​ ​scene.


NATURE DOCUMENTARY VOICE:​ ​The remora eel fastens onto the Whale Shark by means of a disc-shaped organ on the top of its head. Once secured to its host, the eel may hitch a ride across the vastness of the Pacific Ocean.


HOFFMAN:​ ​Incidentally,​ ​scientists​ ​are​ ​still​ ​debating​ ​whether​ ​the​ ​remora​ ​eel​ ​has​ ​a​ ​parasitic, harmless​ ​or​ ​beneficial​ ​relationship​ ​with​ ​its​ ​host.​ ​That​ ​pretty​ ​much​ ​sums​ ​up​ ​Paypal’s relationship​ ​with​ ​Ebay​ ​in​ ​the​ ​early​ ​days.​ ​In​ ​the​ ​long-run,​ ​though,​ ​Peter​ ​saw​ ​trouble.


THIEL: That was a deeply uncomfortable place to be. So I mean it worked but it was uncomfortable because we were the cash registers and you had a different company that ran the store and they were trying to figure out how to get their cash register machines to work. And if they ever figured it out we’d be in real trouble.


HOFFMAN:​ ​We​ ​knew​ ​we​ ​were​ ​in​ ​trouble​ ​when​ ​EBay​ ​bought​ ​a​ ​rival​ ​online​ ​payment​ ​service called​ ​Billpoint​ ​and​ ​directly​ ​integrated​ ​it​ ​into​ ​EBay.​ ​So​ ​much​ ​for​ ​Peter’s​ ​grand​ ​escape​ ​from competition.​ ​Things​ ​were​ ​getting​ ​heated.​ ​But​ ​when​ ​I​ ​remind​ ​Peter​ ​of​ ​this​ ​massive​ ​threat?​ ​To my​ ​surprise,​ ​he​ ​shrugs​ ​it​ ​off.


THIEL: We were certainly not alarmed by eBay initially because they did not have launched the bill point product that got launched after we got started. They bought the company but they haven’t done much with it yet.


HOFFMAN:​ ​I​ ​remember​ ​it​ ​a​ ​bit​ ​differently.​ ​Ebay​ ​scared​ ​the​ ​dickens​ ​out​ ​of​ ​us​ ​— and​ ​yes,​ ​even Peter,​ ​because​ ​I​ ​distinctly​ ​recall​ ​him​ ​asking​ ​me​ ​to​ ​sell​ ​the​ ​company​ ​to​ ​anyone​ ​who​ ​would​ ​buy it​ ​for​ ​$600​ ​million.


HOFFMAN: I remember our conversations. You were actually at that time fairly concerned about you know people think we have this really valuable thing but we haven’t established it yet. It’s a house of cards right now. This whole thing could blow over. There was a six to 12 month period where you had me essentially seeing if anyone would buy the company.


THIEL: Right.


HOFFMAN: And so it’s like will anyone buy this?


THIEL: Right.


HOFFMAN: And you know there’s a funny untold story around you know if Verisign had upped their bid by $50 million, they may have actually owned Paypal right?


THIEL: Yes. It’s hard to say what would have happened but certainly, certainly there was a lot of uncertainty around all these things.


You know the name was a good name. It was a friendly name. You know how can you go after poor little Pay-Pal? Just this friendly little company that was helping customers.


Well the remarkable thing in retrospect was how robust it turned out to be. And so maybe, you know maybe the kind of countervailing advice I would try to give would be that you should try to always do something where there’s an intense use case, where the customers really like what you’re doing, and that will protect you up to a certain point.


HOFFMAN:​ ​Peter​ ​makes​ ​a​ ​fascinating​ ​point​ ​here.​ ​On​ ​the​ ​one​ ​hand,​ ​he​ ​says​ ​avoid competition.​ ​On​ ​the​ ​other​ ​hand,​ ​he​ ​seems​ ​to​ ​concede​ ​that​ ​competition​ ​is​ ​tolerable,​ ​so​ ​long as​ ​your​ ​customers​ ​have​ ​an​ ​intense​ ​attachment​ ​to​ ​your​ ​product.​ ​And​ ​it​ ​may​ ​sound​ ​like​ ​he’s contradicting​ ​himself.​ ​He​ ​isn’t.


Here’s​ ​how​ ​he​ ​sees​ ​it:


THIEL: There are companies that are purely competitive, they do not make any money — think a restaurant. You never want to be in the restaurant business.


HOFFMAN:​ ​I’m​ ​sure​ ​right​ ​now​ ​you’re​ ​thinking​ ​of​ ​a​ ​restaurant​ ​that​ ​does​ ​make​ ​money. Suspend​ ​your​ ​disbelief​ ​for​ ​a​ ​moment​ ​and​ ​hear​ ​him​ ​out.


THIEL: And then there are businesses that do not compete they are monopolies and they do very well. And even though this is not the way people want to talk about it on the inside, you always want to have a monopoly on the inside.


HOFFMAN:​ ​You’re​ ​probably​ ​thinking,​ ​“Don’t ​we​ ​regulate​ ​monopolies​ ​out​ ​of​ ​existence?”​ ​Well, yes,​ ​the​ ​unscrupulous​ ​kind.​ ​Most​ ​people​ ​associate​ ​monopolies​ ​with​ ​the​ ​robber​ ​barons​ ​of​ ​the late​ ​19th​ ​century.​ ​You​ ​know​ ​the​ ​type​ ​— wearing​ ​a​ ​top​ ​hat,​ ​chomping​ ​on​ ​a​ ​cigar​ ​and​ ​lounging on​ ​a​ ​pile​ ​of​ ​moneybags.​ ​Peter,​ ​on​ ​the​ ​other​ ​hand,​ ​sees​ ​monopolies​ ​in​ ​the​ ​here​ ​and​ ​now. They’re​ ​camouflaged​ ​as​ ​competitors.​ ​Look​ ​closer,​ ​he​ ​says​ ​and​ ​you’ll​ ​find​ ​even​ ​the​ ​most​ ​classic examples​ ​of​ ​competition​ ​are​ ​not​ ​what​ ​they​ ​seem.


