Peter Thiel: 1967–2002

[00:00:09] Morning folks and welcome to today's episode called Peter Thiel 1967-2002. And as regular listeners will know, I've wanted to cover Thiel for a long time now. And he's going to warrant a three-parter at least because love him or loathe him, Thiel is without doubt one of the most interesting, controversial and polarising people in business over the last 30 years.

[00:00:38] And for listeners who don't know him, Thiel was part of what became known as the PayPal Mafia. It was this group of super smart guys, and they were all guys, who founded and built PayPal. And the company survived the dotcom crash. It almost went under because of Russian fraudsters. And they eventually cashed out in 2002. And then a lot of the people involved in PayPal went on to even more success. We're talking about Thiel himself, Elon Musk, David Sachs.

[00:01:08] And it's Reid Hoffman, to name but a few. So this episode, I'm focusing on Thiel's early life, and it brings us right up to the sale of PayPal in 2002. It is a cracking story. Enjoy. So Peter Thiel, born in Frankfurt, West Germany, 1967. His father, Klaus, was a chemical and mining engineer, while his mother, Suzanne, looked after the family.

[00:01:34] And because Klaus's work involved these big international mining projects, the family, they moved around a lot. When Thiel was three, the family moved to what is now Namibia. Back then it was controlled by South Africa, and apartheid was still in place.

[00:01:51] Now, they always spoke German in the home. So in South Africa, Thiel went to a very strict German language school. There were very rigid rules, harsh discipline, even corporal punishment. And Thiel later said that this experience, it was where his distrust of conformity and authority began. It was his dislike for institutions telling people what to think and how to behave.

[00:02:18] Now, as a young child, no surprise, Thiel was exceptionally bright. He knew the name of every country in the world by the time he was five. When he was six, he started playing chess, and this really suited him, because chess is all about planning ahead and out-thinking the person opposite you. The family, they returned to America in 1977, and they moved to Foster City. This is beside Silicon Valley. Now, in his new school, Thiel remained an outsider.

[00:02:48] He didn't mix a whole lot. He was obsessed with Tolkien. He read Lord of the Rings more than ten times, and he continued excelling at chess. By the time he was 12, he was ranked seventh in his age group in America, and his chess set had a sticker that said, Born to Win. And this is the thing about Thiel. He is ultra-competitive. And look, we're all pretty competitive. You have to be if you're in business.

[00:03:16] But according to all of Thiel's other very, very competitive friends, Thiel's competitiveness stands out. He absolutely hates losing. Now, while in high school, Thiel discovers Ayn Rand. She was this famous Russian-born writer and philosopher who developed a philosophy called Objectivism.

[00:03:39] Now, I'm not going to go too deeply into this or into any of Thiel's ideologies, mainly because I don't really enjoy or understand a lot of this stuff.

[00:03:52] But why I'm bringing it up is because Thiel takes these ideas very seriously. And over the years, the ideas of people like Rand, they have a huge influence on how he thinks, what he says, how he does business, and of course, how the rest of the world sees him. So, Rand's basic argument was that people should follow their own ambitions rather than doing what the government or everybody around them expected.

[00:04:19] And for Thiel, who at this stage, and remember, he's just a teenager, he's already supporting Ronald Reagan and admires Richard Nixon. So, he hated the idea of simply following the crowd. And you can see how Rand's ideas appealed to him.

[00:04:36] Now, in his SAT exams, Thiel achieved a near perfect score. But, interestingly, some of Thiel's former classmates told Max Chafkin, he's the author of a book on Thiel called The Contrarian, that Thiel also did the SAT exams for other students and charged them $500 each. Now, Chafkin's book contains a lot of stories from people who knew Thiel at school and college.

[00:05:04] And some former Stanford students claimed that he once defended apartheid in this very cold, logical way, looking at it purely in economic terms and, in their view, completely missing out on the human side of it. When Chafkin's book came out, Thiel strongly denied ever supporting apartheid. But the reason why I mention this is because he never publicly denied the SAT story.

[00:05:31] So, if we assume that it did happen, Thiel was taking an enormous risk here. Like, he could have destroyed his chances of getting into college. And, look, I'm not going to come down too hard on him for this. I think it's in every entrepreneur's nature to take risks. And when you're young, you take some very, very stupid risks. I know I did. Like, I strayed into a few grey areas and, I would say, even beyond grey.

