Max Levchin and Peter Thiel: Smart Venture Capital in 2011

Good evening and welcome to tonight's meeting of INFORUM, a division of The Commonwealth Club for Young Professionals with a mission to inspire debate on civic issues. You can find us online at commonwealthclub.org/inforum. I'm Brad Stone, senior writer at BusinessWeek and your moderator for this evening. Tonight, we are lucky to have two of Silicon Valley's most successful entrepreneurs and deepest thinkers here to share their ideas of what the future holds for high-tech investment and startups in 2011. Max Levchin is one of the creators of PayPal, the online payments business, the founder of Slide, one of the first social application companies on the internet. Last year, Slide was acquired by Google, where Max is now a vice president of engineering.

He's also an active angel investor. Peter Thiel is also a PayPal co-founder and is perhaps best known for his early investment in Facebook. He is the president of Clarium Capital, a hedge fund, and a managing partner of the Founders Fund, a San Francisco venture capital firm. Peter is also known for his involvement in, let's call them, unconventional philanthropic causes, like anti-aging research, the Singularity Institute for Artificial Intelligence, and the formation of self-sustaining sovereign countries out at sea. Last October, he announced a program to award fellowships to 20 entrepreneurs under the age of 20 on the condition that they drop out of college to pursue their venture full-time.

As you can imagine, that has proved controversial. So that clearly gives us a lot of territory to cover. Let's get started. Guys, there's clearly something remarkable going on with valuations today in Silicon Valley. Goldman Sachs just invested in Facebook at a valuation of $50 billion. Groupon's valuation seems to add a zero to the end of it every time I check. Is this just optimism in the current opportunity that the internet and social media holds? Or are things getting a little unchained from reality?

I think it's silly to consider it as a broad trend. I think you actually have to look at each individual company and try to make a value judgment. At least you should as an investor. If you look at Groupon, it's the fastest-growing company ever, apparently, with revenues in a similar trajectory. Who knows? They're probably undervalued, even in the last round. There is a startup that pitched me about two weeks ago that has two engineers, a PowerPoint—actually, sorry, take that back, no engineers, a PowerPoint—and a really neat theme, $16 million pre-valuation. That is an overvalued company.

It's, well, it is, I think the valuation question is nowhere near where things were in 1999-2000. It's very hard for there to be a bubble if you have no IPOs. And there still are basically no IPOs that are going on. And so I think that even though there's a lot of speculation surrounding a handful of companies, it's really nothing like it was in 1999-2000.

One of the big changes really over the last two years has been the arrival of Digital Sky Technologies, a Russian venture capital firm, who are very optimistic. They're putting a premium valuation and premium towards terms on almost everything. How do you compete with investors like that, Peter, when their optimism has no bounds and it really seems like terms don't matter a lot to them?

I don't think they've—it looks like they've done an extraordinarily good job in their investing so far. And so it sort of puts, certainly puts the question to whether things have been as overvalued as people think. And I think one of the things that's happened is people in the US are still extremely burned on the late '90s. People still do not believe in technology. And I think that's one of the reasons that was such a big opening for DST to come in as a later-stage investor. And I think the valuations are all over the map. There's some things that are cheap, some things that are probably expensive, some things that are in between. But I don't really think you have a bubble in technology.

Max, DST and Ron Conway, a prominent angel investor in Silicon Valley, recently announced that they were going to invest $150,000 in every startup that came through a startup program called Y Combinator. It sort of sounds from the outside like an undiscriminating approach. As an angel investor, what do you make of that announcement?

Several things in parallel. It's a very smart move for them in the sense that if you believe that Y Combinator has a reasonably rigorous process, they're essentially—they've just created an index fund where they said, 'Well, Paul Graham and his cohorts have figured out a way to select really good entrepreneurs.' And I think five years ago, or I actually don't remember exactly when it started, but it seems like eternity—you could make legitimate arguments saying Y Combinator just doesn't have huge companies. They're all these little featurettes, really, of a couple of entrepreneurs. They didn't know they were entrepreneurs until they went to Y Combinator. It's really not true anymore. If you look at Airbnb and Dropbox, these are all Y Combinator graduates.

So these days, they are creating companies that are probably going to be quite valuable when they do exit. So it's a great index fund investment. It is also the case that a huge number of phenomenal companies—and sort of using my previous example to underscore that point—do not go through the Y Combinator program. So it's not exactly as though DST has showed up and said, 'Angels, leave the room. We're the only guys here.' But it is clearly the case that by offering what is a phenomenal deal to the Y Combinator group, they certainly shut out certain valuation-sensitive angels, which is what competition is all about.

Peter, from your perspective atop the Founders Fund, do you look at that deal and think that's a good move?

I thought it was a brilliant move on their part. I do think there is, within the technology space, there is a question as to where the right place to focus is these days. And if I had to make any categorical judgment calls, it is that the Internet is somewhat more mature, and there are other sectors that are somewhat more promising to focus on at an early stage. But I think it is quite possible that a greater proportion of the Internet companies will be coming out of Y Combinator in the future. There will be new Internet companies created, and some of them will become very valuable. So I think it is probably going to be a very good investment.

Well, it seems to me from listening to you speak publicly, from reading what you write, that you've been a little disappointed in some of the innovation coming out of Silicon Valley. You make a distinction between extensive gains, sort of incremental advancements, and intensive innovations that really have the ability to change humanity, and you've invested in SpaceX, a company that's building actual rockets. Talk a little bit about that and, you know, whether you're impressed with some of the companies and the ideas that come out of Silicon Valley and programs like Y Combinator?