THIEL: You could say that Coke and Pepsi compete very intensely, on the other hand you could say that there’s somehow quite differentiated from a brand so that in practice different people prefer Coke or prefer Pepsi and they’re actually is a much smaller set of people who view them as interchangeable products. And so.I think measuring how much actual competition is happening is not always a straightforward thing to do.


Because just as people want to have monopolies they want to also downplay them, and so they will suggest that they’re facing enormous amounts of competition everywhere whether or not that happens to be true.


HOFFMAN:​ ​Once​ ​you​ ​think​ ​of​ ​a​ ​monopoly​ ​as​ ​simply​ ​an​ ​absence​ ​of​ ​competition,​ ​you​ ​might start​ ​noticing​ ​a​ ​few​ ​yourself.​ ​What’s​ ​a​ ​patent,​ ​if​ ​not​ ​a​ ​monopoly,​ ​backed​ ​by​ ​the​ ​government?


And​ ​what​ ​about​ ​those​ ​companies​ ​that​ ​monopolize​ ​a​ ​market​ ​by​ ​pursuing​ ​a​ ​wildly​ ​original idea?​ ​Elon​ ​Musk’s​ ​SpaceX​ ​is​ ​pretty​ ​much​ ​the​ ​only​ ​company​ ​on​ ​a​ ​mission​ ​to​ ​send​ ​people​ ​to Mars.​ ​Anyone​ ​want​ ​to​ ​take​ ​him​ ​on?​ ​No?​ ​Well,​ ​that’s​ ​precisely​ ​what​ ​spurs​ ​Elon​ ​onward​ ​and upward.


You​ ​have​ ​to​ ​invent​ ​a​ ​new​ ​game.​ ​Seek​ ​out​ ​a​ ​fresh,​ ​new​ ​field. But​ ​you​ ​don’t​ ​have​ ​to​ ​go​ ​to​ ​Mars​ ​to​ ​discover​ ​new​ ​terrain.​ ​ ​We​ ​sent​ ​our​ ​producer, Dan​ ​Kedmey,​ ​to​ ​perhaps​ ​the​ ​most​ ​competitive​ ​landscape​ ​on​ ​earth​ ​—​ ​the​ ​bakeries​ ​of Manhattan’s​ ​West​ ​Village​ ​—​ ​to​ ​see​ ​how​ ​a​ ​baker​ ​breaks​ ​free​ ​of​ ​the​ ​pack.


UMBER AHMAD: I’m actually trying to get into a remarkably crowded market. I mean there is– if people will look at this and think that I’m crazy, you can’t swing a dead cat without hitting a bakery.


HOFFMAN:​ ​That’s​ ​Umber​ ​Ahmad,​ ​founder​ ​of​ ​Ma​ ​Zeh​ ​Dar​ ​Bakery.​ ​You​ ​can​ ​swing​ ​a​ ​dead​ ​cat from​ ​her​ ​front​ ​door​ ​and​ ​hit​ ​Patisserie​ ​Claude,​ ​with​ ​its​ ​legendary​ ​croissants,​ ​or​ ​Dominique Ansel​ ​Kitchen,​ ​where​ ​the​ ​“cronut”​ ​—​ ​that’s​ ​half​ ​croissant,​ ​half​ ​donut​ ​—​ ​was​ ​born. Competition​ ​doesn’t​ ​get​ ​tighter​ ​than​ ​that.


AHMAD: And so I said “all right, well there has to be a point of differentiation.” If if there isn’t an opportunity in a crowded market then Ford and GM and Toyota and Mercedes and Tesla and all these other people wouldn’t exist in the same market. There is opportunity, there is always opportunity, and I believe that very strongly. I don’t believe that you have to be the singular owner of a market in order to be successful.


HOFFMAN:​ ​Umber​ ​knew​ ​what​ ​she​ ​was​ ​up ​against.​ ​She’s​ ​a​ ​former​ ​Wall​ ​Street​ ​banker,​ ​and​ ​she knows​ ​how​ ​to​ ​hedge​ ​her​ ​bets.​ ​So​ ​she​ ​started​ ​selling​ ​baked​ ​goods​ ​online.


AHMAD: I said “how do I minimize my costs,” and I rather than build a million dollar space and build a huge kitchen and all these things and hope someone will show up, I said “let me figure out if there’s even even traction here.” And so I started with an online business.


HOFFMAN:​ ​Once​ ​she​ ​had​ ​repeat​ ​business​ ​— she​ ​gained​ ​a​ ​toehold​ ​in​ ​a​ ​coffee​ ​shop.


AHMAD: And I said “you know where are the people that I care about, where are my customer shopping today? Where are my customers living? And then I would go– I went to those brands and I said “I want to work with you. And one of the first brands was Intelligentsia Coffee. So that was my first wholesale contract.


HOFFMAN:​ ​And​ ​then​ ​she​ ​took​ ​to​ ​the​ ​skies.


AHMAD: I was approached by JetBlue Airlines. So JetBlue had just introduced mint service. It’s like their first class. At the end of the contract we were packaging pastries for 22,000 passengers a month. So that for me was also a really great way to do two things: Test a large brand partnership, and also figure out what customer conversion looked like. If we could get customers to convert to us directly through a partnership like that. So I kept trying to find the partnerships which would gain me access to the customers that I wanted to become my own.


HOFFMAN:​ ​Along​ ​the​ ​way,​ ​she​ ​discovered​ ​her​ ​point​ ​of​ ​differentiation. ​ ​She​ ​would​ ​never make​ ​anything​ ​as​ ​newfangled​ ​as​ ​croissant​ ​crossed​ ​with​ ​a​ ​donut.​ ​Leave​ ​that​ ​to​ ​Dominique Ansel.​ ​Her​ ​bakery​ ​ever​ ​so​ ​subtly​ ​elevates​ ​the​ ​familiar​ ​flavors​ ​from​ ​childhood.