[00:05:58] So, I can definitely understand that mentality. And just to be clear, it's cheating. It's wrong. But, you know, I'd be a hypocrite if I were to come down heavy on young Thiel for this transgression, let's call it. Anyway, he graduated valedictorian. That's top of his class. So, we're now in September 1985. And Thiel goes to Stanford University to study philosophy. And physically, he began to change. He started going to the gym, lifting weights and bulking up.

[00:06:28] But socially, not much has changed. He still remained very much an outsider. He wasn't interested in parting or drinking. Instead, he joined the Stanford College Republicans. And he found a group of friends who were more interested in politics and ideas. And it was at Stanford that Thiel encountered another thinker who would have a huge influence on him. This was one of his professors, a guy called René Girard.

[00:06:55] So, Girard's big idea was something called mimetic desire. And the basic theory was that people don't really decide what they want for themselves. They look at what everybody else wants and then starts wanting the same things. The same university. The same job. The same house. Or the same position in society. And once everybody starts chasing the same prize, you get competition.

[00:07:21] And people become so obsessed with beating one another that the rivalry eventually becomes more important than the prize itself. And this became one of the most important ideas in Thiel's life. Because whether he's investing, building companies, or getting involved in politics, Thiel is nearly always asking the same questions. What does everybody else believe to be true? And what if they are wrong?

[00:07:50] So, as a result, Thiel is always taking a contrarian position. John Collison, the co-founder of payments company Stripe, and Thiel was one of their first investors, he described Thiel as follows. He is a true contrarian. He just takes the thing that everybody else believes to be true and inverts it. He chases that through to its conclusion, even if it takes you to some odd places along the way.

[00:08:17] Now, while studying philosophy, Thiel became friendly with none other than Reid Hoffman, who would of course go on to found LinkedIn. And politically and ideologically, these two, they are polar opposites. They disagreed on nearly everything. But they respected one another's intelligence and honesty. In the first few years of college, Thiel continued to play chess.

[00:08:41] But he obviously didn't endear himself to other players, because fellow players recalled that when he lost a game of chess, which obviously didn't happen very often, he would sweep the pieces off the board and say, show me a good loser and I'll show you a loser. And look, I know defenders of Thiel will say, well, that's just his competitive streak. But as the former Irish rugby coach Eddie O'Sullivan always says when analysing a game,

[00:09:10] he'll ask you to swap the jersey and then say what you see. So in other words, let's just pretend someone you didn't know swept all their chess pieces off the board whenever they lost. You'd call that guy an asshole. And you'd be right. I mean, that's just asshole behaviour. Anyway, during college, he actually quit playing competitive chess. As he said himself,

[00:09:45] Now, while all of this was going on, Stanford was in the middle of this huge culture war over race, gender, and what students should actually be taught. I mean, nothing much has changed, has it? And it was in response to all of this that Thiel co-founded a conservative student newspaper called the Stanford Review in 1987.

[00:10:08] This turns out to be very important because it's through this newspaper that Thiel builds a network of people who remain part of his world for decades. Now, after finishing his philosophy degree, Thiel went on to Stanford Law School and graduated in 1992. Because for all of this time, Thiel has had one big goal, and that is to become a Supreme Court Clerk.

[00:10:34] One of the most competitive and sought-after positions in American law, with only 40 places available each year. So, while Thiel was heavily influenced by the teaching of Gerard and his warnings about following the crowd, at this early stage in his career, he obviously wasn't ready to put those ideas into practice. Now, Thiel actually got to the interview stage with two Supreme Court Justices, but both rejected him.

[00:11:01] And Thiel admitted that he was devastated. He went on to join a prestigious law firm, but hated it, quits just after seven months. And next, he joined Credit Suisse in New York as a currency trader. So, now we're in 1995. And while Thiel is trying to work out what to do with his career, he and David Sachs, who had also been at the Standard Review, they published a book called The Diversity Myth.

[00:11:27] It's their case against multiculturalism and political correctness in Stanford. And the book, it caused a huge backlash. Particularly for suggesting that some allegations of date rape were actually, and I quote, seductions that are later regretted. Now, Thiel later admitted that his views had been too extreme, and in 2016, he apologised, saying, I wish I'd never written those things. I'm sorry for it.

[00:11:56] Rape in all forms is a crime. So, Thiel, he's working on Wall Street, still involved in campus debates, but you also have the dot-com boom in its very early stages. And Thiel rightly believes that the real action is in Silicon Valley. So, in 1996, he moved back to California, did some part-time lecturing at Stanford, and established Thiel Capital with $1 million raised from family and friends.

