Fintech Nexus USA 2016: Keynote Presentation by Peter Thiel

Okay, so what we're going to do now, we're going to move on to our first keynote speaker of the day. And what's going to happen here, we're going to have Peter Thiel come up on stage. He is a well-known investor and entrepreneur, and he is going to give about a 15 to 20-minute presentation about fintech and the future of technology. Then after that, we're going to have Bloomberg West anchor Emily Chang come up on stage, and they're going to have a lively discussion about fintech. So for those of you who don't know Peter, he is really the original fintech disruptor in many ways. He was the CEO and co-founder of PayPal. And after taking PayPal public and selling it to eBay, then selling it to eBay, he has become known as the Don of the PayPal Mafia.

Since so many of his former PayPal colleagues have since gone on to start many successful companies, companies like SpaceX, Tesla, LinkedIn, YouTube, Yelp. And Peter himself started Palantir Technologies, a data analytics company that makes tools for national security and global finance. In 2004, he made the first outside investment in Facebook, and he continues to serve on the board of directors there. Today, as partner of the Founders Fund and in his own investing, he works to identify and support the next generation of technology companies. In this space, he has made investments in SoFi, in OnDeck, in Avant, and in Zest Finance. He's also started the Thiel Foundation and the 20 Under 20 Thiel Fellowship, helping to ignite a debate on the differences that might exist between learning and schooling.

He's also the author of the number one New York Times bestselling book, Zero to One: Notes on Startups, or How to Build the Future. Ladies and gentlemen, please join me in welcoming to the LendIt stage, entrepreneur and investor, Peter Thiel.

Thank you. There's so many different topics for us to talk about today, but one of the tremendous challenges in writing about entrepreneurship and speaking about it is that there is no simple formula. That if I were to give a formula of these are the steps you're supposed to follow and you do these six things, then you will succeed, you would almost necessarily know that it's somehow incorrect. In talking about these topics, I've often tried to approach it somewhat indirectly. What are some contrarian questions? What are some things that are true that people don't believe? What are some businesses nobody is building? And there's certain answers that I always keep coming back to. And I want to talk about some of those and try to bring them to bear on the fintech context that you all think about.

So there's a single answer that I always give that's the overwhelming, this very important truth, I think, is that I think there are always, to a first approximation, two kinds of businesses. There are companies that compete, and there are companies that don't. Companies that compete like crazy don't make money. Companies that don't compete, that do something unique, that's very strongly differentiated, are very profitable. They're known as monopolies, even though the people who run them are generally well advised not to call them that. If you want to compete like crazy, you should just leave the conference and try to open a restaurant in San Francisco. There are a lot of people doing that. It is extremely competitive, but it is not very capitalistic in the sense that capitalism is about the accumulation of capital, and you will not accumulate capital by opening a restaurant.

And so the question of how to go about, and there's certain types of features these monopoly businesses tend to have. One of the critical things is that you often have to identify, it gives you a perspective, it's a little bit different from the standard perspective. So, one of the standard venture capital questions is always, what's the size of a market? And we want to go after really big markets. It's what you're often told, the total addressable market, the TAM, is supposed to be very big. Whereas, from a monopoly perspective, the thing that really matters—not that you have a trillion-dollar restaurant market or some sort of super big market, but that you have a large market share—and for a startup, that often means that you have to start with a very small market because you quickly want to get to a big share, and that's how you can then, then expand. PayPal...

PayPal's initial market when we started it in 1999, we launched it, and we ended up focusing very quickly on power sellers at eBay. There were about 20,000 of them, and you could go from zero to 30 or 40% market share in the first three to four months, which was a very auspicious start. And I think something like that has been true of many of the successful tech, consumer internet companies in recent decades. They started with markets that were very small, they took over those markets, and then they sort of gradually built it out in concentric circles. And if you look at the kinds of things that went badly wrong in Silicon Valley, like the cleantech experiment from sort of 2005 to 2008, these were characterized by enormously big markets, where the PowerPoint presentation started with people saying,

"We have markets that are measured in hundreds of billions of dollars or trillions of dollars, and if we have a fraction of a fraction of the pie, we're going to have a very successful business." And then it turned out that if you're just sort of a minnow in a vast ocean, you have nothing but incredible amounts of competition, that it's basically... You're a thin-film solar panel company. You have to beat the other nine thin-film solar panel companies. And then you have to beat the other 90 solar panel companies. And then you have to beat the windmills and the frackers and the Chinese manufacturers. And this is always a terrible place to be. You don't want to be the minnow in a vast ocean. One of the questions that I always get asked in a related sort of context is, what are some of the trends in technology?