AHMAD: What we really want to do is we want to have whispers of new things in sort of the pillow of something that is familiar. A great example of that is our spinach and feta ham pie. And so it’s kind of like our version of a grown up pop tart but it’s savory and it’s made with sauteed spinach and Greek feta. But then I say season it with za’atar. And so za’atar is a spice that is used very commonly in the Middle East and so it’s somewhat unexpected when you bite into it because you’re not sure, you’re like what is that flavor? And then you think “gosh, it elevates this and it kind of intensifies the experience of the pastry in a way that I wasn’t expecting.”


Some of my favorite comments from customers are “this reminds me of my grandmother” or you know “this thing that I grew up with” or “I was on this vacation and you’re taking me back and you’re helping me sort of remember and experience that” and for me that’s that’s my dream because what happens then is I’ve now created a link and I create a connection with you, and I’ve got you.


HOFFMAN:​ ​She’s​ ​got​ ​you​ ​— as​ ​much​ ​as​ ​a​ ​baker​ ​can​ ​capture​ ​a​ ​customer.​ ​At​ ​the​ ​very​ ​least,​ ​she can​ ​go​ ​on​ ​scaling​ ​her​ ​business,​ ​even​ ​as​ ​the​ ​baker​ ​next​ ​door​ ​invents​ ​the​ ​hottest​ ​new​ ​thing since​ ​sliced​ ​bread.​ ​For​ ​her,​ ​the​ ​goal​ ​isn’t​ ​so​ ​much​ ​to​ ​break​ ​free​ ​of​ ​the​ ​competition,​ ​but​ ​to differentiate​ ​enough​ ​that​ ​she​ ​carves​ ​out​ ​her​ ​own​ mini-monopoly.​ ​How​ ​much​ ​do​ ​you​ ​have​ ​to differentiate?​ ​It​ ​depends.​ ​On​ ​the​ ​size​ ​of​ ​the​ ​market,​ ​the​ ​speed​ ​of​ ​your​ ​competition​ ​and​ ​your own​ aspirations​ ​for​ ​scale.​ ​How​ ​big​ ​do​ ​you​ ​want​ ​to​ ​be?


Umber​ ​knows​ ​exactly​ ​who​ ​her​ ​competitors​ ​are.​ ​All​ ​she​ ​has​ ​to​ ​do​ ​is​ ​look​ ​at​ ​the​ ​storefronts around​ ​her.​ ​At​ ​PayPal,​ ​it​ ​wasn’t​ ​so​ ​cut​ ​and​ ​dry.


Ebay​ ​appeared​ ​to​ ​be​ ​our​ ​true​ ​competitor.​ ​And​ ​as​ ​a​ ​startup​ ​founder,​ ​you’ll​ ​often​ ​hear potential​ ​investors​ ​asking,​ ​isn’t​ ​some​ ​gargantuan​ ​company​ ​on​ ​the​ ​verge​ ​of​ ​doing​ ​whatever​ ​it is​ ​that​ ​you’re​ ​doing?​ ​The​ ​presumption​ ​being​ ​that​ ​with​ ​all​ ​of​ ​their​ ​money​ ​and​ ​talent,​ ​they’ll squash​ ​you.


But​ ​the​ ​reality​ ​is,​ ​your​ ​most​ ​dangerous​ ​competitors​ ​are​ ​rarely​ ​the​ ​big​ ​guys.​ ​The​ ​fact​ ​is​ ​the​ ​big guys,​ ​like​ ​Ebay,​ ​are​ ​hesitant​ ​to​ ​storm​ ​the​ ​field​ ​and​ ​fumble​ ​alongside​ ​of​ ​you.​ ​A​ ​fumble​ ​for PayPal​ ​risked​ ​blowback​ ​from​ ​a​ ​few​ ​thousand​ ​users.​ ​A​ ​fumble​ ​for​ ​Ebay,​ ​however,​ ​could​ ​anger users​ ​in​ ​the​ ​millions​ ​and​ ​draw​ ​the​ ​watchful​ ​eye​ ​of​ ​government​ ​regulators.​ ​And​ ​even​ ​if​ ​Ebay were​ ​willing​ ​to​ ​take​ ​those​ ​risks,​ ​why​ ​would​ ​they​ ​burn​ ​so​ ​much​ ​creative​ ​energy​ ​on​ ​the​ ​online equivalent​ ​of​ ​a​ ​cash​ ​register?​ ​Think​ ​about​ ​it​ ​—​ ​they’re​ ​building​ ​the​ ​store​ ​—​ ​a​ ​global marketplace​ ​for​ ​online​ ​commerce.​ ​So​ ​what​ ​if​ ​a​ ​little​ ​company​ ​is​ ​hijacking​ ​the​ ​checkout counter?


So​ ​while​ ​we​ ​were​ ​wringing​ ​our​ ​hands​ ​over​ ​Ebay’s​ ​new​ ​payment​ ​system,​ ​we​ ​also​ ​were encouraged​ ​to​ ​see​ ​that​ ​they​ ​took​ ​more​ ​than​ ​a​ ​year​ ​to​ ​roll​ ​out​ ​Billpoint. And​ ​now​ ​we​ ​get​ ​to​ ​one​ ​of​ ​Peter’s​ ​key​ ​ideas​ ​on​ ​escaping​ ​competition.​ ​It’s​ ​the​ ​central​ ​idea​ ​that drove​ ​not​ ​just​ ​ ​PayPal’s​ ​success,​ ​but​ ​nearly​ ​every​ ​successful​ ​scale​ ​company.


THIEL: We needed to achieve escape velocity, we needed to grow so quickly that it would discourage anybody from even trying to compete with us. And so if you, if you could scale incredibly fast, on the one hand you have to race really hard to scale fast, but then the benefit if you do it is that you’re sort of achieving escape velocity from the black hole that is, that is hyper competition.


