a16z Podcast - The Definite Optimism of Peter Thiel

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come on in have a seat

whoo there we go if you're looking for a

seat it's just like church there's two

more up here in front four more over

here

um the closer you get to the stage more

likely you go to heaven so for those my

my name is Charlie Rose jr. I will be

interviewing Peter teal today everybody

here probably is aware of Peter my

background I will quickly recap his

professional accomplishments as follows

check founder CEO venture capitalist

hedge fund manager derivatives trader

corporate attorney chess champion

political activist book author public

speaker we are thrilled to have him with

us today I'm really thrilled to be doing

this Peter is one of the people I'm

gonna run the risk of embarrassing him

he's one of the people I respect the

most in the world

and there's really three reasons for

that one is Peter is those of you who

have followed him over the years or have

known him or read his book is a truly

interdisciplinary thinker like he really

draws threads together across fields and

or might describe lateral thinker always

has an original viewpoint and and you

always end up learning something - is

Peter I give Peter a lot of credit for

what's happening in the valley right now

because I think Peter really raises the

bar on the people around him he raises

the expectations of the companies that

he works with and the founders he works

with and he raises the expectations I

think of the thinking that we all do in

the valley he's really you know

substantively elevated a number of

debates and then third is just sheer

intellectual generosity he's a teacher

and he was a teacher before the book he

was a teacher in a Stanford class that

resulted in the the sort of bootleg

notes the Blake masters notes the what

viral and now he is a teacher through

the form of this book the book has come

out the book is called zero to one the

book tour has been very highly

publicized if you haven't definitely go

on Google News and type in Peter teal

and you will get a cornucopia of

excitement the butcher has done highly

viral itself many things feeders that

has gone viral in part because for some

reason

when Peter says something pessimistic or

negative it immediately goes viral

but Peter also is an enormous optimistic

person about about many things

and so what I'd actually like to focus

on today is the optimistic Peter teal

and so the things that Peter thinks are

going well the areas where Peter thinks

that things could clearly be improved

and then in particular given the nature

of this audience a little bit more of

the how to which is like okay I got the

basic idea but like how do I actually do

X how do I make the world a better place

how do I build a fantastic company how

do I build a monopoly so we will go

through a number of those topics I would

like to start though by going back in

history to one of my favorite topics

which is which is PayPal which is the

company that Peter founded I ran the

PayPal story is amazing I think

everybody here has a general sense of

the PayPal story and particularly the

founding story of PayPal has been quite

well told I think and then also the fact

that the PayPal of course got bought by

eBay and it's now actually will become a

public separate public company again

very shortly when it goes when it splits

estimates are it'll be on the order of a

forty billion dollar public company so

it's a it's a very significant

entrepreneurial achievement business

achievement and then of course the

PayPal mafia has become central to

Silicon Valley and the people who were

at PayPal have become you know really

formative and foundational people for

the modern valley what I really like to

focus on is what I think is the really

dramatic part which is the middle part

which is what happened after the

founding before the sale because the

world was a pretty exciting place PayPal

is an exciting company so I like to set

the stage by asking everybody to recall

if you're old enough some of you are in

elementary school at this time but some

of you will recall March of 2000 which

was the high of the Nasdaq in the.com

bubble which was possibly the most

exciting month of all time because

everything was going up into the right

everything was working everything was

wonderful all companies could raise

infinite amounts of money and higher and

higher valuations the new economy had

arrived Silicon Valley was going to win

everything and all was going to be

glorious and so I'd like to start March

of 2000 by asking you to describe what

was the state of PayPal in March of 2000

well we we at the start of the month we

merged

can Finity and XCOM which the company

started by Elon Musk PayPal was myself

and Max Levchin and and the combined

company had 15 million dollars in the

bank this ar-15 reflects what one 515

million dollars we had a we had a

exponentially growing customer base

because we had these referral programs

where we you got a new if you signed up

you got $10 if you referred someone who

signed up you got $10 so it we had a $20

customer acquisition cost the customer

base was growing at sort of a five to

seven percent daily compounding rate and

it hit a hundred thousand users in on

February 3rd 2002 million by mid April

of 2000 and with the exponentially

growing customer base was also an

exponentially growing burn rate since we

had no revenues and certainly no profits

and so the CFO had the projection that

the 15 million dollars was gonna run out

in about six weeks

people people did not seem especially

worried about it at the time but but we

we did so the reason they would be

worried is because everybody knew you

can always raise more money

he's always more evaluation I think I

think in fairness Elon myself were were

a little bit worried and we we sort of

we managed to you know manage to raise

some money that month so what was that

like what was fundraising like in March