[00:12:23] It's part hedge fund and part venture capital firm. And he hires Ken Howery as his first employee. Howery had also written for the Stanford Review, while Luke Nosek, who pitched a web-based calendar idea, becomes the first entrepreneur Thiel invests in. And these two guys, Howery and Nosek, they tell us a lot about the kind of person who is drawn to Thiel, and also who Thiel is drawn to.

[00:12:51] So, Howery was so fascinated by Thiel's mind that he told his girlfriend, I think I might work with this guy for the rest of my career. And he ended up doing exactly that. And Nosek, meanwhile, is this very smart and unusual computer engineer, who didn't really care what other people thought of him. When he first met Thiel, he told him that he planned to have his body frozen after he died, so he might one day be brought to life. So, Thiel was fascinated by this.

[00:13:20] And Nosek, Howery and Thiel, they become lifelong friends. But here's the thing. Like, when Thiel's friends talk about him, and I've really dug into this, they talk about his intelligence and his ideas. You hear nothing about warmth, fun, you know, having the crack. I mean, one colleague who knows him well said the following, He's very cerebral, and I'm not sure how much value he places on the more intimate human emotions.

[00:13:49] I've never seen him express them. It's certainly not the most developed aspect of his personality. You see, Thiel, for all his brilliance, I think he's very emotionally challenged, I say is one way of putting it. And I guess you can have friendships based on intellectual respect, but without warmth, affection, laughter, I mean, how deep can those friendships really be? Then again, I'm judging his friendships by my own standards.

[00:14:18] Perhaps that's unfair. And look, regardless of what I think, these relationships that he formed with the likes of Howery and Nosek have been long-lasting and very rewarding financially, because by staying close to Thiel, both Howery and Nosek would go on to become billionaires. Anyway, back to his venture capital firm. Nothing comes of Thiel's investment in Nosek's calendar company. But Nosek introduces Thiel to his friend, Max Levchin.

[00:14:48] And Levchin is a brilliant young computer scientist who has an idea for security software for PAM pilots. Now, PAM pilots were small handheld computers. And by 1998, more than 1 million had been sold. Thiel loved Levchin's idea, and he immediately put in $100,000. They formed a company called Feelink, which then became Confinity, and which then became PayPal. And just to keep things simple, I'm going to call it PayPal from here on.

[00:15:17] And let me just stop for a minute and recommend that you read Jimmy Sonny's book, The Founders. It has the entire PayPal story and is one of my favourite books ever. It's a brilliant read. Anyway, Levchin's original idea was security software for the PAM pilots, but the company soon began experimenting with sending money between PAM pilots. And then they added a way to send money by email for people who didn't own a PAM pilot.

[00:15:45] But this email money transfer feature, it's almost an afterthought. It wasn't seen initially as being very important. After raising more money, Thiel and Levchin recruited largely from people they already knew. Thiel brought in people from Stanford, including David Sachs and Reid Hoffman. And because Levchin wanted to focus on the product, he persuaded a very reluctant Thiel to become CEO. But by all accounts, Thiel was pretty good at it.

[00:16:14] There were no private offices, very little hierarchy, every idea could be challenged. As Hoffman said, it was all about, here are my arguments, here's my perspective. So it was very demanding. It was often ruthless and everybody worked ridiculous hours. But it also helped create this us against the world mentality. So under Thiel's leadership, there were very strong bonds built between the team.

[00:16:44] And look, I've just criticized Thiel for bringing zero emotion into his relationships. Yet at PayPal, without ever talking about emotion, he helped build a team that had this strong emotional connection with each other that for lots of them has lasted the test of time. So there's a lot to be said for that. Now, while PayPal was developing its Palm Pilot product, another company is starting just down the road from it.

[00:17:13] Enter stage right, Elon Musk. So Musk had just sold his first startup for $307 million and he walked away with $22 million and he put $10 million of that into a new company called X.com. And the idea behind X.com was much bigger than PayPal. Like Musk wanted an online bank where customers could hold money, use a current account and invest. Basically, he wanted to disrupt the entire banking system. So a typically huge,

[00:17:43] ambitious Musk idea. And just as PayPal had stumbled across an email money transfer feature, X.com developed the exact same product. But neither company saw it as the main business. Like for Musk, it was just one very, very small feature inside his enormous online bank. But then, eBay changes everything. Back in 1999, eBay was one of the hottest internet companies in the world. But initially,

[00:18:13] it stayed out of payments between buyers and sellers. Most buyers paid by check or money order. So sellers could spend days waiting for the payment to arrive and then several more waiting for it to clear. So when eBay sellers discovered X.com's and PayPal's email money transfer system, they were delighted. Now, Thiel had very little regard for eBay. He saw it as this grubby auction site. And Musk felt more or less the same. He didn't want

[00:18:42] his grand plan, you know, for reinventing bank reduced to handling small payments between eBay users. But eBay sellers, they didn't care. They had found something that solved a real problem. So they piled in and started spreading the word within their community and the numbers shot up. For example, in November 1999, PayPal had around 1,000 users. One month later, it had 10,000. Two months later, it had 100,000 users.