You could start on something that’s very competitive, but then over time get to a place that’s less and less competitive. So you say Amazon was incredibly competitive. But over time it’s becoming more and more of the retail monopoly. And that’s why people value the company so highly because even though it’s still not making that much in profits, when they look into the future they envision Amazon having destroyed all other retail stores and making all the profits.


HOFFMAN:​ Now​ ​this​ ​is​ ​a​ ​big​ ​idea:​ ​escape​ ​velocity.​ How​ ​do​ ​you​ ​know​ ​you’re​ ​hitting​ ​it?​ ​Peter has​ ​a​ ​formula.


THIEL: You know I used to have this equation on the Pay-Pal white boards, u sub-zero equals u sub.


So u sub T equals u Sub-Zero, e to the X T, where u Sub-Zero is the initial users, u sub T is the users at time T and e to the X T is sort of the exponential growth factor, and X is sort of, if you get X up the exponent rises even more quickly.


HOFFMAN:​ Yes,​ ​he​ ​did​ ​just​ ​recite​ ​that​ ​equation​ ​off​ ​of​ ​the​ ​top​ ​of​ ​his​ ​head.​ You​ ​don’t​ ​have​ ​to understand​ ​any​ ​of​ ​it.​ ​The​ ​equation​ ​simply​ ​helps​ ​Peter​ ​detect​ ​whether​ ​users​ ​are​ ​growing exponentially.​ ​It​ ​comes​ ​down​ ​to​ ​what​ ​Peter​ ​calls​ ​“the​ ​X​ ​factor.”​ ​Translation:​ ​Watch​ ​for exponential​ ​growth.


THIEL: The X Factor in the exponent was growing at about something like 7 percent a day. And even when you start with only 24 people that, the compounding dominates.And so you go from 24 to 1000 by mid-November. We were up to thirteen thousand by end of December 99. By early February of 2000 we were up to 100,000. By mid April of 2000 we were up to a million.


HOFFMAN:​ ​If​ ​you’re​ ​wondering​ ​how​ ​Peter​ ​remembers​ ​every​ ​date​ ​and​ ​every​ ​metric​ ​from​ ​17 years​ ​ago,​ ​your​ ​guess​ ​is​ ​as​ ​good​ ​as​ ​mine.


Maybe​ ​it’s​ ​because​ ​the​ ​daily​ ​movement​ ​of​ ​these​ ​numbers​ ​hinted​ ​at​ ​a​ ​radically​ ​altered​ ​future for​ ​our​ ​company.​ ​Exponential​ ​growth​ ​is​ ​simple​ ​to​ ​grasp,​ ​but​ ​really​ ​hard​ ​to​ ​believe​ ​in.​ ​The sooner​ ​you​ ​can​ ​detect​ ​it,​ ​the​ ​better​ ​you’ll​ ​understand​ ​whether​ ​you’re​ ​hitting​ ​escape​ ​velocity.


Think​ ​about​ ​the​ ​moment​ ​Peter​ ​detected​ ​our​ ​blistering​ ​growth​ ​rate.​ ​We​ ​had​ ​only​ ​24​ ​users. Every​ ​day​ ​they​ ​grew​ ​by​ ​7%.​ ​If​ ​the​ ​trend​ ​held,​ ​we​ ​could​ ​break​ ​free​ ​of​ ​every​ ​competitor​ ​in​ ​the span​ ​of​ ​a​ ​few​ ​years.​ ​In​ ​short,​ ​eat​ ​dust,​ ​Ebay.


THIEL: There’s as you know there’s an Einstein line that compound interest, it may be apocryphal or maybe Einstein didn’t actually say it, but it’s to the effect that compound interest is the most powerful force in the universe. And so there was this question how do we get some sort of powerful compounding to work. And we concluded that you know linking money with email and maybe giving people some money to sort of accelerate the process would really get it started. It was, it made for a very crazy ride.


HOFFMAN:​ ​This​ ​underappreciated​ ​rule​ ​of​ compound​ ​growth​ ​is​ ​why​ ​Silicon​ ​Valley​ ​seems​ ​to spawn​ ​so​ ​many​ ​overnight​ ​successes.​ ​It’s​ ​why​ ​investors​ ​pour​ ​hundreds​ ​of​ ​millions​ ​into​ ​a​ ​whisp of​ ​a​ ​company.​ ​So​ ​long​ ​as​ ​your​ ​startup​ ​is​ ​hitting​ ​escape​ ​velocity,​ ​anyone​ ​who​ ​understands​ ​the power​ ​of​ ​compound​ ​growth​ ​will​ ​keep​ ​funding​ ​you.​ And​ ​most​ ​of​ ​those​ ​investors​ ​tend​ ​to​ ​reside in​ ​Silicon​ ​Valley​ ​— because​ ​they’ve​ ​seen​ ​compound​ ​growth​ ​with​ ​their​ ​own​ ​eyes,​ ​and​ ​they
believe​ ​it.


Take,​ ​for​ ​instance,​ ​the​ ​time​ ​Peter​ ​and​ ​I​ ​invested​ ​in​ ​Facebook.​ ​We​ ​weren’t​ ​blown​ ​away​ ​by Mark​ ​Zuckerberg’s​ ​pitch,​ ​as​ ​Peter​ ​and​ ​I​ ​recalled.


HOFFMAN: I don’t know if you remember two features of that meeting which were pretty funny. One was Zuck was. He’s grown into his articulateness. He’s very articulate now. But back then there was a lot of staring at the desk not saying anything. So like what are the right words to say? Well Zuck didn’t say very much. The second part is remember he said well if you don’t like this one I have this other business wire hog. Do you remember the, do you remember the peer to peer file distribution?




HOFFMAN: We were like what, get rid of that.


THIEL: Not interested. No. Not interested.