of 2004 a company like this well it was

it was it was much crazier though

there's always this talk are we in a

bubble again today and and it's a

complicated question I don't think we

are but but I think compared it's it's

nothing compared to what it was at that

time so we had this round-the-world trip

there was one one day we were in South

Korea there were three competing

investor groups we met with there was a

professor from a university who's hiding

behind a palm tree and in the hotel to

spy on us and steal internet business

models from the US so there's this

frenzy thing you know everybody was

trying to get in on the action

um I was one group then took me to the

airport and and I was you know I was

running this new payment systems new

payment technology

and I was not able to buy a plane ticket

my credit card didn't work I probably

soon have enough credit on it or

something

they me and this was not disturbing at

all it was it was they were really

excited they bought me a first-class

plane ticket on the spot the next day

they called the law firm and said you

know where do we wire the money and the

law firm figure if he must have signed

all the paperwork's they gave him the

account so they wired five million

dollars in its high no paperwork and

then the and answered the opening

negotiation was you know we're we're not

telling you where the money came from

you have to take it we're not telling

you where you can send it back and so

you know and so we did it we did it

ended up taking his investors but but so

but I sort of and you know there had

been this this period for a year and a

half two years where things have been

getting crazier and crazier but there

was sort of a sense in March 2000 that

it was hard to imagine how it could go

any crazier so you know people sending

five million dollars without paperwork

okay Hartman and South Korea was a

country was really hard to get money out

at the time they saw like all these

capital controls it was it was

phenomenal they got the money out and

and so we closed on yeah we closed on a

hundred million on Friday March 31st and

the following Monday the bottom fell out

of the market okay so then we had a some

time to build the business so the bottom

falls out of the market and it's always

hard to think about these things in

retrospect but kind of the bottom falls

of the market of March or April a lot of

people I just remember from the time a

lot of people you know there were sort

of equal arguments of like okay this is

yet and I remember like Roger Mattingly

I think in particular came out and said

this is it like you guys don't

understand like the end is here and then

of the people came out and of course the

conventional wisdom that had worked in

the stock market for the preceding eight

years or so had been by the dips and so

people said wow this is great it's a

buying opportunity because everything

will go up into the right again

it took a while for it to become clear

what was actually happening what was

what was the view inside the company and

what how were you an Elan kind of

processing through this especially given

the various in the burn continued then

there was there was a sense on we did

dial back the marketing pretty quickly

although there was there was a

then there then emerged this very big

fraud problem in rapid succession and so

the burn stayed over 10 million a month

all the way through September 2000 so we

had sort of seven months in a row of 10

million plus burn we kept raising some

more money in these additional tranches

and and there was you know there was a

sense I think in the few weeks

afterwards that everything was over but

then I'd say the that by the summer

there was sort of a sense that you know

there was actually still a lot of time

left and I remember remember having

conversations the two conversations

their members were were mid April was a

group of friends and we had this event

on Sunday and it was let's take a

picture of everybody on the day the

internet ended right and and so and that

was actually that day was the low it

went from 5000 to 3100 and then it

recovered that the next Monday but then

sort of end of August 2000 it's talking

with my friends and it's like you know

the Nasdaq was back at 4200 you know

it's gonna go all the way to 6,000 and

and then it was after Labor Day 2000

when it just went straight down for you

know a month after month for two years

and and so so yeah we we and we had sort

of all these blocking and tackling

problems to deal with it felt it felt

really really chaotic on the inside we

got on top of the fraud problem starting

in fall of 2000 we had all this money so

there's always it's always good to have

more capital rather than less but but

certainly one downside was perhaps we

didn't move quite as quickly and

figuring out the business model we had a

you know the business model in early

2000s you're going to upsell people on

financial services and you know online

banking customers were valued at $50,000

a customer and so if we could acquire

customers for $20 a piece that was a

great arbitrage yes upsell all of them

to $50,000 online banking customers and

then and then sort of by fall of 2000

we'd sort of zeroed in on

on just payments being the thing to do

and had you had to just take a slice of

all the money you that went through the

system and is that when they're really

that like the eBay kind of attach

happened was that at that stage sure had

that already happened they were they

were sort of well you were at that point

the default payment system on eBay well

yeah we'd started targeting eBay

January 2000 I'd say was thirty thirty

five percent of those sellers in eBay

were using us by April or May so it was

it was fairly heavily embedded they had

an alternate payment system called bill

point that was sort of a partner

partnership between eBay and Wells Fargo

Wells Fargo didn't want to take any

fraud risk and so the product was you