What are things that are happening? And I always dislike this question because I'm not a prophet. I can't tell you what trends are happening. But I think if I had to say something systematic, it is that almost all trends are overrated. That if you hear a trend, by the time you've heard the trend, it's somehow already—that wave has already passed. It's way too much of a consensus thing. So, trendy words in Silicon Valley, trends in recent years have been educational software, healthcare IT. There's been a trend around cloud computing, big data, SaaS enterprise. If you hear "big data," "cloud computing," I often think you need to think "fraud" and run away as fast as you possibly can. And if you sort of had a startup that was pitched as a concatenation of these buzzwords, "We're building a mobile platform for SaaS enterprises to bring big data to the cloud."

That's what we're doing. My pattern recognition on this—and perhaps it's a really good company and I should spend a lot of time talking to them, but the—the pattern recognition is that the buzzwords are a tell, like in poker, that people are bluffing and that the business is, in fact, not very well differentiated and that it's just one of many of a kind. The categories are well-defined, and—and when you tap into these well-defined categories, you—you often are doing something that's already very poorly differentiated. And so, I—the great companies, in many ways, I think, have been in a category of one, where one of the challenges that people starting them have is that you don't even have quite the right words to describe it, or it's often because there are no natural categories for things

to tap into. So, these are some of the kinds of things that I've looked at a lot. Certainly, in evaluating startups, you always look at the technology and the people, but I think it often also is quite valuable to think about the business strategy. And when one applies these kinds of lessons to the fintech context, I think there are sort of a few things I want to maybe draw out. Just as a starting point, fintech obviously is a very big theme. It's—there's always a risk that it's something of a buzzword. It's a very—it's a very natural theme in a way, since, you know, money, finance are sort of naturally thought of as zeros and ones, as digital kinds of goods. And so, it's a natural mapping between fintech and a lot of IT, internet

consumer technologies of recent years. And there's, of course—we, of course, are also dealing with a sector that's fairly lucrative in some sense. When I started working in New York in the '90s, one of the thoughts was always that you made more money the closer you were to the money. And so, people who worked on trading desks in banks made more money than the investment bankers, and the investment bankers made more than the lawyers, and the lawyers made more than the doctors. And so, if you were sort of in a profession that was somehow closer to the money, you were naturally—it was easier to just keep some of it for yourself. And there is something about fintech that sort of taps into that. And then, of course, we have a lot of the existing industries: sclerotic and kind of broken and not very innovative.

And so, there seems to be a big opening to do things. So, there's this macro story around fintech that's extremely, extremely powerful. But what I want to challenge people here today is to always think a lot more on the micro level, on this question of specific differentiation, and what can be done that other people cannot sort of quickly clone, copy—or are you just really opening a restaurant where, even if it sounds like very exotic and it's the only Nepalese-British fusion cuisine, it's really just a restaurant and people will sort of copy it quickly in one way or another? Because this question of sort of monopoly, pricing power—it's not just something that you have for sort of a brief moment in time.

The really good businesses somehow are able to sustain it for quite a long time. And so, what I'm often looking for on the fintech side is trying to find some sort of a narrative, a story of how one will build a sustainable business with the sort of moat, with the sort of defensibility, and then the challenges—why it won't get copied quickly by other people in due course. There are certainly a number of different angles to do this. One kind of an approach—and this is always, I think, a challenging question in fintech—is if you have a powerfully differentiated technology that's really dramatically better than what anybody else has, I believe that can always be a powerful differentiator. I think one of the challenges is that this is actually quite uncommon.