[00:19:12] And X.com was growing as the same race. And once PayPal and X.com saw what was happening, they went to war. They started paying between $10 to $20 to anybody who opened an account and then also paying them again for referring their friends. And customer numbers soared, even outside of eBay. But both companies, they were burning through cash. And Thiel realized this couldn't continue. So he pushed for a merger between both companies.

[00:19:41] And Bill Harris, who was CEO of X.com, agreed with Thiel. And just as a side note, you see, Musk wanted to focus on strategy and product development. So he had brought in Harris, a seasoned tech executive, to become CEO of X.com. So the merger was announced in early 2000. The company kept the X.com name. Harris remained as CEO. Musk became executive chairman. He was overseeing strategy and product development. And Thiel became executive vice president of finance.

[00:20:11] Now, at the same time, the company was trying to raise $100 million. Some of the team wanted to keep negotiating in the hopes of getting better terms. But Thiel believed that the market was about to collapse and he pushed them to take the money as quickly as possible. As one employee remembers him saying, we have to close on this now because the end is near. And he was right. They completed the round just before the dot-com bubble burst. So technology companies were suddenly

[00:20:41] collapsing everywhere while X.com had $100 million in the bank. So now, they have plenty of cash and a lot of their competitors were wiped out. But it was far from plain sailing. Like the merger had forced together two workforces that had completely different cultures and that had spent months and months trying to destroy one another. So there was a lot of personality conflicts. And there was also a fundamental disagreement over strategy. Musk still wanted

[00:21:11] his big disruptive online bank. Thiel and the PayPal team, they wanted to concentrate on the one product that was going gangbusters, the email payment system. And as well as fighting Musk, Thiel had become frustrated with Bill Harris, the CEO. He believed that Harris was introducing too much corporate bureaucracy and slowing everything down. As Thiel put it, we were moving too slowly when speed was everything. So,

[00:21:41] only a few months after the merger, Thiel resigned. But Musk, Levchin, Sachs and other senior figures, they were also unhappy with Harris and they forced him out. Thiel returned as chairman while Musk now became CEO. And despite all the fighting over strategy though, Musk and Thiel, they had a lot of respect for one another. Musk said, my bullshit tolerance is low but Peter's is like zero. And Musk also appreciated what he called Thiel's ability

[00:22:10] to think from first principles. Now, I didn't know what that meant but basically it's his ability to ignore accepted wisdom, return to the basic facts and work from there. By summer 2000, the company had more than 2 million accounts, was adding over 10,000 every day and turnover would be $2.5 million for that year. So for context, initially the email money transfer system was totally free but in June 2000, they began charging

[00:22:39] fees of 2.2% plus 30 cents per transaction. But of course, the arguments over strategy continued and Musk was also sticking his oar into the technical side of the business and this was leading to huge tension with Levchin. Something had to give. So four months after becoming CEO, Musk, he finally left for a belated honeymoon to Australia. He had married eight months earlier but had been too busy to go on any honeymoon. And it was

[00:23:08] while he was away, Thiel, Levchin and the other senior figures, they approached the board demanding that Musk be sacked. The board went with them and Thiel was brought back as CEO. Now, it was a pretty sneaky way to remove somebody but Musk's response, as I've mentioned in other episodes, it was very gracious. In an email to staff, he wrote, Peter is an exceptionally smart guy with a strong knowledge of the issues we face. So, you know, as I mentioned,

[00:23:38] there was obvious respect between Thiel and Musk but were they ever friends? There's a great description of their relationship in the capsule review where they wrote, it is a relationship that has never resolved itself into anything so simple as friendship or feud but instead something colder and more durable. A strategic entanglement between two men who understand each other too well to fully trust one another. I love that. Anyway, so with Thiel back in charge, PayPal makes

[00:24:08] one crucial but fairly obvious decision. They drop the online bank idea, the x.com name is dropped as well and they focus solely on email payments. But while the customer numbers were going up and up, fraud was threatening to destroy the business. Criminals, mainly in Russia, they were using stolen credit cards to buy goods through PayPal. The seller received the money and posted the goods but when the real cardholder reported the theft, the bank reversed the payment.