can always get a product to be a fraud

proof if it's unusable right and so the

bank had a bias to have it but it's kind

of both sites you can always you can

always take all the customers if you're

willing to take all the fraud you can

always shut off all the fraud accrual

and shut off all the customers yes

so one can argue there was a little bit

of it you know we were sort of on the

customer side and eBay was on the

anti-fraud side but so yes there was it

was this very uh but then you had this

very weird dynamic with eBay for the

next two and a half years where it was

sort of symbiotic but it was sort of

like they owned ran this big store and

there was a different company than ran

the cash out registers and the people

running the store could never forget how

to get their cash machines to work if

they just figured out once we'd be in

trouble they never seemed to quite be

able to figure it out then eventually

they bought the company so it's so it's

fall of 2000 going into winter of 2000

spring of 2001 it is now clear that the

you know the world the nuclear winter

has arrived and the money is shutting

off you know my particular thing I

remember very vividly is did the crate

taking about coupling in March of 2001

it was all about the blest point where

it shut down yeah our last money came in

like March to April 2001 2001 right and

so in every word just we were on the

road for three weeks and while we were

on the road for three weeks in March of

2001 the Nasdaq dropped in half and the

significant sorry it was it the referent

heifers at tech stocks drive from half I

think about it were the Nasdaq my

teardrops in half again but like

literally all of our cops the way you

price IPOs as you price based on

comparables of existing public companies

literally we're on the road selling

stock and the comps all dropped in half

and then Yahoo blew up an Intel blew up

and like all these big technology

companies blew up so it was through that

time it was becoming clear that the

nuclear winter had arrived you guys

still had the tiger by the tail in terms

of you still have the growth you had the

eBay thing how did you kind of process

through though okay like we really now

are in a different environment like how

different did the business plan get when

it became crystal clear that the capital

spigot was turning off well we just we

just dialed up the the amount we charged

to people so we've had this tagline in

early 2000 always fast free and secure

and so the and so there was a question

how do you charge customers if you say

that your products always going to be

free and so and so David sacks who ran

though the product team came up with

this idea of upgrading people and so you

were upgraded from a customer to a

business account you own and then there

were all these extra benefits and just

had to just pay a small 2.9% fee on

every payment you had to click one

button to be upgraded and one of the

things that did work with the payments

companies once you've had all these

customers you could actually upgrade

people because you already had all the

payment information so they were had no

all these other companies had been built

on acquiring lots of customers and then

upselling them later and it turned out

the day you tried to upsell them they

all left but in our case we had very

little attrition right and then it took

the company public we took the company

on CSV and we got to break-even in

September 2001 we were the first company

in the u.s. to file after 9/11 filed end

of September we took it public in

February of oh two and then eBay bought

it in July of that year so what was it

like doing an IPO in February of 2002 it

was probably the sky was sort of still

falling but a lot of the sky at that

point was on the floor well there's

there's a lot of yeah a lot of crazy

things so there was um certainly um

certainly the press had become much more

hostile in all these all these strange

ways it's like the understatement of all

time so there was um I'm not at the

quotes exactly right but there was this

article on this so this column and I

think was a San Jose Mercury News around

October of 2001 after we

filed our IPO and it was the title was

earth to Palo Alto and has anyone sent

told these people that you know you

can't have a company in which the

average age of the executives in the s-1

is 29 years old you can't have you know

we don't we need money a company that

people think might be used for

terrorists money laundering as badly as

we need an anthrax epidemic right and on

and on and on um we we had we had as we

and when you when you file for an IPO

you get these s-1 forms that you have to

you have to do with the sec and you get

a reviewer from the sec and there's a

respect remove people some are better

some are worse and we had this one

person named godly who there are lawyers

in advance well so yeah there's one

person who's just terrible if you get

the scott leave guy and we and he sort

of ideologically believed companies

should not go public they were all run

by crooks and so it was this this crazy

open-ended process where it would be

things like you have to disclose that

you're not allowed to do business in

louisiana anymore

it's like oh well that's news to us yeah

well I just talk to them and you know he

he was seeking out reason so he's like

I'm calling from the SEC to the state

banking officials in Louisiana it is

PayPal allowed to do illegal banking

activity in Louisiana and Sur know if

they're engaged in illegal banking

they're not allowed to do that and then

he came back to the company and said you

have to disclose that so it had it was

sort of a grout the crazy process but we

we somehow got it public just like you

guys got cloud cloud public and February

oh and then and then there was there was

always this complex negotiation with

eBay for for close to two years and I

think I think one of the types of

negotiation that's always super

complicated is when you have a sort of a

