PAYPAL MAFIA: Reid Hoffman & Peter Thiel's Master Class at CEIBS

All right. It's all right. So like many startups, we were planning this this morning. So just-in-time planning. So this is PayPal today, which is a global company. It's a unicorn, before the term unicorn. And it is spinning out of eBay later this year. But the more interesting story is about what is called the PayPal Mafia, which is the group of people behind this. And more value was created essentially after PayPal than was in the initial period. And so this is kind of the iconic PayPal Mafia picture. You can see Peter in the front here with the dice and the poker chips. And the kind of funny term with PayPal Mafia, because actually, in fact, we don't exist as a covert organization, we don't exist as someone doing illegal activity, but it's actually much more like a PayPal network.

And then you've got each of these people in this picture have actually gone on to participate in the broader Silicon Valley. So between 1998 and 2002, over four years, PayPal started out as encryption on mobile phones. But because there was this intense shift, it moved from encryption on mobile phones to cash on mobile phones to cash on a device that you probably no longer remember called the PalmPilot to cash on a PalmPilot and an email payment service to a payments network that became a global platform. It had to weave through many different possibilities of death, right? There was death of, essentially, banking. There was death of, by the fact that we were on eBay, of a banking license and regulation. We were on kind of eBay. There was death of the business model because, as Peter remembers, we first actually were like, 'Oh, it's going to be a bank, and we're going to make money...'

balances on the float, and then Visa and Mastercard, who were both competitors and also on the platform. So in 1998-2002, we sold it to eBay because we had to grow it on its key market, and we were exiting the gambling business. Did this mean that we were done? No, because part of what happened is this network of folks went out and founded essentially these companies. And part of what was interesting in these companies was that the diversity of all of them, like none of the content is exactly the same. If you look at this, LinkedIn is about kind of professional networking. YouTube is about video. Tesla, electric cars. SpaceX launches spaceships. Yammer, which is business communication; Slide, which is social gaming; Palantir, which is government information systems, now going into corporate information systems; and Yelp, which is small business reviews.

None of these are payments, and they're all a bunch of different things. So what made this kind of go? Well, the question was, as we are all talking to each other, how do we solve these problems? How do we solve models of distribution, business models, different content areas, and how do we have them have global reach? But even more than this, part of what happened is we then invested in all of these companies. And part of why was this essentially something that we managed to do successfully? It was because we formed a network with each other. We could share information. We could talk to each other. We could share intelligence about what's working and not working. We can have resources that we can say, 'Well, who do you know, or who might do this the right way?'

But part of the lessons that we learned from working with each other was being bold. This is precisely part of the thing that Peter's book, Zero to One, is talking about, is doing something that's contrarian, which other people may not think is a good idea, like PayPal when we started, and then having the experience of succeeding in that. And so these companies end up creating a tremendous amount more value that is launched essentially by our network. Now, part of it, what's key is that networks support entrepreneurship. And they do so because it helps you provide business intelligence for knowing what's going on in terms of technology trends. It helps you figure out what's going on in terms of talent and talent might be applicable to solving a problem.

It helps you essentially figure out kind of what are the future product-market fit for customers and for finance for pulling this together. This is my own network. This is representative from a LinkedIn graph. And one of the things that's interesting is, if you look at it, the pink that's on the right there, that's essentially the PayPal network as connected to me. Now, part of what happened, the reason why this visualization is interesting is think about what the PayPal network has created already in terms of the companies they founded, in terms of the companies they've invested in. That's just out of the, essentially, the right, reddish, kind of pink area. The blue area is my LinkedIn network. The orange area beneath that is essentially Silicon Valley, although you can see there's two kind of networks in Silicon Valley.

And then the green on top is General International. This is a network that, like sure, my network may be intense, but all of us have these networks. And part of what makes entrepreneurial areas go is these networks. So the networked age is essentially, it's critical to adopt entrepreneurship strategies for the networked age. Because part of what happens in the networked age is it's dynamic, which means it's changing. It's global, because we're connected everywhere. And it's competitive, because you now have many more people who can bring entrepreneurial projects in to compete with you no matter where you are. This is actually one of the reasons why I think Peter's book, Zero to One, is so critical for the networked age, because what he establishes here is how do you create maximum competitive differentiation?