Well, I think that there is a lot of innovation happening in Silicon Valley. I think there's more innovation happening in Silicon Valley than elsewhere in the U.S. or probably anywhere else in the world. That being said, there is this open question whether it is enough to actually take our civilization to the next level 20 years from now. You have sort of this very widespread pessimism in the U.S. about the future, where people think things will be worse in 20, 25 years. The government's racking up too much debt. There are all these different problems people cite. And if we really had tremendous technological progress, this wouldn't make any sense at all. And so I think there is something very odd about this disconnect you have between the sort of extreme optimism

in certain parts of Silicon Valley and what's happening even 30 miles outside of here in California where the state's close to bankrupt and sort of all these things that have strangely gone very wrong. And so even though I think there is technological innovation and a lot of that is still happening, it somehow has not been enough to drive the whole society. And you have questions why that is. And my own sense is that somehow we're not doing enough to really create major breakthroughs. And you have sort of a lot of cultural, political, social, economic questions, scientific questions why that is.

A company like Facebook, which you invested in early, is that to you a sufficiently ambitious initiative, expression of optimism? Does it have the ability to move the needle on humanity?

I think Facebook is an extremely important company in terms of how it's going to impact the world. And so if you, you know, I mean, it's the precise causal event sequence of things that are happening in the Middle East, for example, the last few weeks, but there certainly is a sense that the social networking piece has somehow decentralized media in ways that may, may really change the world in very significant ways. So I think it is an extremely important company. But I think in a way that's the wrong question. The question always gets asked about, "Is Facebook going to make money? Is it overvalued? Is this specific company going to be a specific failure or a specific success?" And the question is more, why is Facebook the company people talk about more than any other company that's been created in the last decade?

And why is there such a big drop-off? I mean, obviously, there's going to be one company that will be the most successful. But why is the next one so much less successful? And where are all the other companies in that list? And so I think, specifically, it will do very well. But generally speaking, we need to do much more.

Max, I know you've heard Peter say that before. Do you agree with that? Do you think that your fellow entrepreneurs are being sufficiently ambitious?

I think there's lots more room. I think one of the things that has been fascinating to read about recently for me is the sense of just insane abandon that people had felt during, for example, the beginnings of the space program in this country and the Soviet Union, where I was growing up during the beginnings of the space program. It seemed that people were extremely happy to put their lives on the line every day just to achieve a—what seemed—relatively incremental task in the service of a larger goal of putting a man in space or putting a man on the moon. And I think in recent years, I don't see that similar narrative played out anywhere in innovation, not in Silicon Valley, not in natural sciences, not in any of the areas traditionally referred to as a hotbed of innovation.

We hear a lot about the screen in the iPad 2. Today's leaked pictures sound very exciting, but it is not that radical. And the radical innovation that was seemingly just peppering the early part of the 20th century isn't quite the story of today.

What's holding it back?

I think there's just a variety of speculation we can have right now on that topic. My sense is that there's a certain bifurcation that always takes place in the minds of entrepreneurs: the short-term outcome versus the long-term outcome. And the balance has shifted from the long-term outcome to the short-term outcome. The other thing, which, as a Bay Area libertarian—which is to say I'm not quite as libertarian as I probably should be—it pains me to say this, but, you know, it took Kennedy to get out there and say, 'Look, we're going to go to space. We're going to put a man on the moon,' or Khrushchev, or whoever was on our side to do the same. And you don't have that today in the rhetoric of the U.S. government, and no other government in the world, really,

except for developing countries or countries that are rapidly coming up to speed. But what they're doing is they're basically saying, 'We're going to be just like those rich guys in America.' They're not saying, 'We're going to go way beyond and put a man on Mars.' There's no need. What they need is to feed their people and get them to the point where they are now competing successfully against the United States. And we are sitting pretty. We're already there. And so it doesn't seem like anyone is that interested in just going way out there.

Well, you guys backed SpaceX, which obviously is fulfilling some of those same goals.

Well, look, I think there are definitely examples one can give of these, but they're striking because they're counterexamples to this broader trend that this is not what is happening. And I think one of the things that's very strikingly different from the 1950s or 1960s is how the future—as in, not the super-distant future 100 years from now, which is very hard to speculate on, or the near-term future six months out, which you can probably extrapolate from various growth curves, but sort of the intermediate future, 15, 20 years from now—is not really a subject for serious discussion. And so in the '50s and '60s, it was like we were going to be in space. We were going to the moon. You'd have bases on Mars.

You'd have flying cars. You'd have supersonic airplanes. There was a very specific way people thought that things were going to progress. And this was a subject for discussion. And I think today people can be optimistic about the future, but the optimism is very indefinite. It is sort of, 'It will be better, but it will be better because it's always gotten better, because it'll be figured out.' And so the future is not a problem that people have to work on themselves. It is a problem for other people to solve. And that's been a very efficient way to do things for a long time. It's been very efficient to have other people do things for you. It's been very efficient—it's been efficient not even to think, in a way.