bilateral monopoly where you have one

person who's a seller and one person

who's a buyer and it did it actually

didn't make a lot of sense and by that

you mean by that I mean it wasn't like

there was anybody else eBay could buy

you were it cuz you were already the

default yes and there was no real number

to other than yourself

and then there was really nobody else

for you to sell to at that point but

nobody else people would be scared that

eBay would shut us

right 75% of volume was on eBay right so

we could only sell to eBay it made a lot

of sense to combine the companies

because there were actually huge

synergies and and so there was always

this this super complex question with

the what the price was you know once you

had it as a public company you just say

some percentage premium to that well

let's talk about that for a second so

how many how many different deals almost

happen before the actual Kircher there

were there were I'd say five separate we

had the first serious negotiation was

late 2000 there was one in spring of oh

one there was one in fall of oh one

there was one in March of Oh two right

after the IPO that looked like it almost

came together and that fell apart and

then it was like you know gonna be this

this crazy eBay PayPal war that was

gonna escalate and then in June of 2002

there was this eBay convention in

Anaheim and it was sort of big company

we managed to get a booth there even

though they weren't that friendly to us

at the time so we sent 30 people down to

the convention and we we handed out all

these PayPal t-shirts and so this was

and so they saw this sort of all their

power sellers wearing PayPal t-shirts

and they and at that point they decided

by the company yeah did the price they

did did the parade did the price go

continuously up through the negotiation

you think um I think was about the same

in June as it was in March but again it

was gonna contact with the market kept

going down okay right cuz on the one

hand you were growing you Bay was

growing they were trying to compete with

you and they weren't able to on the

other hand the world was falling apart

when it went down it went up a lot

relative to the pre IPO like we had not

taken it public it would have been a

much lower valuation right right so what

do you think would have happened had you

not sold PayPal PayPal I continued as an

independent company what would have

happened it's hard to say you know the

the certainly on certainly if you'd been

able to keep it going as an independent

company it would be a lot bigger ten

twelve years later there were you know

there were sort of a lot of crazy risks

there was a there was an investigation

Spitzer started for vice related

payments we were doing

well he would know he was undoubtedly

running personal experiments yeah we did

more not so much the adult is more the

the the the the offshore sports betting

sites and and we got the notice the yet

acquisition was announced on Monday July

8 2002 we got the notice on Tuesday July

9 and so if you sort of had the

counterfactual experiment you know it

would have been like you know probably

stock wouldn't hit 20 to 40% and and

then the questions would eBay have tried

to take advantage of that of that to

hurt the company so there's sort of our

all these scary scenarios had it stayed

had it stayed stayed a standalone

company but certainly they're all these

post mortems and we've you know we've

debated many times whether it was the

right thing to sell or not um you know

it's always a somewhat sad thing when

you sell your company because you don't

you sort of no longer running it you no

longer have control over it and it's

like you know um I'm gonna sell your kid

or something like that but it's I'm

still the view was it was the right

thing to do I mean I think most tech M&A

deals don't make sense because most the

time there's no there no synergies this

is one word made tremendous sense yeah

it's because of the dependency because

of the yes and the volume increased

tremendously after the acquisition so so

of course PayPal now is famous for the

PayPal mafia and so you know just to

list names you know you and Reid Hoffman

and roll-off and David Sachs and you

know a whole cast of I made the the Yelp

you know the old guys you know that

YouTube guys kind of autumn axe and you

know every basically like you know

there's I don't know what ten or twelve

people who have gone on to do really

foundational things right and and and

for in in the case of that like the most

like amazing venture capital port fill

of all time to be if you just simply

invested in all the PayPal founders are

all the PayPal people for all the new

companies but you know that's how we

know these people now and now they're

out and about they're doing their things

at the time they were all working for

you so what was it what was it like with

all those personalities in that place at

that time

we had a lot of strong personalities and

there were you know I I think and I

think the company had its share of

challenges so you know one one cut I

have on there's always this question why

was why were there's so many successful

companies that came out of paper I think

it's a hard question to answer but but

sort of one of the lessons you learned

at PayPal was it was hard but possible

to build a great company and there was

sort of a lot of ups and downs a lot of

challenges on regulatory fraud marketing

business model you had to sort of work

out over the two and a half three years

the I think that's actually not the

lesson people normally learn in these

companies because most of the time

people are either in companies that fail

and then the lesson you learn is that

it's impossible to build a great company

and so the next time around you try for

something that's less ambitious and so

and then you certainly will not build a

great company or you are in a company

where everything works just phenomenally

from day one sort of like Microsoft or