What are the strategies by which you would do that? And that that is actually essential for thriving in the networked age. And so with that, I will hand it over to Peter, who will tell you about Zero to One and many other things. Please welcome Peter.

Thank you very much. Well, thank you, Reid. It's a tremendous honor to be here, a privilege to be here tonight. And certainly, I think, before I even talk about my book, one of the features of the networked age is that the world is a much smaller place. It's a very big place, but in some ways, it's also a smaller place. There are people you meet, you work with. The relationships matter. They last for a very long time. Reid and I became friends at Stanford University back in 1986. So almost 29, almost 30 years at this point that we've been friends. And remember, we were brainstorming in 1994 how to start internet companies right after the Netscape IPO in Silicon Valley. And then we both took a crack at it in the 90s and worked together at PayPal and have worked on many things in the years since.

One of the ideas that we had when we started PayPal very early on was that we certainly wanted the company to succeed, but whether the company was going to succeed or not, we hoped that the relationships would last. We hoped that the friendships would outlast the PayPal business because this was where so much value would come. While PayPal itself did far better than we thought it was going to do when we founded it in 1998, I think the relationships have actually been the much more valuable piece. And so many of these PayPal companies were started by people who worked together very closely with a number of other people they'd become friends with at PayPal or worked together. It was certainly true at LinkedIn.

It was true at many of the other companies that Reid mentioned. If I had to give a formula for starting a company, I think it's always number one, team; number two, technology or products, if we're talking about technology startups; and number three is business strategy. I always think you want all three. The teams come out of this networked age. This is how you find the people that you work with. It's how you recruit people. It's how you build companies. You cannot—I think one of the questions I often get asked, how do you know, if someone's just pitching you on a startup, how do you have a sense of whether it's gonna be good or not? And of course you can look at the individual people on the team, how smart they are, how talented, but the real question is how well will they work together?

And I think one of the questions I always like to ask is the prehistory question: how long have these people known each other or been working together? And so if Reid and I showed up at a venture capitalist office and said, 'We're starting a company,' and they asked us, 'Well, when did you meet?' and we said, 'Well, we just met a week ago at a networking function. We decided to start a company.' That's a bad prehistory. A good prehistory is we've been friends for many years: one of us is good at technology, one's better at business, and we're working together. So a long prehistory is always a very good thing that I look at in the teams. And my single sort of thesis in business is always that you want to be doing something that's so different that there's no competition at all, or that you put such a distance between yourself and the competition.

And I think the really great companies manage to somehow pull away from all competition. They end up being monopolies. They're in a category of their own. And these are the really valuable companies in business, and the less good ones are involved in ferocious, non-stop competition. This can be very good for consumers, for people who buy the product, but it's not that good for the people inside these companies, whether they're employees or founders or investors, because when you compete like crazy, all the profits get competed away. So I think one always has to look at this broader context, and it's not just the network of people, it's also the network of companies that you're looking at, and you want to be sort of in a dot on that chart where you don't blend into all the others and where you're different and you're in a category of your own.

You know, one of the questions people often ask me are: What are some of the trends that I see for the future? Where do I think technology is going to go? I'm always very uncomfortable answering that question because I'm not a prophet. I can't foretell the future. I can give you very stupid answers like there will be more cell phones in five years or something like this. But one of the answers that I've come up with is that I believe every trend that you hear about is overrated and is overvalued. And so in Silicon Valley, there's a trend around educational software or healthcare IT software. It's overrated. There's an even bigger trend around SaaS, enterprise software, very overrated. If you hear the words "big data," "cloud computing," you need to think fraud and you need to run away as fast as you can.

And the reason is that these buzzwords, they're a tell, like in poker, that the person's bluffing and that they don't have anything undifferentiated. So we think of an elevator pitch in which you have a concatenation of buzzwords: "So, we are building a mobile platform for SaaS businesses to bring big data to the cloud." That's what your company's doing. The fact that you're using all these trendy buzzwords is an indication that you have not differentiated. Because once you have a buzzword, you know that you have photo sharing. Once you have a buzzword, you know that you have many, many different people doing the exact same thing. And then I think the things that are underrated, conversely, are the things that are one of a kind that nobody else is doing.