It's been efficient to outsource thinking, outsource all sorts of stuff, but it gets very dangerous when everybody does that. And so if you ask who is actually working on the future, the people in DC will say, 'Well, we don't have any specific ideas, but surely it's something that's going on in universities or Silicon Valley or something like that.' And then when you drill down, it's really unclear where that is actually happening. Typical topic of conversation: if you talk about underwater cities or turning deserts into agricultural landforms or any sort of massive changes like that, that's just incredibly bizarre. In 1960, there was a very serious proposal someone made in the San Francisco Bay Area to dam up the entire Bay Area.

to fill it with an earthen dam and basically drain it out and replace it with a freshwater lake. And this was a congressional hearing. There were people in Congress who had him come testify. The Army Corps of Engineers did sort of a miniature model of it. And it sort of got—he worked on this and it got a significant amount of traction. Thank God they didn't do it. That's the perspective today. Certainly, there were all sorts of other things like that. The Hoover Dam was in the 1930s. The counterargument of the Hoover Dam was, this is crazy. We would never need this much electricity. Today, it would never—something like even the Hoover Dam would not be built today. You would not be building the interstate highway system.

There's no need for people to drive. People aren't driving between cities. Why do you build it? And I think there's a whole set of things like this that have changed quite dramatically. I don't think the U.S. government could do the space program today. I don't think it could do the Manhattan Project. I don't think it could even start the Manhattan Project. The letter from Einstein would get lost in the mailroom.

But you'd like to see entrepreneurs take up that mantle of ambitious projects.

It's a broader problem than just entrepreneurs. I think it's generally the narrative of the nation to some extent. It starts with a president getting out there and saying, "We're going to build a cure for cancer in the next 10 years," or, "We're going to give everyone a flying car," or all these things. Having that in the fabric of the conversation, the front page news, drives people to wake up and say, "I'm going to drop out of college and start a company tomorrow morning because I just heard on the news we're going to have a cure for cancer, and by God, I'm the guy to do it." If you don't have anyone saying that out loud or publishing the front page, "Well, I heard a friend of mine just made $10 million flipping a company before they launched."

It's not a bad way to go at all. I'll do that instead.

Well, we'll get to more provincial topics like IPOs and Facebook and Google in a minute, but because we're talking about this, you've contributed some money to seasteading. Tell us a little bit about that and what you see as like the real potential or practical possibilities.

Well, this was a bit of an experimental project that we decided to underwrite. It's the grandson of Milton Friedman, who started it—a former Google engineer. And the basic idea was whether you could help create autonomous communities on the ocean. It's an engineering problem. We gave it a small amount of money to basically stimulate some thinking about it. They've done something called Ephemerisle, which is like a Burning Man with ships and boats in the bay. And so they've done various experiments with it. And we're actively soliciting business plans for seasteads at this time. So if people have specific ideas, they should direct them to the Seasteading Institute.

Max, will you be moving to a seastead when they exist?

I get easily seasick, so probably not.

Good. Okay, so let's talk about the IPO climate today. LinkedIn has filed to go public. Groupon may go public this year. Facebook, maybe next year. Peter can fill us in on that. The IPO, there's so much attention paid to it. It's sort of seen as a company getting into the end zone and doing a touchdown dance. Is that the right way to look at it? And should these companies be going public now, Peter?

Well, I think the striking thing is that they're taking a very long time to do it. And in some ways, I think the Google IPO in mid-2004 was a very important turning point, where the story that the media wrote about the Google IPO in July 2004 was the IPO window is opening up again. Companies are starting to go public again. But the real precedent that Google set was actually you don't go public until it's very, very late. And if you look at when did Google really win the search wars, it was 2002 to 2004. Had they been public two, three years earlier, Yahoo, Microsoft might have been able to track how well they were doing and probably would have competed much more aggressively with Google. There were all sorts of other benefits to staying private.

But I think that's actually the precedent we have. And we're now in a world where you want to defer going public as long as possible. You have constraints. You eventually hit 500 shareholders, typically. It eventually gets very, very complicated. And there's some point where you have to go public. But I think the Google precedent is the one that people are following in Silicon Valley.

Peter, what did you think of some of the spectacle around Goldman Sachs' recent investment in Facebook? But really, Goldman Sachs and its clients were exclusively allowed to invest in the company.

I think it's probably just—I don't think there's too much to read into it. It's probably just an ongoing part of the anti-Wall Street saga. So it's assumed that anything Goldman does involves some sort of nefarious types of insider dealing, and people may believe that or not, but I think that it was basically a story about malfeasance by Goldman.

So incorrectly interpret it.

Probably incorrect, but that's up to people to decide.

Max, you guys had the experience of taking a company public with PayPal in 2001. Tell me what the process holds for LinkedIn, Groupon, maybe Facebook next year.

It's pretty different these days. We were one of the very last companies to go out before the Sarbanes-Oxley sword hanging over our heads, for example. The entire process is pretty onerous and, to some extent, it's designed—celebrations around the IPO time are actually a direct consequence, in part anyway, of the suffering that leads up to it. I remember sleeping at the printers for several nights in a row and being awoken by the boot of a lawyer who was kicking me awake to ask for some patent-related issue. But it's a pretty huge process that really derails a lot of the efforts within the company. The reason—to sort of put a little bit more color on what you're saying, I agree that we are now in a world where people defer going public as long as possible.