And so I often think that when you talk to people in startups, you want to often ask the questions they're not comfortable answering. So if you're talking to a scientist starting a biotech startup, you want to ask business questions because they want to hide behind the science. And in a Fintech context, the uncomfortable questions are often the technology questions. Where's the tech? Is it just a website with some marketing engine attached? And so one set of questions that can be powerfully differentiating is if there really is a dramatically better technology than exists elsewhere. And then I think very often in the absence of that, the questions come down to figuring out ways to scale things very quickly and to have this very differentiated marketplace.

And the questions then revolve around: Is the market narrowly enough defined? Is it something that you can take over in a defensive way? Is it going to cost too much to market? A series of questions around this. When I started at PayPal—and it's always so hard to even draw lessons from any of these businesses because it was sort of a particular moment in time, this particular constellation—and it was around the summer of '99 that we stumbled on this idea of linking money with email, which was clearly to us an interesting, very innovative idea. Email was sort of this basic application, had this account-centric system where you linked money to it. That seemed like a very natural kind of a thing to do.

It also did not seem like that technologically great a breakthrough. So even though it was already five, six years into the Internet and nobody had thought of it yet, once we had thought of it, there was this question: Why couldn't somebody else copy it really quickly in turn? And what we sort of ended up backing into was this ferociously rapid marketing strategy where it was, 'No, in fact, it's not going to be that defensible.' And so we have to compensate by just spending money like crazy and marketing at an absolutely breakneck pace. We launched the product in October of 1999. We started with the 24 people at our office as the first customers. And then we decided, well, we have to just accelerate it as fast as possible.

So we're going to give everybody $10 to sign up. And we're going to give them $10 more if they refer someone else to sign up. So it's a $20-a-user acquisition cost. We sort of ignored the question of whether any of the users would be any good whatsoever. And we were able to get it to grow at sort of this very happy exponential rate of seven to 10% a day compounding. So, you sort of got to 1,000 users by mid-November '99, you got to 12,000 by December 31st, '99, 100,000 by February 3rd, 2000. And of course, there were no revenues or anything, so it was just this exponentially growing cost curve. By early March of 2000, we had about—we combined with Elon's company, that was doing the same thing. It was four blocks down the street from us in Palo Alto, a 50-50 merger, Elon Musk's company.

And then the combined companies had $15 million in the bank, and the burn rate, because of the exponential growth, was approaching sort of $10 million a month. And then we succeeded in raising a lot more capital, the marketing kept going. We started dialing it back. And then it turned out that there was, in fact, a very hard technological problem. There was enormous amounts of fraud on the Internet at that point in time. And actually, most of the competitors, most of the banks that wanted to launch parallel products were actually, in some ways, too scared to launch anything because they thought all the money would get stolen. And so we had some time to figure out how to solve the fraud, to build more technological defensibility.

And over time, some of the network effects in the sort of payment system kicked in. And so I think there's often something like—the PayPal thing in some ways was a very crazy story. I never quite know what precise lessons one should draw. We at least had a powerful vision. It was very differentiated. And we were honest with ourselves that it was not necessarily a massively sustainable advantage. There was this email money link. It was a great insight. And we had to capitalize on it as aggressively and quickly as we could. And I think these are the kinds of things that one has to think about in many of these FinTech businesses. I've invested in a number of them over the years, and the challenges

are that very often, there are many that are quite good and that have a dynamic that's somewhat similar to PayPal, where it's a really good idea, it can be copied fairly quickly, and so you have to sort of aggressively raise capital for the business. It ends up being a somewhat dilutive process as you scale the business and rapidly ramp it up. And anything one can do on incrementally improving the business model, if you make it less dilutive, if there are ways to scale it quickly in a non-dilutive way, that's both very unusual and very powerful. When you can pull that off, that's incredibly important. So we've sort of looked at all of these, trying to pull all these different things together.

I think one of the areas in FinTech that I would suggest people are a little bit too nervous about, perhaps, is the specter of regulation. There's always a bias to try to do things in the most unregulated way. This has certainly been true of a lot of the investments we did. It was true also in the PayPal history. We originally had this idea we were going—we were just going to build the first cell phone bank, the first mobile bank in the world. And then our CFO had a sort of two-foot-high stack of paperwork that he had to fill out to start a bank, and convinced us that we really didn't want to start a bank after all, and that we should just go into this somewhat thinner payments business. And I think that that was perhaps the right thing in 1999, 2000.