Let me end with one thought on China. It's been a fascinating week here in China, meeting with a lot of different people. There's this incredible dynamism in China. People, I think, work harder than anywhere else in the world. That's the good thing. I think the challenge in China is that in some ways it's more competitive than anywhere else in the world. And so you're always at risk of having 20 other people do something just like what you're doing very, very fast. And so you have to always think about this issue very hard. And I think one of the questions on this Zero to One, or one to n, where one to n is copying things that work, Zero to One is doing new things, is: Does China need to do anything new, or is it good enough for China simply to copy things that already work?

And I think this is a complicated question. I'm not going to try to answer it. But I think the history of the last 40 years in China has certainly been that copying things has worked incredibly well. China has done this better than any country in the history of the world. Globalization has gone faster and better. You've skipped a lot of steps. It's worked extremely well. But there is a sense people have that this cannot go on forever, that at some point you will have copied everything there is to copy. And then there's a question whether it becomes important to do some new things. And I think there's this history of Japan that one always should keep in mind, where Japan very successfully copied things for decade after decade.

Even before, but certainly from 1950 to 1990, had 40 very successful years of copying the US and Western Europe. And then they had copied everything. And they could not change to doing new things very quickly or right away. And Japan sort of hit a wall. And it has been sort of a very stagnant place for the last 25 years or so. And while I think China still has a lot of room left to copy and to improve things by just adapting ideas from elsewhere in the world, I think that it would always be a good idea to also start thinking to some extent: How do we innovate? How do we do new things? What are new features that would make sense in China? What are some new ways to go about doing things? Because you don't want to be copying 100% and then you just decide one day, "Now we're going to all innovate."

That's not going to work. So it has to be somewhat of a gradual transition. And I've been very encouraged by how engaged people in China have been about this whole question about both adapting good ideas and then figuring out ways to improve them and make them even better in China. Thank you very much. We'll open up some conversation.

Thanks. To get the ball rolling, first of all, Reid. Aren't you just rolling out a LinkedIn strategy? Aren't you just copying LinkedIn here in China?

Yes, now it's working. On paper, it's a great concept. We actually have a, a kind of two-fork, two-prong approach to China. One is essentially creating the Chinese version of the global service, which is live today, and there's a bunch of different benefits. There is LinkedIn Influencers from around the world, people like Bill Gates, Richard Branson, other folks who essentially bring their particular business expertise, and that, that's useful everywhere in the world, including China. We also have a team that's working on a completely localized product that is in development, and where there's not very much we're saying about that, but part of our approach to China is, is to try to get the best of both worlds in terms of the global network, but also being local-specific.

The market here is different. While the business culture here is as familiar as anywhere in the world to those of us from Silicon Valley, from a speed of development, from a hustle, from a how quickly things are growing, there's also kind of a different design to how the product works, to how the information flow works, what the expectations are for how people connect professionally. And so, building product that is specific to China is also very important, and that's part of the reason that we spent years hunting for the right team, and part of the reason that we selected Derek was not just because of his managerial expertise, but because he himself has been an entrepreneur here. And part of being an entrepreneur is building the product that uniquely fits the market, and so we're doing both.

Peter, over to you.

China, like the United States, on its own is a very big market. And so if you just were to target China as a whole, that's probably not a good idea, just like targeting the United States as a whole is not that good an idea. And so you want to prove the concept and then scale it very fast. There occasionally are these very thin viral products where they just grow very quickly. So Twitter, you have a lot of messaging services, things like that, where it could be very thin, it grows very fast, and even if people copy you, they can never catch up because you're growing so fast. Most of the time, though, I think it's often better to sort of grow out in concentric circles. If you want to frame in terms of two time frames, I always say there's time T1, which is a time to take over a market, to get large market share, and time T2 is the time it takes for somebody else to copy you.