HOFFMAN:​ ​So​ ​why​ ​did​ ​we​ ​invest?​ ​The​ ​“X​ ​factor.”​ ​Facebook​ ​expanded​ ​from​ ​one​ ​college campus​ ​to​ ​the​ ​next​ ​at​ ​a​ ​speed​ ​that​ ​was​ ​unprecedented​ ​among​ ​his​ ​competitors,​ ​like Friendster​ ​or​ ​MySpace.​ ​We​ ​still​ ​had​ ​a​ ​million​ ​questions​ ​about​ ​whether​ ​the​ ​network​ ​could ever​ ​break​ ​out​ ​of​ ​college​ ​campuses​ ​and​ ​spill​ ​into​ ​the​ ​wider​ ​world,​ ​but​ ​there​ ​was​ ​no​ ​denying that​ ​Facebook’s​ ​user​ ​engagement​ ​was​ ​unreal.​ ​If​ ​memory​ ​serves​ ​me​ ​right,​ ​when​ ​Facebook launched​ ​to​ ​a​ ​new​ ​college​ ​campus,​ ​within​ ​six​ ​weeks​ ​80​ ​percent​ ​of​ ​the​ ​students​ ​were essentially​ ​using​ ​the​ ​service.​ ​And​ ​by​ ​using​ ​the​ ​service​ ​I​ ​mean​ ​they​ ​checked​ ​it​ ​more​ ​than​ ​four times​ ​a​ ​day.​ ​That​ ​X​ ​factor​ ​mattered​ ​more​ ​to​ ​us​ ​than​ ​whatever​ ​Mark​ ​said​ ​—​ ​or​ ​didn’t​ ​say​ ​— about​ ​his​ ​business.


THIEL: The story I always tell is that people have this Shark Tank image of this and what did they say and what were the right magic words to use to get money. And I think the answer was much more that the two of us and maybe you more than me had done our homework for you know at least a year maybe a decade before that and were primed to invest. And that’s that’s actually what you what you want to be able to do.


HOFFMAN:​ ​Suppose​ ​you’ve​ ​hit​ ​escape​ ​velocity.​ ​User​ ​growth​ ​compounds​ ​by​ ​the​ ​day.​ ​Investors back​ ​you​ ​in​ ​round​ ​upon​ ​round​ ​of​ ​financing.​ ​You’ve​ ​mastered​ ​a​ ​game​ ​of​ ​your​ ​own​ ​making.


Now,​ ​the​ ​pressure​ ​is​ ​on​ ​to​ ​not​ ​just​ ​gain​ ​a​ ​competitive​ ​edge,​ ​but​ ​to​ ​escape​ ​the​ ​competition entirely.


The​ ​very​ ​same​ ​force​ ​that​ ​enabled​ ​you​ ​to​ ​secure​ ​huge​ ​sums​ ​of​ ​capital​ ​will​ ​compel​ ​you​ ​to spend​ ​at​ ​an​ ​alarming​ ​rate.​ ​If​ ​you​ ​want​ ​to​ ​break​ ​free​ ​of​ your​ ​competitors,​ ​get​ ​ready​ ​to​ ​burn money.


THIEL: We had a burn rate north of 10 million a month from March to September of 2000. That was pretty uncomfortable.


HOFFMAN:​ ​Yes,​ ​you​ ​heard​ ​that​ ​right.​ ​We​ spent​ ​upwards​ ​of​ ​$10​ ​million​ ​a​ ​month.​ ​You​ ​might think​ ​making​ ​sure​ ​your​ ​business​ ​has​ ​a​ ​steady​ ​stream​ ​of​ ​cash​ ​should​ ​be​ ​the​ ​priority.​ ​But​ ​when you​ ​face​ ​intense​ ​competition,​ ​you​ ​often​ ​have​ ​to​ ​SPEND​ ​to​ ​leave​ ​your​ ​competition​ ​far​ ​behind. And​ ​you​ ​might​ ​have​ ​to​ ​spend​ ​a​ ​LOT.


In​ ​Silicon​ ​Valley,​ ​competition​ ​can​ ​be​ ​downright​ ​lethal.​ ​Think​ ​all​ ​of​ ​the​ ​late​ ​90s​ ​search​ ​engines. Remember​ ​ask​ ​Jeeves?​ ​Hotbot?​ ​Infoseek?​ ​Direct​ ​hit?​ ​Then​ ​Google​ ​comes​ ​along​ ​and​ ​it​ ​was like,​ ​nope.​ ​That’s​ ​it.​ ​No​ ​soup​ ​for​ ​you.


And​ ​that’s​ ​just​ ​the​ ​nature​ ​of​ ​an​ ​internet​ ​or​ ​software​ ​business​ ​fueled​ ​by​ ​network​ ​effects.​ ​It’s like​ ​my​ ​favorite​ ​line​ ​from​ ​the​ ​movie​ ​Glengarry​ ​Glen​ ​Ross:​ ​First​ ​prize​ ​is​ ​a​ ​Cadillac​ ​Eldorado. Second​ ​prize​ ​is​ ​a​ ​set​ ​of​ ​steak​ ​knives.​ ​Third​ ​prize​ ​is​ ​you’re​ ​fired.​ ​Except​ ​in​ ​Silicon​ ​Valley,​ ​it’s usually​ ​first​ ​prize​ ​is​ ​the​ ​the​ ​whole​ ​Cadillac​ ​dealership​ ​and​ ​second​ ​prize​ ​is​ ​you’re​ ​a​ ​footnote​ ​in history.