[00:24:39] It's called a chargeback. So the fraudster kept the goods, the seller kept the money and PayPal was left covering the loss. And this was costing the company around $10 million a month. PayPal had only a few months of cash left. So this became an existential threat. It was basically all hands on deck emergency. And it says something for Thiel's management in the way that the whole PayPal team got together and worked on this big, big issue because they

[00:25:08] developed systems for spotting suspicious transactions and verifying the bank accounts belonged to people using them. They also helped bring CAPTCHA, you know, that distorted letters used to separate humans from computer programs into widespread use. And it worked. Like PayPal brought the fraud under control. They survived and they kept growing. By 2001, more than 70% of eBay listings accepted PayPal even though eBay by this stage now was heavily promoting its own

[00:25:38] payment service. The problem for eBay was simple. The service they had wasn't as good and its users and its sellers kept choosing PayPal. So, eBay offered $300 million to buy PayPal. Thiel wanted to sell and this time his judgement was badly wrong. PayPal backers including Sequoia, the VC firm, they rejected the offer. Then in September 2001, PayPal announced plans to go public. And this,

[00:26:07] this was a pretty ballsy move because the dot-com bubble had burst, technology shares had collapsed, and the 9-11 attacks had damaged the markets. PayPal was still losing money as well despite its 2001 revenues coming in at $105 million. That's up from $14 million the previous year, so huge growth, but it still had accumulated losses of $283 million. And it was during the publicity surrounding the flotation that I first really became

[00:26:36] aware of Thiel and familiar with how his ideology was very central to who he was because Thiel was now presenting PayPal as something much bigger than an online payment processor. He linked it directly to his libertarian beliefs arguing that PayPal could become a vehicle for geopolitical liberation. Anyway, PayPal floated in February 2002 at a valuation of $790 million and the team

[00:27:10] played 10 games of speed chess simultaneously. He won 9 and lost 1 to a very delighted David Sachs. And I mentioned this on my Sachs episode that there's a great photo of this moment if you just Google Sachs Thiel chess photo. PayPal then recorded its first quarterly profit shortly after the IPO but like after four years of fighting fraudsters, fighting eBay and fighting one another, the team

[00:27:40] was exhausted. So when eBay comes back with another offer this time for $1.5 billion, five times what they'd offered just a year before, Thiel and PayPal this time they accept and the deal was announced on July 8th 2002. Musk made $176 million while Thiel walked away with $55 million. He resigned as CEO and was about to begin the second chapter of his life and that's where I'll pick up the story

[00:28:09] maybe in a few months or years time when Thiel takes his PayPal millions and he uses them to launch a hedge fund help create Palantir and become the first outside investor in Facebook. That's going to be very very interesting. So where do I stand on Thiel? Well like every story that I'm breaking into several episodes I'm not really going to give a final assessment until the last episode when I have a more rounded and better informed view of him.

[00:28:39] And look I'm sure that when I get to future episodes on Thiel I might be a bit more critical but Peter Thiel 1967 2002 as mentioned I think he's emotionally challenged I think he's an asshole when it comes to losing and for the most part I don't agree with his politics but I really like that we have people like Thiel who are willing to take contrarian views like I'm all for diversity in every aspect of life including diversity of

[00:29:09] thoughts and I have to give Thiel a huge amount of credit for making PayPal a success yes he had lots of very bright people around him but he hired most of them the x.com merger closing the 100 million funding round just before the crash solving the fraud crisis building such a strong and cohesive team doing the IPO like Thiel and the PayPal team they succeeded where

[00:29:38] lots of other companies back then failed and I think a lot of people who aren't involved in business shrugged their shoulders at this kind of yeah so what but doing all of what they did and all of what Thiel did is really really hard and I think Thiel has he makes for a fascinating story and I really can't wait to do the next episode on him that brings us to listeners emails and this one comes from

[00:30:08] Hanny who would love me to do the story of Rafiq Hariri he is this very successful and very controversial Lebanese businessman and politician who was assassinated in 2008 it is a great suggestion thanks Hanny and thanks so much for listening and remember if you have any comments any corrections or any story that you'd like me to cover email me at info at gbspod dot com all the best folks