One of the reasons to do so is you swear it's never going to happen to you. You tell your employees to just stop thinking about it, not look at the stock price. But the day your shares become listed, instead of having this hypothetical "What am I worth?", you can now just set up a little script in Excel that pulls the share price at closing or every minute, if you like, or every second. Or you can get direct quotes with all the contracts going on and calculate to the tenth decimal place exactly how much money you have to spend on that new car or house or whatever it is you've been dreaming about. And people's attention really shifts from long-term betterment of the company to exceptionally short-term consideration of where they are in their financial well-being and their mood, their ability to execute, and their willingness to invest their time in long-term projects.

really just becomes essentially can be charted and, in fact, tracks the stock price. As you know, when the stock goes down, you feel down, and you sort of feel like maybe you should be looking for another job to hedge your bets. And if the stock is a rocket ship, you know, nothing can hurt you. So, it... I don't envy the companies going public because it layers an enormous amount of public scrutiny, analyst scrutiny, misinterpretation by everyone who has a free moment, but most importantly, it really derails the employee productivity and focus because they can now busy themselves by contemplating what purchase they're going to make on the day the 180-day lockup is over.

So, does that portend a sort of deceleration in innovation?

Absolutely. It slows you down. You really should go public once you're essentially on rails. The famous quote from Meg Whitman many years ago is, 'Monkeys can run this ship,' or train, or whatever it is she was comparing it to. It was generally perceived as a huge insult because she was calling her employees monkeys. But what she was really saying is the business model and the network effects of eBay were so strong that even if people worked at half capacity, it wouldn't really have mattered for the value generation capacity of the company. And that was a huge compliment to give to herself and her crew. She basically said, 'Look, even if people are spending half their time staring at the stock price and figuring out what they're going to do with their money, it doesn't matter.'

'We're still making tons and tons of money.' And they did for a very long time. So, I think... before you decide to pull that trigger to go public, you really should get to the point where monkeys can run that train.

It is unclear when that actually happens, though. And it's possible that it takes quite a bit longer. And so, you can think of the pre-IPO phase as the innovative phase and the post-IPO phase as the extensive phase. So, the innovative phase is intensive. You're creating something new. The extensive phase is you're just scaling it. So, zero to one is pre-IPO, one to n is sort of the post-IPO world. And if you think of, sort of, the greatest, most highly valued technology company in the world today—is Apple Computer. In 1985, Apple got rid of Steve Jobs and replaced him with Sculley because they thought selling computers was like selling Pepsi, and that it was basically that all the innovation had been done.

And it was just a matter of marketing and scaling. And I think that probably was not the exact correct determination with respect to Apple. And you wonder if that's the correct determination with any of these companies. The ones that have continued to do it post-IPO are phenomenally impressive. So, I think the most impressive of the early internet companies from the '90s is probably Amazon, where, in some sense, it's sort of psychologically extraordinary how Bezos has sort of, like, ignored everything people said, didn't care about losing money for years. And it sort of looks like it paid off, but somehow they've been able to keep a very long-term focus even with this. But that probably requires just an extraordinarily stubborn person.

So, what's the thinking on the board at Facebook about preserving a kind of intensive innovation cycle even when the company is publicly held?

Well, I think these are reasons that the bias has been to try to defer the IPO. There are constraints. There are points at which you hit the shareholder number, and you have to go public. So, if you have over 500 shareholders, you become de facto a public company, and then you have to start filing. But certainly, the idea has been to avoid that as long as possible.

Max, let's talk about what you're up to these days. Last August, Google bought Max's company, Slide, for, I believe, more than $200 million. What did Google get when they bought Slide?

I'm staring directly in the face of the person—one of your colleagues, one of my colleagues from Google PR, who is probably terrified of the thing I'm going to say next. Don't mind her. No, she actually came from Slide. But I think Slide was an over 100-person company with a number of products and a five-year journey through the wild and woolly social space before it was called the social space. Probably given the fact that Google is fundamentally driven by the people it has, the most important thing Google got from this Slide acquisition is the collective DNA and the shared intelligence and, frankly, the war scars and stories that we have to share from the journey. It also got a few other pretty valuable things which I'm not at liberty to share anything about, this being Google and all, but I'd like to believe they got at least their money's worth.

Well, I'd like to ask what you're working on today.

Part of the success of Google, of all my six months of experience being there, is their ability to keep secret the things they're working on until the time it's time to talk about them is a key ingredient. So seeing how I'm working on things that are secret, I have to keep them secret.

Fair enough. So let me put the question then to Peter. Peter, your friends in Mountain View have created a tremendous business, but an algorithmic-based search and advertising business. You know, what's the opportunity and what's the challenge for them in social?

Well, I think the question is really whether it's something that's fundamentally—how different it is from search. And certainly, the Facebook bias on this would be that Google's been focused on organizing the world's information. Facebook, in some sense, has been focused on organizing the world's people. And there's a question how much overlap or how different these kinds of things are. And I think the biases of the different companies are very differently oriented. My own sense would be that probably it doesn't make sense for Google to be competing in social, and probably doesn't make sense for Facebook to be competing in search and Google in social, but that's not what's going to happen. There's all these assumptions that things will converge over time.

It may or may not be true. I think the main way in which Google and Facebook are competitive today is not on any sort of a product level or any sort of overlap on that. It's mainly on hiring talented people. And that's probably why the two companies are super focused on one another. There was a shift where the talented people started going not to Microsoft, but to Google. And that was a major point in Google's ascendancy. And I think that's probably one of the main things that Google would be extremely focused on. So I think it's more the people than the specific products at this point.

It sounds like you think there might be more direct confrontation on the line.

I think these things are so hard to predict. My suspicion is that it's probably overestimated because I actually think people are very different from information. So I think these things are really, really different worlds. And organizing the world's information is very different from helping to get the world's people to share and network with one another. And so they seem like very different companies, but I think the place where you have incredible overlap is on competition for talent in Silicon Valley, which is at a pretty intense phase.