And​ ​that’s​ ​one​ ​reason​ ​Peter​ ​agreed​ ​to​ ​do​ ​something​ ​that​ ​was​ ​pretty​ ​much​ ​unheard​ ​of​ ​at​ ​the time.​ ​Most​ ​companies​ ​paid​ ​advertisers​ to​ ​reach​ ​users.​ ​We​ ​took​ ​a​ ​more​ ​direct​ ​route.​ ​We​ ​paid the​ ​users​ ​themselves.​ ​If​ ​an​ ​existing​ ​PayPal​ ​customer​ ​referred​ ​our​ ​service​ ​to​ ​a​ ​friend,​ ​they each​ ​got​ ​$10​ ​online​ ​cash,​ ​on​ ​the​ ​house.​ ​Peter​ ​wasn’t​ ​exactly​ ​gung​ ​ho​ ​about​ ​this​ ​idea.


Here’s​ ​why​ ​he​ ​decided​ ​to​ ​pay​ ​users,​ ​despite​ ​his​ ​misgivings.


THIEL: We had to get to scale as quickly as possible and if we didn’t get to scale maybe somebody else would beat us and we wouldn’t achieve escape velocity and we didn’t know that there would still be a rapid organic growth even when we stopped giving customer, the referral bonuses for example. And then similarly I also thought that we either could get to scale or figure out our business model. And so we should we should get to scale and then see if the business model worked, rather than see the business model worked and then scale it.


HOFFMAN: Yes. And burn rate and exponentiating, right, free credit…


THIEL: It was exponentiating, and then it was, certainly there were no revenues yet.


HOFFMAN: Because the funny thing is there’s a flip side which will go into a little bit of the positive exponential curve, but the negative exponential curve was one of the things that we were also…


THIEL: Well there were both. It was exponentially growing users and exponentially growing costs.


HOFFMAN:​ ​Now​ ​as​ ​an​ ​investor,​ ​if​ ​a​ ​founder​ ​told​ ​me​ ​they​ ​acquired​ ​users​ ​at​ ​$20​ ​a​ ​person,​ ​I’d ask​ ​some​ ​tough​ ​questions.​ ​A​ ​critical​ ​objective​ ​of​ ​a​ ​rapidly​ ​scaling​ ​business​ ​is​ ​to​ ​shrink​ ​the​ ​cost per​ ​user.​ ​You​ ​don’t​ ​want​ ​costs​ ​and​ ​revenue​ ​to​ ​rise​ ​together,​ ​and​ ​certainly​ ​not​ ​exponentially. That​ ​pushes​ ​your​ ​payday​ ​—​ ​that​ ​first​ ​prize​ ​Cadillac​ ​dealership​ ​—​ ​far,​ ​far​ ​into​ ​the​ ​future.​ ​Just how​ ​far​ ​off​ ​was​ ​PayPal’s​ ​payday?​ ​Once​ ​again,​ ​Peter​ ​crunched​ ​the​ ​numbers.


THIEL: You know one of the other calculations I did at Pay-Pal in March of 2001, we’d been business for 27 months of that time, was you do a discounted cash flow analysis. And it turns out you know all sorts of crazy different valuations you get to for the company. But the basic thing was the key variable was the terminal value. 80 percent of the value came from cash flows a decade or more in the future in 2011 and beyond. That’s like, how in the world do you think about that?


HOFFMAN:​ ​You​ ​can,​ ​in​ ​fact,​ ​think​ ​about​ ​this.​ ​Plenty​ ​of​ ​wildly​ ​successful​ ​businesses​ ​defer profitability​ ​for​ ​years.​ ​Amazon​ ​chugged​ ​along​ ​for​ ​roughly​ ​two​ ​decades,​ ​ignoring​ ​the occasional​ ​gripes​ ​from​ ​Wall​ ​Street​ ​that​ ​their​ ​whole​ ​operation​ ​seemed​ ​to​ ​be​ ​a​ ​money​ ​pit.​ ​In fact,​ ​they​ ​were​ ​breaking​ ​free​ ​of​ ​their​ ​competition​ ​in​ ​one​ ​retail​ ​sector​ ​after​ ​the​ ​next.


You’d​ ​think​ ​just​ ​as​ ​PayPal​ ​was​ ​hitting​ ​its​ ​stride,​ ​we’d​ ​also​ ​rest​ ​easy.​ ​I​ ​wish.​ ​At​ ​no​ ​point​ ​did​ ​we say​ ​to​ ​ourselves:​ ​“Relax,​ ​Peter.​ ​We’ve​ ​hit​ ​escape​ ​velocity.​ ​Sign​ ​that​ ​$10​ ​million​ ​check already.”​ ​In​ ​fact,​ ​we​ ​worried​ ​without​ ​end.


Our​ ​concern​ ​was​ ​grounded​ ​in​ ​a​ ​humbling​ ​truth:​ ​Escape​ ​velocity​ ​is​ ​not​ ​a​ ​fixed​ ​speed.​ ​It’s always​ ​and​ ​forever​ ​relative​ ​to​ ​your​ ​competitors.​ ​Your​ ​fastest​ ​competitor​ ​determines​ ​how hard​ ​you​ ​hit​ ​the​ ​gas.


Peter​ ​suspects​ ​the​ ​majority​ ​of​ ​Silicon​ ​Valley​ ​startups​ ​could​ ​gun​ ​it​ ​a​ ​little​ ​harder.


THIEL: Post-2000 the main post-mortem was that you shouldn’t scale too quickly. And you had to do it you know fast but not too fast. And if you think about businesses that have failed because they scaled too quickly, there have been very few posts 2000. I think there have been a few companies I can point to in the last one or two years, so perhaps as of 2015/2016 people finally got over the hangover from 99/2000. But if you if you think about scaling there’s obviously a lot of businesses that scale too slowly. And then you expect there would be a lot that are scaling too fast, and it’s striking how few have scaled too fast in the last 17 years.


HOFFMAN:​ ​So​ ​how​ ​quickly​ ​can​ ​a​ ​competitor​ ​sneak​ ​up​ ​on​ ​you?​ ​Brian​ ​Chesky,​ ​the​ ​co-founder and​ ​CEO​ ​of​ ​Airbnb,​ ​has​ ​a​ ​cautionary​ ​tale.​ ​Now​ ​Brian​ ​invented​ ​a​ ​wildly​ ​new​ ​game​ ​that​ ​was​ ​so strange,​ ​he​ ​really​ ​didn’t​ ​have​ ​a​ ​single​ ​competitor.