I have come to wonder whether there are a number of these somewhat regulated industries that are actually, if you can go through some of the hoops, it may be worth it because so many people are discouraged, both on the entrepreneur side and of course also on the investor side here in Silicon Valley. There's an almost allergic reaction to anything that's regulated. And so if you go into one of these partially regulated industries, it can be slower, but if you get through some of the hoops, this can be a fairly decisive advantage. And then I think the other question that's always an important one is, so the initial monopoly, the initial technology, having a view on the overall marketplace. And then I think the other one that's always a very important one is this question of the endgame.

Is it sustainable? How does this work in the long run? We went through this exercise at PayPal in early 2001. We'd been in business for only 27 months. And it was sort of a discounted cash flow analysis of the business, which is always a little bit of a fictitious exercise. But we looked at it was a very high growth rate, very high discount rate. And almost all the value was in the terminal value. We concluded that 75%, 80% of the value of our business came from cash flows in years 2000 2011 and beyond as of 2001. And I submit that something like that is true of every single company represented in this room, is that three-quarters or more of the value of your business will come from cash flows 10 years from now in the future, 2026 and beyond.

That's just the math. That's just the discounted cash flow math equation. And this is extremely counterintuitive because everything you think about is, well, how do we grow it over the next few months, the next quarter, the next year? And I don't want to minimize or diminish these questions, but the real value question is not, are you the first mover? Are you the next mover? The really valuable companies are the last mover. It's the last companies that end up defining the category. Is Google the last search engine? Microsoft the last operating system? The last—hopefully, PayPal is the last sort of email payments company that will ever be built. It's the last company in a field that often ends up defining.

So you want to be first to get a jump start. And even more importantly, it's an and. It's not an or. You want to be the first mover and you want to be the last mover. And so thinking about this question of how the advantage builds sustainably over the long run is a very important kind of question as well. These are some of the sort of questions that I tend to like zeroing in on. The answers are always somewhat speculative. It often involves a story that you tell about how the future looks, how things are going to work out. It's not empirical. We don't have time to know whether it's going to work or not. By the time it works or hasn't, the business already has succeeded or is out of business. And so it's sort of a very analytic exercise.

And how coherent is it? How plausible is it? Do we think the story makes sense and can work? But if you just push on these kinds of questions, you can get to, I think, a very good sense of the coherence of a strategy. And it ends up being very powerfully differentiating between many different ones. The title today was Developing the Developed World, which is this broader rubric that I always try to put everything under. I think that as the 21st century progresses, we can have progress through globalization, through copying things that work, and through technology, through doing new things. I differentiate these very strongly, where I always draw globalization on an X-axis, sort of horizontal, technology on a Y-axis.

It's vertical. And I think that we should always, we should always keep in mind the sort of vertical, intensive, doing new things as a way to open new markets and create new products. The globalization narrative was very powerful from the '70s to, I think it peaked in 2007. And I think since the 2008 crisis, we're living in a world where I think, once again, there's a sense that there needs to be more innovation, doing more things. Things have gotten very unbalanced. People were too focused on globalization, not enough on technology. And it was already embedded in the language we used to describe the world when we divided the world into the developed and developing worlds. That very dichotomy is a dichotomy that's pro-globalization.

It's convergence. The developing world is that part of the world that's copying the developed world and converging. But it's also an anti-technological dichotomy because when we say that the U.S., Western Europe, other countries like that are in the developed world, we're implicitly saying that we're in that part of the world where nothing new is going to happen, where things are done, finished. Nothing new will happen. And I think that's a bias that we need to very strongly resist. And, you know, the banks, the big banks that, you know, many of us are indirectly competing with, although hopefully not too directly, but indirectly, they were geared to globalization like crazy. They forgot about technology.

They forgot about doing new things. They have internal politics that preclude them from doing new things for the same reason the banks couldn't do something as simple as linking email with money in 1999. They're culturally and politically geared against innovation. And that's why we should never underestimate how big an opening there really is and how we can get back to answering what I think is a very contrarian question of how to go about developing our so-called developed world. Thank you very much.

Thank you.