Now, you guys have been friends and colleagues for a long time. And on this particular issue, you're sort of sitting on opposite ends of the table. What's the status of Max-Peter relations these days on this topic? Is there a free flow of information?

I think our friendship predates the Google-Facebook predicament. So I think we're fine. But I'll let Peter speak for himself.

Max, are you still making angel investments?

Yes, I do.

What kind of companies are you looking at?

I try to stay true to my previously stated viewpoint that there's just not enough radical innovation. So the thing that I'm most interested in is something that answers to my, I believe, unfulfilled demand for radical innovation. I typically try to be in the Internet space because that's what I know and love. On occasion, I'll venture out to things that could be broadly classified as non-Internet things that benefit from the explosion in cheap computing resources. In other words, biocomputing, something computing, that sort of stuff. Yeah, that's my investment profile in a nutshell.

A lot of your friends, I think, think that your future eventually is in investing full-time. Do you see yourself doing that? And if and when you do, do you see yourself investing like Peter in big, ambitious, radical, not just seasteading companies, but space exploration, really ambitious stuff?

So to answer the first part of your question, if I knew my future as well as my friends purportedly know it, I would already be there. There's definitely temptation to be on both sides of that story. I love working with entrepreneurs, especially entrepreneurs where I honestly can add value and see someone that wants to do something and I literally have something in the background and I say, oh, just do that and you'll get to your goals. It's extremely satisfying to be there. On the other hand, nothing beats the rush of executing like a well-oiled machine. Being at the helm of that is just a phenomenal feeling and I love that and I love entrepreneurship and to me that's kind of what the American Dream is all about and I enjoy living it every day and kind of look forward to living it as much as I can really.

The answer to the sort of the investment question or the investment profile is a little bit more nuanced than, yes, obviously as an investor you want to invest in huge things because those typically return extremely well and you wind up making a lot of money. The, of course, obvious other side effect of this is that if you invest in huge things by the time they're obviously huge, you're essentially a late-stage investor and you're expecting to make a relatively mild return on something that's probably already pretty well-valued. Things that I found to be really compelling investments that either work out or don't, but when they do work out, they work out great are the ones where the idea is actually relatively narrow and the entrepreneur is really focused on doing something exceptionally well, but they're doing this in a market that has just enormous potential.

One of my more successful investments is Yelp. And when those guys started, they had all kinds of ambition, but the number one ambition they had at the very beginning was to just make an awesome local review site for San Francisco. San Francisco's a small market, less than a million people. At the time, I think a lot of my friends told me, 'That's kind of a wacky investment. Those guys throw local parties. They rent out bars, and it's always going to be landlocked in San Francisco.' I didn't really mind that, although I did have my concerns. Five years later, they are an international juggernaut just nailing it with their local review service. They were able to figure out the exact formula in San Francisco and replicate it everywhere else in the world.

Peter, what are you looking for today in an entrepreneur to back?

Well, I do think we're looking for companies where there is a very powerful narrative around the company, where there's some powerful story as to how they're going to really change the world. Because I think you have to, as an entrepreneur, you're trying to create something new. And obviously you want people who are very smart, very talented, they're looking at a good business. Beyond that, there has to be an ability to attract a number of other talented people. And that's how you really build the critical mass that builds these great businesses. And so I think normally when we find talented people with a powerful story, that's almost enough for us to invest. I think that's actually very, very rare at this point.

But you have to ask the question: what will motivate the 20th or 30th or 40th employee to join this company when it's probably not financial and it's probably not fame or anything like that? It has to be that they believe that there's something incredibly powerful and valuable about what it's doing.

A lot of your colleagues in venture capital are rushing to lay down roots in China. And of course, there have been a lot of incredibly successful internet stories coming out of China: Baidu, Tencent, Alibaba. But from one of your earlier comments, I get the sense that you're not all that bullish about real innovation coming from Chinese entrepreneurs.

Well, this is keying off of the point that Max made. I do think there will be a lot of companies that copy companies that were developed in the developed world in the emerging markets. But the issue in most of these emerging market countries is they have a lot of just very basic things to do that are extremely straightforward. And so in China, you can probably make a lot of money just starting a McDonald's franchise. It's not straightforward, but there's a lot of basic things you can just copy. In the developed world, it's much trickier. And that's why I think the incentives are actually for people to try to innovate in the developed world, whereas in the emerging markets, the incentives are for people simply to copy.

And so to the extent people have been investing in emerging market countries as an arbitrage, where we look at businesses that were done in the U.S., and then we'll invest in similar ones that are starting in other countries, that's been quite a good model. Baidu's search engine in China—search was valuable in the U.S. We know it's valuable. China's big. The search engine in China is probably also going to be big. That was a very good way of thinking about it. But there have been relatively few technology breakthroughs that have come out of the emerging market countries to date. That may change. My suspicion is that that does not actually change until they become developed or closer to the frontier.

So do you think your colleagues that are opening offices in Beijing and Shanghai are misguided?

Not necessarily. I think it's just—I think their model is—so, they're misguided to the extent it's not an arbitrage model. To the extent it is, to the extent they're looking for breakthrough technologies in these countries, that seems unlikely. To the extent they're looking to just invest in companies that are very similar to ones that have been developed in the developed world, that might work very well.