Google where you then learn the lesson

that it's easy to build a great company

and there's a way in which both the

lesson that it's easy and the lesson

that it's impossible are sort of equally

wrong because both lessons tell you that

you don't there's no point in working

hard or you don't need to work hard you

know impossible no point easy no need

and so you end up not not doing what it

takes so I think there was sort of this

intermediate aspect we even though

PayPal was not as successful as some

other companies have been it was a

context in which people got a very good

perspective on what what you needed to

do so I think when people with founders

today who are you know I've read about

you guys I met you guys I think they

view that you guys must have been an

incredibly harmonious organized team

they probably work in lockstep and kind

of probably completed each other's

sentences and got along really well at

all times is that how it was not sure if

that's precisely correct I mean there's

certainly there's certainly always an

aspect where all's well that ends well

and and but but certainly there were

sort of all sorts of crazy points

the points of conflict you know I always

think um conflict happens when different

people want to do the same thing and one

of the challenges in it's not when two

people want different things it's when

people want the same thing and and in US

and so the challenge you have as a boss

is to try to have people do different

things if you're like a sociopathic boss

what do you you know what you do is you

tell two people to do the exact same job

and you'll generate a fight out of

nothing right and so if you don't and

there are bosses who do that and there

are some bosses who do that and so if

you want to avoid that you should always

have people do different things the

challenge in a start-up is that there's

a lot of fluidity in the roles and so

people end up doing a lot of different

things or ways these roles overlap David

Sachs our head of product like to say

that the product was a single seamless

whole which was certainly true on one

level but then of course was a recipe

for the product team being in conflict

with absolutely everybody in the company

since the fraud team thought the product

should be different or the customer

service team thought you know there's a

certain customer question that should be

answered and on on down the line on but

but ya know there were there were a lot

of a lot of crazy challenges yeah so one

of the defining kind of industry

defining members of the PayPal mafia

Elon Musk and so you had the opportunity

I take it you've probably first met Elon

when you when you guys ultimately ended

up merging our companies together and

then work with him and obviously you've

known him very well

since and I know you've been very close

to and very kind of you know you've been

tracking very carefully and been

involved with in various ways his

companies that he's built since you know

given the prominence that he has in our

industry and given how I mean my view is

he's really shaking up the view of

what's possible in Silicon Valley we

could talk about that at length so I'd

like to kind of probe a little bit into

look at your view and what makes the

Atlantic because I think you're kind of

uniquely situated to do that so I'd like

to start with what was what was he like

to work with at PayPal like how long did

you guys actually work together and what

were the jobs and what was he like to

work with well he was incredibly smart

incredibly hard-working and incredibly

ambitious so it was definitely not the

person you wanted to compete against

this was the first

counter we had with them was as this

competing company four blocks down the

street on University Avenue in downtown

Palo Alto and so and so I do think one

of the really good things we did was to

was to join forces in in March 2000

there were all sorts of challenges in in

getting this work worked out and in all

these different ways uh you know and

there's so many different elan stories I

can tell there was there was one I

believe this was literally the day of

the market peak in March of 2000 and we

were we were driving up to Sand Hill

Road to meet with one of our VCS to

brainstorm on how to raise some money

Elon had made a fair bit of money his

previous startup most of it had gone

into Hagin in tax calm 1 million dollars

has been spent on McLaren x1 sports car

for those of you this is worth a Google

search this car well this it was the it

was the first million dollar sports car

something like it was it was basically

the supercar it's like just take the

most extreme idea of what a car could be

and this was it and we you know and we

we were driving up Sand Hill we're

supposed to prepare for the meeting we

just talked about the car who goes zero

to 100 miles per hour in six seconds he

taken it up to 180 on the highway 280

pretty fast miles per hour you know we

we got to the part of Sand Hill right

past Santa Cruz which sort of a four

lane to Lane each way 35 mile per hour

zone

and we sort of time for a demo and we

can sorta bake who go - who - doing the

demo but the car was taken from 45 to 85

miles per hour in two seconds flat while

changing lanes Elon the driver lost

control it skidded there was enough

torque because he sort of turned the

wheel while accelerating really hard

that as it hit the side of the road we

sort of achieved a cart went up in the

air there was about four to six feet

between the car and the air we did a 360

degree rotation in the air you know

horizontal not vertical but horizontal

and then it and then it crashed into the

row

and it was sort of a sort of like an

unidentified flying object over a sand

hill road the the the first the first

person who stopped told us that she

didn't really want to stop that day she

figured the people in the car were just

dead and she really want to deal with

that but it had a you know how to it had

a price resistance driver compartment