In China, T1 is low because people work very fast, but T2 is also a small number because people are very fast at copying. And so you need to think very hard about how you keep T1 below T2. If T1 is less than T2, you win. If T1 is greater than T2, then it's going to be this very tough competitive dynamic.

And the thing I would add to Peter's answer is that you may have an initial focused market, but you want to figure out how you can use your first wins to compound the later battle, because that will essentially increase the delta between T1 and T2. And whether or not that's network effects and compounding, or whether or not that's in your first—because one of the metaphors that I frequently use for entrepreneurship is you have the Marines take the beach, the Army takes the country, and the police govern the country—three phases. If you can't be gaining an edge at each one, which makes it—gives you a stronger competitive edge, you have a problem.

Let's build on that. Let's just build on that. You talk about entrepreneurship. You're known for being one of the great investors, an angel investor. What do you look for?

So I'll give a slightly different slant. The things that Peter mentioned in terms of team and technology and business strategy are all correct. But let me take a tangent, almost like go from 30,000-foot to 20,000-foot in some of the details. So specifically, I do investing in software products that help define human ecosystems in terms of how millions of people interact with each other. That's my primary target. And so you look for people who know how to build a product that is current with current technology trends, that they have a bold enough idea with some uniqueness, they have ability to execute on building their product, and then they have a very quick learning cycle. And so that ability to learn is central.

And so those are all the things that go into the team. And then the question, as Peter has also mentioned, is, well, what's the competitive landscape look like? And one of the challenges, of course, is now in the networked age, there's tons of competitors. So for example, there were 10,000 different Groupon companies here in China. That's 10,000 companies competing in the same space. So having a differential edge is important. And this is part of being contrarian but right, which means frequently I prefer to be pitched on an idea that at the time that it's being pitched, most people think it's crazy or won't work, but there's an idea for why it would work. And that idea is what you then evaluate for how this breaks out from the noise and becomes something unique.

If most people think that an idea is a really good idea, that's telling you that too many people are already doing it, and therefore it's a bad idea. So I think this is sort of the pattern recognition. And I think there's so many anecdotes like this that I can give where... There was an event in Silicon Valley about three years ago where Reid and I were on a panel in May of 2012. There were five venture capitalists, and we were supposed to talk about trends for the future. And I remember that the one trend... And then the audience voted on it. So the most unpopular one was one of the people said there will be more electric cars in five years' time. It was a very modest prediction, actually. All four of us voted no.

The audience was 91% no, 9% yes. And I remember as I left that evening, I thought, you know, I should probably just buy some shares in Tesla, because nobody likes it. It's probably a good investment. And so I think there are a lot of these very paradoxical things. People often ask these questions about the traits entrepreneurs have, and I think they often have these things that are almost opposite traits that are somehow combined. So you want to be very open-minded, but you also have to be somewhat stubborn. You want to be able to iterate very quickly and change things very quickly, but you also want to have some sort of a long-term strategy. And so it's often some strategic way in which these things are combined that makes for very powerful companies.

If you just focus too much on one end of it, you go badly wrong. So it's often like this Zen paradox where you're doing two things that are almost the opposite.

But hadn't you—it strikes me when I think about Facebook—hadn't you seen Facebook earlier in an attempt by Reid? Hadn't you seen it in a shape and you didn't recognize it, but you saw it later?

Well, I think the thing that you want to have in all these companies is you want to be both first and last. The great technology companies are the first ones to do something new, but then they're also the last in their category. But the terminology is very, very tricky. I think Facebook was not the first social networking site. The hope is certainly that it will last for a long time. Maybe it's the last one for a while. That's the hope we have inside the company. We'll see if that's right. Google's the last search engine. Microsoft, the last operating system. So the last mover is very important. And you could say that there were a number of other people who had done social networking. But I think the thing that I'd say Facebook was the first company to really crack was the problem of real identity.

How do you get a product that will encourage people to put enough of their identity on the Internet? And that's also what makes Facebook controversial in all sorts of ways, because real identity is very deeply disturbing in some ways if people know too much about you and so on. And so if you label Facebook as a social networking site, then you would say it was not the first. If you characterize it as real identity, you'd say it was the first. Something similar is true of Google, where if you said Google was a search engine, you'd say, "Well, there are lots of search engines. It's nothing special." And that's one of the main reasons people ignored Google when it came along. They'd say, "We already have 20 other search engines."