If​ ​you​ ​listen​ ​to​ ​Masters​ ​of​ ​Scale​ ​regularly,​ ​you​ ​may​ ​recall​ ​my​ ​initial​ ​response​ ​to​ ​Airbnb​ ​—​ ​and the​ ​idea​ ​that​ ​strangers​ ​would​ ​open​ ​their​ ​homes​ ​to​ ​other​ ​strangers.


HOFFMAN: “Oh, someone’s going to rent a couch or a room from someone else?” Who are the freaks on both sides of that transaction?


HOFFMAN:​ ​Bear​ ​in​ ​mind,​ ​this​ ​is​ ​coming​ ​from​ ​the​ ​guy​ ​who​ ​invested​ ​in​ ​Airbnb.​ ​Fortunately,​ ​the people​ ​on​ ​both​ ​sides​ ​of​ ​that​ ​transaction​ ​weren’t​ ​freaks​ ​at​ ​all.​ ​And​ ​now​ ​you​ ​can​ ​find​ ​them​ ​in just​ ​about​ ​every​ ​city​ ​around​ ​the​ ​globe.​ ​Brian​ ​and​ ​his​ ​co-founders​ ​had​ ​basically​ ​invented​ ​the Ebay​ ​for​ ​extra​ ​rooms​ ​and​ ​empty​ ​homes.​ ​And​ ​as​ ​the​ ​new​ ​mover​ ​in​ ​that​ ​space,​ ​Airbnb​ ​scaled fabulously.​ ​Brian​ ​thought​ ​he​ ​had​ ​hit​ ​escape​ ​velocity​ ​around​ ​the​ ​middle​ ​of​ ​2011.​ ​They​ ​had users.​ ​They​ ​had​ ​investors.​ ​They​ ​had​ ​no​ ​competitors.​ ​And​ ​then,​ ​as​ ​inevitably​ ​happens,​ ​they did.


BRIAN CHESKY: All of a sudden—we had gotten cloned. So we had to expand really fast internationally.


HOFFMAN:​ ​By​ ​“cloned,”​ ​Brian​ ​means​ ​websites​ ​had​ ​cropped​ ​up​ ​across​ ​Europe​ ​and​ ​Asia​ ​—​ ​that looked​ ​and​ ​worked​ ​a​ ​lot​ ​like​ ​Airbnb.​ ​ ​They​ ​were​ ​backed​ ​by​ ​a​ ​behemoth​ ​of​ ​a​ ​company,​ ​Rocket Internet,​ ​based​ ​in​ ​Germany.​ ​Brian​ ​recognized​ ​the​ ​competitive​ ​threat,​ ​thanks​ ​to​ ​some​ ​sage advice​ ​from​ ​Michael​ ​Moritz,​ ​a​ ​partner​ ​at​ ​the​ ​venture​ ​capital​ ​firm,​ ​Sequoia.​ ​Brian​ ​and​ ​his co-founders​ ​invited​ ​Michael​ ​to​ ​their​ ​headquarters​ ​to​ ​discuss​ ​Airbnb’s​ ​expansion​ ​strategy. Back​ ​then,​ ​Airbnb’s​ ​“headquarters”​ ​was​ ​just​ ​a​ ​dingy​ ​apartment​ ​with​ ​a​ ​no​ ​shoes​ ​policy.


CHESKY: We make him take his shoes off—it was the funniest thing. He’s like, “What?” He’s used to going to these offices, he has to take his shoes off in our apartment to meet with us. We had to get advice from him. We had two choices for international expansion—we could either go to the football cities, or international expansion. The football cities are basically, where in the United States are like small, medium to large cities with a football team?


And we can expand to St. Louis, and Baltimore, and Boston, Chicago. Or we could do something else. Michael Moritz said, “Plant flags.” What does that mean? He said, “Pick the most important markets in the world, and imagine you lost them. Which ones couldn’t you lose?” And we thought, “London, Paris, Barcelona,”—we kind of stayed in Europe—Asia was maybe a later chapter—Rio—and so we started planting flags.


HOFFMAN:​ ​I​ ​saw​ ​just​ ​how​ ​quickly​ ​Brian ​planted​ ​flags​ ​across​ ​Europe.​ ​He​ ​literally​ ​hopscotched from​ ​one​ ​European​ ​capital​ ​to​ ​the​ ​next,​ ​scrambling​ ​to​ ​get​ ​users​ ​on​ ​his​ ​site.


Ultimately,​ ​a​ ​wildly​ ​original​ ​idea​ ​only​ ​buys​ ​you​ ​a​ ​grace​ ​period​ ​from​ ​the​ ​competition.​ ​As​ ​soon as​ ​it​ ​works,​ ​you​ ​have​ ​a​ ​target​ ​on​ ​your​ ​back.


And​ ​in​ ​the​ ​early​ ​2000s,​ ​ ​PayPal​ ​was​ ​an​ ​increasingly​ ​juicy​ ​target​ ​for​ ​Ebay.​ ​They​ ​did​ ​all​ ​sorts​ ​of things​ ​to​ ​rattle​ ​us.​ ​ ​Like​ ​a​ ​promotion​ ​with​ ​Visa​ ​that​ ​made​ ​it​ ​free​ ​for​ ​sellers​ ​to​ ​accept payments​ ​from​ ​credit​ ​cards.​ ​And​ ​who​ ​knows?​ ​Maybe​ ​one​ ​day​ ​they​ ​would​ ​have​ ​just​ ​booted​ ​us off​ ​the​ ​site.