that Ilana had told me all about as we

were driving up the road ahead was

Hitchcock like feel and as we uh and and

the and the first thing Ilan said was

you know wow that was really intense and

then and then it was you know I'd read

all these stories about people who made

a lot of money and bought sports cars

and crashed them but I knew this would

never happen to me and so and so I I of

course had no insurance on the car and

then and then we actually you know we

both a little bit of whiplash but we

first hitchhike and went to the VC

meeting and then and then sort of went

to see a chiropractor afterwards we were

both ended up being we both ended up

quite fine but but there was sort of so

there was always this sense that and

this is what I think is sort of

remarkable at the the young story in

retrospect was there was always sense

that Elan really pushed the envelope and

certainly you know certainly up on the

weather I just want to go back to stuff

was just the driving it was you put it

this was it's like what net worth is

that that he put it into the car I think

he had it was like one third of it yeah

it was like a significant part there was

one of the investors on I talked to

years later who talked us in summer of

2000 and said he didn't want to invest

in the company because the CEO Elin was

living in a one-bedroom condo and Palo

Alto at the time and the CEO was clearly

lying to him because he told him that

his car was worth more than his house

of course it was totally true right um

and so anyway there were sort of there's

a lot of a lot of crazy stories like

this but I think yes I think I think on

and so I think the I think certainly

when Elon went on to start Tesla and

SpaceX um in sort of O 2 O 3 o 4

timeframe um and with respect to both

companies I think the conventional

wisdom was that they were not going to

succeed it was it was way too ambitious

the conventional wisdom was he was out

of his mind

yes something like that I mean either

what you knew two things you knew two

things in life you knew there would

never be another American car company

and you knew that he knew that because

they made a movie about it right the the

the last major American car company was

called Tucker and they made a movie

about what a disaster it was and why you

never ever start a car company the

United States and then SpaceX there

hadn't been a new I mean a rocket ship

company in yeah 60 years yes there's

always there's always sort of a

half-full half-empty version I had a

conversation with Elon in 2008 wind

who's still the jury was still far from

clear on either Tesla or SpaceX and we

ended up investing in SpaceX as founders

fund in Oh a was sort of six years into

the process and people thought we were

crazy to invest six years after they'd

gotten started and on the Tesla side

yeah

Ewan's con was yeah there hadn't been a

new car company in the US the last

successful new car company in the US had

been Jeep which was started in 1941 and

so you know the standard interpretation

would be well you can't start a new car

company eelain's interpretation was it's

about time for a new car company right

right and so there's always a half-full

half-empty version of these things but I

think you know I would say if you take

both SpaceX and Tesla what what I think

did work on and was perhaps very

underrated for for many years in both

cases um you know I always have the sort

of anti competition bias and the

competition was really weak and so it

described what you mean like well which

competition well I think I think you

want to you know you want to aim on you

you don't want to go for the things that

are the most competitive

you know you know it's sort of opening a

restaurant is my sort of the paradigm

example of an intensely competitive and

really bad business idea and and so to

the extent you're competing you want to

compete against industries that are

somehow where something sort of off and

you can do something that's very very

different and certainly the u.s. car

companies were very oft they weren't

going to build an electric car ever and

so there was a way in which he picked

really weak competition there and then

aerospace was with these sort of weird

government quasi government

conglomerates that were pretty badly

managed by the 2000s as well so I think

it was sort of an opening to to do this

the the thing that's you know most of

the innovation that we do involve some

combination of brilliant breakthroughs

and sort of step by step iteration which

are very good at iteration we're pretty

good at occasionally coming up with

brilliant breakthroughs but I think both

Tesla and SpaceX were stories that

involve complex coordination where you

need to get a lot of different pieces to

fit together in just the right way and

so if you ask me what was the real

breakthrough with Tesla or the real

breakthrough with SpaceX it was actually

that you had everything coordinated I

think something some was piped with the

iPhone with Apple there was you know no

single part that was massively better

than anything that had come before that

was actually getting all these pieces

together in just the right way and and

there was sort of a vertical integration

to that that people generally did not do

and that I think he pulled off in both

cases so we have I want to leave time

for audience Q&A but I want to get a few

more topics before we go to that so you

alluded earlier let's just do a kind of

a situation check on where we are in

Silicon Valley right now so you alluded

earlier to I mean obviously there's the

hiking there's been high concern for

some time that there's a new bubble

forming even some of some of us who have

said there's no bubble or if now started

expressing public concerns about burn

rate and lawsuit discipline you know

money you talked about the you know the

five million dollars really count I

haven't heard that specific story

happened yet but I wouldn't be surprised