Could we call Tencent an exception to that rule? I mean, they seem to have innovated quite a bit. This is the second-most highly valued internet company in the world, and they seem to have innovated quite a bit in virtual goods and real-time messaging.

The interesting thing about Tencent is that their original product that sort of drove their enormous audience aggregation is a copycat of ICQ. So I think it's an exception to the extent that it started as a copycat and developed itself into a much broader set of services. The real innovation that Tencent did sort of introduce is they proved quite decisively that you can make an enormous amount of money from an audience that is actually relatively poor by international standards simply by aggregating an enormous audience and selling them things that they seem to value irrationally.

Like little icons for their instant messenger.

I wouldn't know anything about that.

You guys have a shared history in the payment processing world with PayPal. And there's a lot of innovation right now in payments. There's Square and mobile phone companies trying to get into the game. Google has been adding some former PayPal execs. What do you guys think of the market right now? And do you still have interest in that industry?

Sure. I'm an investor in at least one of those companies. I think there's—Peter, I think, said it a long time ago—if you want to make a lot of money, you should get as close to money as possible. At least that was the model for PayPal, and we did all right. I think payment is a complicated topic for me because I can't talk about it in generalities. There's just too much stuff in my head about it for a long time. But there are huge opportunities now, even in the cracks between features that PayPal has implemented, simply because it's such a large product for so many people. There's opportunities by way of people not having enough time to develop everything. But there are also enormous changes in the world by the emergence of smartphones and just the general acceptance of phones and phone payments, and trust becoming a much easier commodity to come by in payments on the internet.

All that stuff is just generating tons and tons of opportunities. It's not entirely clear to me, however, to put a darker cloud over it, that anything out there right now is really attacking the very core of the payments infrastructure. For example, the interchange fees that Visa and Mastercard charge and the acquiring and issuing banks model has been around since the day Visa and Mastercard, or even before that actually. And that's—no one's really challenging that today as far as I can tell. And so challenging that is an opportunity, and it is the sort of thing that will probably fail, but it's worth trying.

How about, how about technologies like near-field communications, which Apple and Google are building into their mobile phone platforms with the idea that the phone can be used as a payment mechanism?

You know, that story has been in a few newspapers, somewhere in the 1960s, I think, or maybe '70s, and it just keeps on coming back, how you're gonna have something in your pocket that's not gonna be your wallet. The fundamental judgment call one has to make as an investor looking at such opportunities is: is the process easier than pulling a fiver out of your pocket and saying, 'Here you go'? And if it doesn't pass that test, it's never going to succeed. And then the other one that's really important that we figured out a long time ago, early on in PayPal history: it's two friends at a dinner table and a restaurant and they want to split a bill. The solution you're offering those people better be simpler than me saying, 'I'll get you next time,' because that works really well.

And there's not a lot of market for that product.

Yes, my standard account on this is if I knew as much about payments as I do today, we would have never started PayPal. And so I'm glad that we started at a time when we didn't know this much about it. The payments business is extremely valuable if you get it to a certain scale. It's very hard to get it to scale. It's fundamentally a networked business. You need to actually create a network. Unlike most products where you just need to have single audience members, a payment always has two counterparties to a payment. And so there is something about it where you have this very strange chicken-and-egg problem. It's like, we're going to create a new currency. We're going to create this whole new system for doing things.

It may be a lot better, but it only works if you get a critical mass of people to use that. How do you get it started when nobody is using it on day one? And I think that's the fundamental challenge every payments company has. And it makes it very hard to start, but if you succeed, it makes them very valuable.

So this is going incredibly fast. We're going to start taking questions in about four minutes, and you can line up at the microphone here. Max, you recently wrote a lengthy post on Quora, the question and answer site, about lessons for young entrepreneurs. And number 10 was, figure out the one thing each of your investors is genuinely good at, and insist they help you with that, so that among other things, it will save you from their help in other areas. Now, Peter was an investor, of course, in Slide via the Founders Fund. So where did you not want his help?

I can tell you exactly where I wanted his help.

That's interesting, but also...

I think Peter is probably one of the best fundraisers I know, and so when we started Slide, I really wanted to learn how to portray the company really well with investors, how to raise money on good terms with good valuations. And so I looked to him for help a lot. I think one of the nicer things about Peter is that he is not at all interested in helping people in things he doesn't do very well. So I never got to experience things that he doesn't do very well because he's never really pushed them on me.

Okay, so now an awkward question for Peter. Peter, you were an investor in Slide through the Founders Fund. I get the sense that the sale of Slide to Google didn't meet Max's personal goal. He had talked about a PayPal-scale exit. Did the sale of Slide to Google meet your goal for Max?

I think these things are, you look at where a company is at a given point in time and that decides sort of how these things play out. I think as an investor, what we think of with all our companies is, on the one hand, we want them to do as well as they possibly can. And on the other hand, you don't want people to have a company try to reach for more than is reasonable. And I think the Slide exit to Google was an incredibly good outcome that all the investors and employees were or should have been happy about.

okay now we have a all a long line of questions here so i invite you all to be very distinct with your queries uh... my question is for mister feeling of max wants to join in that's fine uh... i submitted solution to the deficit commission that wouldn't called uh... wikipedia ebay like website looking at solutions and getting input from various players in our country and i was wondering if you'd be interested in that i called the shock and all counterintuitive libertarian approach to solving this problem. And could you also comment on Israel's entrepreneur spirit and how it as a socialist nation is doing and China as a communist nation, how it's doing in comparison to where the United States is going in this decade?

In three sentences or less.