That​ ​day​ ​never​ ​arrived.​ ​And​ ​it’s​ ​because​ ​we​ ​found​ ​the​ ​ultimate​ ​escape​ ​plan.​ ​We​ ​sold​ ​PayPal to​ ​Ebay​ ​for​ ​$1.5​ ​billion​ ​and​ ​got​ ​out​ ​of​ ​the​ ​online​ ​payments​ ​competition.​ ​Why?


If​ ​you​ ​ever​ ​do invent​ ​a​ ​new​ ​game,​ ​fumble​ ​through​ ​it,​ ​master​ ​it,​ ​grow​ ​at​ ​an​ ​exponential​ ​rate, hit​ ​escape​ ​velocity​ ​—​ ​even​ ​after​ ​all​ ​of​ ​that,​ ​you​ ​might​ ​still​ ​come​ ​crashing​ ​back​ ​down​ ​to​ ​earth. There’s​ ​a​ ​much​ ​older​ ​adage​ ​that​ ​you​ ​should​ ​always​ ​have​ ​in​ ​the​ ​back​ ​of​ ​your​ ​head:​ ​If​ ​you​ ​can’t beat​ ​‘em,​ ​join​ ​‘em.


And​ ​after​ ​all​ ​of​ ​that​ ​hard​ ​work,​ ​it​ ​can​ ​a​ ​bitter​ ​pill​ ​to​ ​swallow.​ ​Just​ ​sell​ ​your​ ​company?​ ​We​ ​still question​ ​the​ ​decision.


HOFFMAN: Do you have any additional thoughts on whether or not selling to EBay was a good idea or not?


THIEL: Well I I think it was. I think it was still the right idea because there were so many regulatory constraints on the business, and we were not really achieving escape velocity from eBay. You know eBay was growing fast. We were growing on eBay. So we’re going to be 100 percent annualized on eBay. And so to diversify away from e-bay we had to grow the non-eBay business by more than 100 percent a year. And I think that was extremely hard to do.


HOFFMAN:​ ​We’ll​ ​never​ ​know​ ​whether​ ​Ebay​ ​would​ ​have​ ​gained​ ​on​ ​us.​ ​Maybe​ ​we​ ​could​ ​have achieved​ ​escape​ ​velocity.​ ​Or​ ​maybe​ ​we​ ​could​ ​have​ ​held​ ​out​ ​for​ ​more​ ​growth​ ​or​ ​a​ ​higher​ ​bid. The​ ​PayPal​ ​founders​ ​to​ ​this​ ​day​ ​have​ ​differing​ ​opinions.​ ​And​ ​I​ ​don’t​ ​claim​ ​to​ ​have​ ​the​ ​right answer.


But​ ​one​ ​thing​ ​we​ ​did​ ​learn​ ​from​ ​that​ ​experience​ ​is​ ​that​ ​competition​ ​is​ ​just​ ​a​ ​drag.​ ​As investors,​ ​Peter​ ​and​ ​I​ ​both​ ​look​ ​for​ ​that​ ​founder​ ​who​ ​aspires​ ​to​ ​break​ ​free​ ​as​ ​much​ ​as possible.​ ​As​ ​Peter​ ​says,​ ​he​ ​always​ ​comes​ ​back​ ​to​ ​a​ ​fundamental​ ​question:​ ​Will​ ​this​ ​founder reshape​ ​the​ ​future?


THIEL: I always. I’ve gone back and forth over the years how much is the people versus the technology versus the sort of the business strategy. But if you sort of ask people what they are trying to do and if it’s not that ambitious and if they’re not trying to win in that significant a way that’s probably a relatively bad sign.


And then of course if it’s ambitious then you have to sort of calibrate how realistic it is and maybe it’s always a little bit unrealistic, but there’s a lot of calibration around that but there’s something there’s something around that that I think is very underestimated where you know the future is the future that we will. You know we decide what future we wish to create. And if you want to ask what kind of future is going to happen in a given company you just ask the people, and they will tell you, and you all need to do is ask.


HOFFMAN: So my version of that is you have a very ambitious future like you if you have an ambitious goal and you at least have a plausible theory about how you get there. Right it’s not just we will get there. It’s a this is what I recognize the path looks like, these are some of the risks, these are some of the techniques.


THIEL: Yes that’s the good one and the bad patterns tend to be either no ambitious future or winning the lottery sort of ambitious desires but no pathways.


HOFFMAN:​​ These​ ​people​ ​who​ ​want​ ​to​ ​reshape​ ​the​ ​future,​ ​but​ ​also​ ​understand​ ​how​ ​hard​ ​it​ ​is to​ ​get​ ​there,​ ​and​ ​plan​ ​accordingly​ ​—​ ​they’re​ ​exceedingly​ ​rare.​ ​Most​ ​of​ ​the​ ​things​ ​you​ ​imagine about​ ​the​ ​future​ ​are​ ​wrong.​ ​And​ ​that’s​ ​why​ ​people​ ​tend​ ​to​ ​vie​ ​for​ ​excellence​ ​on​ ​the​ ​same well-worn​ ​playing​ ​field.​ ​There’s​ ​a​ ​deep​ ​comfort​ ​in​ ​knowing​ ​the​ ​rules​ ​of​ ​the​ ​game.​ ​And​ ​no harm​ ​in​ ​it,​ ​either,​ ​if​ ​that’s​ ​your​ ​thing.


But​ ​if​ ​you​ ​stop​ ​for​ ​a​ ​moment​ ​and​ ​realize​ ​you​ ​can’t​ ​find​ ​a​ ​single​ ​member​ ​of​ ​the​ ​herd​ ​you aspire​ ​to​ ​be,​ ​then​ ​perhaps​ ​that’s​ ​the​ ​first​ ​sign​ ​that​ ​you’re​ ​ready​ ​to​ ​break​ ​free​ ​of​ ​the competition.​ ​And​ ​to​ ​that​ ​I​ ​say:​ ​Game​ ​on.


I’m​ ​Reid​ ​Hoffman.​ ​Thanks​ ​for​ ​listening.

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