given some of the activity especially

for money coming in from outside Silicon

Valley so what's your assessment what's

it why do you say what why are you

confident when you say not a bubble like

how do you think about I'm not sure you

can ever be fully confident but I think

I think these

and we've had certainly a history of all

these crazy bubbles for a few decades

now you know there was the Japan had

this crazy bubble in the 80s you have

the tech industry in the late 90s you

had the housing finance one in the last

decade so it's definitely reasonable to

ask the question is there another bubble

I tend to think the bubbles always

required the public to be involved in a

very big way and there were these

psychosocial phenomenon on some level

and and this the public is not really

involved because the companies are not

going public till extremely late in the

cycle and there may be I've looked the

exact numbers maybe 30 or 40 tech IPOs a

year versus something like 300 in the

late 90s and so in this entire boom the

public has in some sense not really been

involved um it is that more because they

haven't been able to I have many of them

they haven't been able to because they

haven't wanted to well they probably

haven't wanted to price still burned

they probably haven't wanted to the

company's having one of them you know

it's all all sorts of different factors

um but I would say the other the other

thought on this bubble question is I

think I think if you identify candidate

for where the bubble is today is it's

the government printing money it's the

government bonds it's on - 2 percent

real interest rates and and so the

things that are bubble like are the

things that are most like government

bonds that's corporate bonds it's

probably housing which is linked to very

powerfully linked to the interest rates

and then to some extent it's stocks that

act like bonds so it's stocks that pay

very high dividend yields it's a lot of

the old tech stocks like Oracle or IBM

or Microsoft where you need financially

model them like government bonds and the

most important variable and evaluating

them is the discount rate most of the

kinds of companies we invest in are

actually the the main variable that

dominates is growth how fast do they

grow and so if the if the bubble is

centered on the risk-free interest rate

then you have to be careful of assets

that are linked to the risk-free

interest rate and things that are

actually linked to growth are very

different and so so I didn't sort of one

one way I've put it is you know I

probably three quarters of my net worth

is in illiquid text

since Silicon Valley and it's because I

believe there's a giant bubble centered

on government bonds and this is the

furthest I can get from it

yes furthest from government bonds

trysting so that actually leads me to

another you mentioned companies like

Microsoft and Oracle so you said we've

been talking a little bit publicly on

this topic so take us through your

theory on what's you I think it's I

think your your I think your

nomenclature is tech companies and is an

anti tech companies or how do you

describe that you find a technology

company and then describe your view of

some of the larger incumbents like

Microsoft in Oracle and why you don't

necessarily do them as technology

companies well when you when you invest

in a company there's always a question

are you investing on the creation of new

technology or are you or are there cases

where you're betting against the

creation of new technology and so so I

would say that there's a whole set of

companies in the nasdaq-100 that are

actually bets against technological

innovation so Microsoft is a bet that

there will never be anything like Linux

it's a bet that there will be that the

operating system won't ship to mobile

platforms it's about that nothing will

change

you know iBM is a bet that we will keep

the same kludgy software from the 70s

and 80s I need lots of service people to

support it Oracle is sort of a bet

against cloud computing and so there are

sort of a lot of it doesn't necessarily

make these bad investments but the

fundamental thing you're doing is you

are betting against technological

innovation and this is always obscured

because the companies themselves have

this protec narrative because there was

some point in history when they were

actually technology companies Microsoft

was a technology company in the 80s

probably still in the 90s you know much

less so in 2014 but that's you know when

when Microsoft recruits engineers in

2014 it doesn't say you know you're

working at a bank where we're just you

know money just flowing as long as

nothing happens elsewhere in the world

and so General Motors was a technology

company in the 1920s by the 70s and 80s

investment in GM was a bet against

Japanese and German innovation and cars

and so there's always this that you

always have this sort of an arc right

well this is

probe on that from one more direction so

you talked as in your book and on the

book tour you've talked a lot about your

theory of Monopoly versus commodity and

in a nutshell right

Peter's thesis two kinds of businesses

monopoly commodity monopolies are sort

of infinitely profitable and can go on

to do all kinds of amazing very problems

the consequence of being profitable he

would argue can go on to do very amazing

things

commodities inherently are zero profit

and the enemy of innovation is therefore

these beings are a profit because you

can't afford to fund innovation so

commodity companies are not going to

innovate and so you know sort of sort of

revised thesis monopoly is better than

commodities on the East Coast you know

the reach for that has largely been

panic and freak out on the west coast

the reaction divided among founders has

been hell yeah let's go build monopolies

certainly advice that is certainly on

how to advise site if you're an

entrepreneur founder you always want to

build a monopoly now there's a public