If you say the critical thing was machine-powered search, the PageRank algorithm, as opposed to human-powered search, that's the right way to categorize things.

Your ability to, as you're forming the business, your ability to pivot, to really morph into something else, how do you see that in a team?

Now, the qualifier I always give to this is I don't think pivoting is a great thing to aspire to. You pivot when you've made a mistake. So when you make a mistake, you should stop making it and you should do something else. But you shouldn't aspire to failing, to making mistakes. That's not the goal in business. And so I do think that it's very important to try to think through these things as hard as you can ex ante because you don't get an infinite number of chances to get it right. And if you just try different business models at random, if you try to do everything through A/B testing, the search space is simply too big and you'll never get to the right answers. And so sometimes you get to the wrong business model

not because you need to try to figure out if it's failed, but often because you're too lazy to really think it through and you need to push on the thinking a lot more. And so I think that's—so I often—I think there's always a sense of pivoting or failure that gets sort of turned into this virtue in Silicon Valley. And I think it's good in Silicon Valley that you can change your mind. It's good that if you fail, it's not the end of the world. You can keep trying. But we should not turn it into this sort of pornographic thing where we talk about all our failures, and that's what's really wonderful. You're interested in listening to me and Reid not because we failed at a whole bunch of things, but because at the end of the day, we haven't failed.

One of the funniest things that's frequently said by people who visit Silicon Valley, which none of us think, which is, "Celebrate failure." We do not celebrate failure. We celebrate success. However, what is also true is we celebrate learning. So when you have entrepreneurs that learn and adjust, they have a higher chance of succeeding.

The thing that worries me, especially when I'm in Silicon Valley, is this. You're really targeting a very small group of people in our global population, yet both of you have very deep thoughts on changing the world. But when I look at the demographics, half the world, 3.5 billion people are living below the poverty datum line. Are you really messing around here with trivia and not really tackling the serious thing?

It's the nature of technology that when you do something new, initially only a small number of people get access to it, but the hope is always that it will grow and it will scale to cover more and more people over time. And this is true of medicines, it's true of computers, it's true of all sorts of technologies.

Well, and in particular, one of the things that makes it about technology businesses is technology businesses keep trying to figure out how to get to lower cost, broader distribution. And exactly as kind of Peter's comment is, like take, for example, all the internet technologies. Well, when the internet started, people didn't think smartphones, they didn't think mobile phones would be the way that essentially you'd be bringing China massively online, Africa online, a bunch of other places. You said, 'Well, the wired infrastructure didn't exactly exist.' Well, now it has an advantage, because you move immediately to the wireless infrastructure, and you start developing new products for that. Some of those value propositions then get rebuilt for the mobile age and then you move from a billion to two billion to three billion and that's part of what I think happens in technology.

I've often defined technology very simply as doing more with less. And so whenever you do that, then you are actually going down the cost curve or going up the quality curve. And certainly there are some strange things that get more expensive over time and therefore might not get accessible. So maybe there's some sort of art that's not—not everyone can buy art because it's exclusionary by nature. And the more people want it, the more expensive it gets. And you never break the cycle of exclusion. And so there are certain goods for which this is true. But I define technology as doing more with less. So I think it's a problem for many other sectors of the economy. But I don't think it's a problem with the technology sector.

Do you think Chinese companies can defeat American startups in a global marketplace by using this kingmaker strategy you'd spoken about before, being dominant player in the market?

I do think that people in Silicon Valley are very much underestimating China today. I think there will be a major effort in the next decade by many of the larger Chinese companies to scale to the rest of the world, and I think it's being very much underestimated. China, like the United States, it's a challenge because you have such a big market. It's really hard to get traction, but once you succeed in China or once you succeed in the United States, you have a very powerful base from which you can expand. While I think there always are big cultural challenges in going from China to other countries, I think the companies are in a very strong position. It's quite different from, say, if you were the best

You know, the best company in a category in Portugal. If you won the Portuguese market, you were the best Craigslist clone in Portugal. And then you try to—that might be easier to achieve, but it'd be much harder to go from there to taking over the whole world.