Can we crowdsource solutions to the nation's problems?

I'm skeptical of that. I think that the wisdom of crowds has been very overrated. And I think that if you're libertarian, you should be skeptical of the wisdom of crowds as well. That's my sound bite answer.

And the entrepreneurial culture in Israel, I guess, was question number two.

Max, you can spend more time there.

That is probably true. I think it's pretty amazing. And just having gone there and met the entrepreneurs, I literally had to once give a speech to what seemed like an enormous crowd of Israeli entrepreneurs under the open skies, which was supposed to be a 20-minute talk wound up being a four-and-a-half-hour, I think, question and answer session. And people just had this insatiable appetite for information about how to start companies, how to succeed, what to do in failure. It's really, really sort of exciting to be there. I think if you look at return on investments in Israel, it actually has not been a phenomenally successful place, just judging it objectively on an ROI basis, but I think the jury's still out.

I think the many books, articles, and essays describe all the interesting specialties of Israeli entrepreneurs probably better than we could this panel, but the connection to the military is sort of fascinating. Yes, sir.

My name is Leonid Nakhutkin. I came to the United States directly from the jail as a refugee. It's the same, Max's family came to the United States as a refugee from the same country. And my question is, are you have invitation from Russian government to participate in their Silicon Valley project they called the Skolkovo? And second question, are you ready to invest your money to your native country in Ukraine or Russia? Thank you.

So the Silicon Valley in, I think it's near Moscow, so I'm aware of this project. Someone from the Russian Ministry of Commerce or whatever the equivalent is had contacted me about it at some point or another in Davos, maybe a year or two ago, and my general sense was that I would love to participate in it if I believed in it, but just in those conversations alone, I realized that it was probably not going to work. I think the way things were being structured, the way they were thinking about it, just seemed immature. And I stated so to the person talking to me on the spot, and they haven't talked to me since. So I imagine it's either doing really well and I missed out, or it's not doing very well and I was right.

But I'm not that much more aware of it than two years ago. I have invested and I believe to date only lost money in Ukraine. It doesn't stop me from investing in the future, but I have certainly done it and have not seen positive results so far. I do not restrict my investing to Silicon Valley or any other geography. However, I restrict my investing to areas that I have sufficient amount of transparency into, and as a libertarian, where I believe the rule of law will likely prevail in important disputes. I certainly don't have a lot of clarity into what's going on in Ukraine these days, or for that matter, much of the former Soviet bloc. And I have some real concerns about prevailing rule of law in certain countries there.

Yes, sir. Hi.

My question is centered around the internet. We have right now in the United States, it seems like that we have a very slow or a very small volume compared to Europe. Europe has somewhere I think they changed to fiber optic something like about 20 years ago. We were really way behind. And the internet is starting to look more like a telephone, like a movie. You can get so many things across. And it's starting to really pick up. And now we're hearing about two-tier systems and the ISPs and how much they're costing and everything going up. I noticed, I think Peter, I believe your company, I think it's Founders Fund, invested in a company in fiber optic out of New Zealand, and it's going to connect, I believe, New Zealand with Australia and come across the Pacific to us, maybe Hawaii.

I don't know if you're going to hook up China or not. But can you tell me why you invested into it? And also, how does that actually compare to something like satellites? And do we really need fiber when we have satellites? And can they handle the volume?

Why don't you tell us about your New Zealand project and whether you see that as a model for broadband speeds in the US?

I think that specific one was just a very idiosyncratic, fact-specific set of things we liked about that particular business. Tell us a little bit about that investment. I actually have no strong opinion on how fiber changes. I think there's something about it linking it up across the Pacific where it's probably a pretty critical thing and there was not enough capacity. It's not—and I—and that made us think that was—that particular one was a good investment. But, but I think, you know, I think in general there is something to be said for looking at other developed countries. And this is—this is probably the area that—that one, you know, if you had to have some geographic constraints, that you should—you should look at. There's probably—there probably are things in Western Europe, there probably are things in—

Even places like Japan, which—I don't have any expertise in it, but there's probably not enough venture capital in Japan.

Super grids and power, along with just broadband, is extremely powerful. There's an article in Scientific American in November. That's what's going to enable next-level development. My question is a layer up. I like the quote by Einstein. He said, "You can't solve a problem at the same level of thinking as it causes." So I'm going to ask you one question. Do you prefer the Gordian knot—cutting the knot? Do you prefer actually getting everybody to pick up the elephant that everybody's blind and sees the problem together, like crowdsourcing? I kind of hear you don't like that. Or are you a "find the right mouse" person? I'll ask both of you.

I'm a "change the metaphor" person. That's all right. Change the metaphor. I'm not sure what I'd change the metaphor to, but something not like an elephant and not that you need to cut with a sword. I would change the metaphor. Help me, Max. I'm with a different metaphor.

I'm an outsourcing person. I have a metaphor for you. It's dangerous to mire oneself in meta-level discussions about how to solve problems or how to sort of address big questions. The only metaphor, which I found to be painfully correct through my own negative experience in many companies where I've been both an investor and an observer: if you have a hammer and everything looks like a nail, that's a really bad approach.

Right, and that's what the sword is. It's just execution.

Okay, thank you.

Hi, I'm Nick. I'm founder of a fitness startup here in San Francisco. And I've been actively pitching investors recently, both angels and VCs. And my co-founder and I have sort of made some observations that a lot of the investors are sort of looking for certain trends. They want to see technologies that match some of the newest, most successful trends, be it real-time social networks or geolocation or what have you. And Max's comment about sort of a revolutionary technology and idea really kind of hit me. So I just wanted to hear your guys' comment on that sort of trend and what do you think that it does for innovation here in the Valley?

I think you're pitching the wrong investors. I think if you can quickly identify the fact that an investor is trying to bucketize you into something that they've already seen and think is a hot space, they are just lazy. They're not doing their homework. They are refusing to understand that you have something different to offer. You should shake their hand and go find an investor that actually wants to be outside of what's currently hot. For one, they're also being dumb because whatever is currently hot is terribly overpriced.

Great. Thank you. Let's get to as many questions as we can in our 10 minutes remaining.

So the whole sort of Series A, seed funding, angel funding world has just gotten so either more complex or more interesting or whatever you want to call it. When you guys, every day or a couple times a day, have friends that come to you—two people, heads down on a product, they're just trying to work as fast as they can—what advice are you giving them in terms of the financing? What advice are you giving them about how to go about their financing? I'm mostly interested in this post, this whole Start Fund, SV Angel announcement from Friday.

Well, it depends a lot on... I'm not... I think that we are in a zone where there is a decent amount of capital. I'm not sure it's a complete crazy bubble again, but there is plenty of capital. And so I think the key variable is actually not to focus on that specific thing right now, but actually to focus on what a company is doing, what it is creating. And if you can get that down, I think you'll be able to attract a decent amount of capital.

Thank you.

Both of you have talked about sort of a lack of innovation, a lack of radical thinking. How much of that do you think is just basically a decade of bubble after bubble and financial collapse and credit meltdown? Or how much of that is structural? So, is it that people aren't thinking, or is it that people aren't getting the money and they're scared because Wall Street is going up and down like crazy?

I think there's a part of your question that there's some correlation, because it's very clear the narrative of really, really smart classmates you had or I had or all of us had going to hedge funds instead of to startups in Silicon Valley is real. I think that story has been covered pretty well. But I don't think it's more than that. I think the problem is far more structural and fundamental. I think it really stems from the fact that the Greatest Generation told their kids, 'It's your time to enjoy yourself. Settle down in the suburbs, have two and a half kids, have a dog, live your life.' And that was a really great thing to pass on to the children, but that's not the life they led. They sacrificed themselves to go to space or to win World War II or whatever it is they did.

And the fact that they taught their kids, 'Don't do any of that,' had a profound effect on our generation. Namely, we haven't seen any phenomenal innovation in the last 10, 15, 20 years.

I would say that it's, you know, I think sort of the positive version of it is that there have been a lot of other things that have made sense for people to do. And then the negative version is that it's been maybe harder to do some of the innovative things, or that there have been barriers to that. I would say one of the things is there have been a lot of non-innovative ways for people to do quite well, and that have worked probably for, I would say not really the last decade, but probably really the last 40 years. So probably something like a third of the people in the US who made over $10 million did it in real estate. It's something like that, somewhere between a third and a half. And that was the most straightforward way for people to make money.

And it worked extremely well for an extremely long time. And that probably, over time, really did shift things. But I don't think it was just the last decade.

Hi, my question is more for Peter. I mean, based on your broad-based macroeconomic view, how importantly do you value timing of execution? And if you can elaborate a little bit more on the global currency market that your fund is involved with, that'd be great.

I think the most important thing is to try to get things right. I mean, I think there obviously are certain contexts where you have to execute super fast, but there's like a startup investing context where you have to be really fast and get to the right thing, and there are market contexts where that's the case. But I think generally speaking, it's more important to focus on understanding what's going on and getting into the right kind of things. I think there remain a lot of very interesting unbalanced things in the world. The biggest one is probably the dollar versus the Chinese renminbi and how that plays out is going to be a very interesting story that will unfold over the next decade.

We have time for one more audience question.

Hi, my name is Anna Vital. My question to both of you is about do you remember the moment when you developed the trust in yourself and in your gut that you would know when the right thing comes across that you would be able to recognize it?

I don't think I've ever developed that. I'm constantly in search of that exact feeling, and I don't think it's ever going to come. Same here.

Okay. I get to ask the last question. It is the newly created Inforum tradition of 2011 that we are asking all of our speakers the following question. Max and Peter, what are your 60-second ideas to change the world?

You go first.

I need 60 seconds to think.

Peter goes first.

Well, I have a whole series on this. But I think we basically need to be working on breakthrough technologies in a variety of areas. I would focus on applying computer technology to all sorts of areas outside of computers. And that is biotech. It is the next generation. We looked at computers applied to agriculture, computers applied to energy, computers applied to all sorts of different domains. And that's probably the sort of thematic area where you could see a lot of breakthroughs happen over the next 20 years. And we have to make a number of them happen because it's not good enough for us to just run and stay in the same place. We'd probably lose ground if we're doing that.

I think a lot of what Peter just said applies to my thinking as well. To give some more examples, I think in general we need to be willing to take more risks as a civilization. I think it's high time we figure out a variant of safer or safe enough nuclear energy, because I think we have a real problem on our hands without it. I think it's also high time we figure out a lot more about human diseases. I think there's an enormous amount of fixes that we can have to our bodies that are currently going frail a lot faster than they really should.

Thank you. Let's give a big round of applause to Max Levchin and Peter Thiel for sharing their thoughts with us tonight. And now this meeting of Inforum and The Commonwealth Club is adjourned. Love the candle.