Yeah, I mean, fundamentally, part of the advantage that Silicon Valley has is that the companies launch in a global English market, which includes the US. And so having a large market that you first, essentially is your first entry, then very much helps you globally. And I frequently think there are three internets. There is the Chinese, the English, and everything else. And part of what happens is I think you'll see a lot more, just as, for example, eBay launched earlier, went global. Alibaba is now the most important global marketplace. I think as you begin to see competition in kind of the everything else market, I think you'll see a lot more domination from Chinese companies like Alibaba.

So I think that that pattern will happen. The key thing will be is how much do companies within their country realize that they may have to adapt as they get to other markets. So we in Silicon Valley have had decades of kind of thinking about like, 'OK, how do we get international? What do we do?' There's a whole playbook around folks who say, 'This is what you do with market localization, this is how you do things.' That will also need to build up in China as the Chinese companies begin to figure out how they are going to do US, Brazil, Europe, other places.

So this is a personal question because I need to put some money somewhere. What does the future hold? Where should I be putting my money? Where should I be investing?

Well, look, if I could answer that question, I would have already done this or all sorts of things like this. You know, I'm not going to give a direct answer, but I think the answer—I think great investing, it's always a contrarian thing. It's always two questions you want to answer: Why is this a great—if you're investing in companies, why is this a great company? And what is it that other people are missing? So when I evaluate companies, people are always focused already on the first question. I always try to stress the second one: What is it about this that we understand that nobody else understands? And if there's nothing, if everyone understands it's a great company and you understand it's a great company too, then you're just in a crazy auction where whoever wins the auction may really lose because you will overpay.

And so I always like it when it's, 'Okay, here's something very important that we understand where other people systematically have a blind spot.' And that's something one should always think through. You know, Facebook was a very good investment, not just when I did it, but even when Reid's venture firm did it in 2006. It was a very good investment in the first few years because it was only a college site. Most investors themselves were not in college. They did not understand how much people were using it, so they had a blind spot. Once Facebook became available to everybody in 2007, the investors got on Facebook, the valuation went up a lot more in the summer of 2007. And so I think there often are these surprisingly systematic blind spots that people have, and it is really worth trying to think through them, even though it's always idiosyncratic and very fact-specific why they happen.

To close off, as you can see, most of our group are students and most of them will be looking for jobs. You've got a very particular view on how people should be looking at jobs and their careers and going about it. Would you like to elaborate?

So this is the first book, The Startup Review. You have to be the entrepreneur of your own life, your own career, which means that you have to steer your career like an entrepreneur steers their business. And essentially what The Startup Review is a subset of the advice that I give entrepreneurs directed to individuals. Now, part of that is to have essentially a theory where you take, okay, what are your aspirations? Where do you want to be? What are your assets right now? What are the market realities, e.g., competition that you steer against, and where to make that happen? You formulate essentially a plan A, but with that, you think, well, maybe it won't work. What are my alternative plans B, and how do I reconvene?

Now, part of the thing is is that most of the time, most general advice on jobs is to follow the main road. Go find some listings, apply to the listing, and so forth. Part of entrepreneurship is establishing a unique competitive edge. And so whether it's your network, whether it's an ability to volunteer for something first and get in the door by essentially doing a volunteer internship, you should think about what are the things that you can do en route to your aspirations that can give you a very unique edge. Because if you do what most people do, which is simply apply to a job listing, you know your odds. Your odds are difficult. It's not impossible. Sometimes it works. But you want to give yourself the best possible edge.

And these are essential techniques in the networked age. Because part of what happens in the networked age is there's a lot more change and dynamism. There's also a lot more competition. So establishing that unique edge is critical. And there's no generic solution to a unique edge. You have to think about what you can do to do something unique.

Great. Well, gentlemen, thank you very much for being here tonight. You made a tremendous contribution to the group, and I know that they've thoroughly enjoyed it. Good response. Thank you very much for taking the time to be here. Thank you.