policy question as to when these things

are good or bad that's a somewhat

separate question right which is what

you get the East Coast reaction but so

and those are two different questions I

could just to be clear but I think from

the point of view of someone starting

these companies you always want to go

from an operator so let me ask you this

so so you describe you describe

companies you describe companies that

basically have become as you said sort

of Bank like that's against technology

Microsoft Oracle and General Motors and

I forget there was a fourth one in there

sorry I'd be IBM IBM and so you could

describe like I think you could describe

it there was a point at which all four

of those companies have become

monopolies Microsoft Microsoft certainly

obviously General Motors at one point

was some giant market share of US auto

auto production Oracle is some giant and

share of databases with enormous pricing

power and IBM obviously is like it's IBM

at one point actually well at MIT I've

been went through decades of actually

antitrust prosecution's over being a

monopoly and even today has a very large

monopoly position and sort of it's the

fortune 500 in terms of global services

so how do you reconcile your view that

monopolies are the enabler to

competition like what like how do you

sustain that view in the face of the

observation that these companies that

that were monopolies are no longer

innovative well I think there's always a

challenge with these companies staying

innovative over time whether and that

doesn't you say um my claim my claim is

not necessarily the monopolies are more

innovative for all time

it's on you get to monopoly if you do

something really innovative at some

point so so the goal should be to do

something super innovative where you're

so differentiated that you get a

monopoly and then hopefully you keep

innovating and you you build on that

monopoly can we talk about that

hopefully part what's what's the

hopefully what's the somebody becomes a

monopoly arguably today Google and

search or you know take your pick of the

next big company well there's um what's

the hopefully like what has to happen

well you well for the company they're

not just evolving as long as the

founders run the companies there's

normally enough pressure to keep doing

things once the founders are replaced

with politicians who act like CEOs you

end up with much less incremental stuff

happening so and so I do think you know

sorry I don't know I don't think Apple

was much of a monopoly 97 when Jobs took

over again but you know he shifted it

from the home computer focus to the

consumer electronics focus and that's

something we've been very hard for

someone who was just a politician CEO to

do so from in historical terms then it's

a that's sort of a bet on the great man

thesis as opposed to the historical

forces thesis cuz but the easiest thing

in the world for monopolies to do and

sort of the default position is to stop

innovating because they don't have to

write it's like the the model for every

successful monopoly is we don't care

because we don't have to write and every

time you deal with your table company or

any monopoly like you experienced and so

in most of time these things decay over

time they decay and and and and so and

so I guess I'm probing you whether you

agree with this which is by default

monopolies will decay unless there is a

great report great man a great person

aka the founder so it's it has to be an

intrinsic motivation on the part of the

founder to keep it going or yeah well

there's there's always a risk these

things decay at some point and and

certainly on it's unlikely you know I

don't think it's necessary for the

government to be that involved in

regulating them because they normally

actually do have some shelf life at

least in a space where you have

continued innovation but but you know

yet the goal the goal that can get to

monopoly would last for a few decades

that's still much better than opening a

restaurant yes in context that I would

agree with well it depends on the

restaurant the food supply chain in the

world right now is

- what - like up to half of all carbon

emissions for the current level of food

output and the current kinds of food we

consume like a hamburger consumes 350

gallons of water in its production cycle

mean just these these crazy kind of

out-of-control

you know food supply chain energy supply

chain things they clearly lead to you

know just mass it I mean Beijing is

already drowning in smog right you can

imagine how much worse it could get if

these trends continue it seems like

there should be a natural Alliance of

sort of sort of very radical innovative

technologists with environmentalists it

seems like it's if there's a shared

agenda there and yet that doesn't exist

at all do you think that that's a bridge

that can or should be crossed well

people should be trying to do a lot more

on it you know certainly I think the I

think always the people who are

concerned about climate change and

global warming

I always think they should be much more

open to nuclear power typically they're

the opposite typically they want to go

Italy seems to me typically they want to

revert their less I'm hopeful it's a bit

of a generational issue where the the

anti-nuclear people are these boomers

these baby boomers who came of age in

the 70s and once they lose grip on power

in the next decade or so we may be able

to have a nuclear Renaissance in this

country is that a hangover from Three

Mile Island or is that you know I I

think it was not so much the accidents

as it was the dual use of nuclear power

for both peaceful and military purposes

so people always cite Three Mile Island

1978 is a critical turning point I think

it might have actually been when India

got the bomb and I believe 7475 where we

had given India all this reactor

technology we thought it could never be

weaponized it turned out it could be

weaponized and so there was something

there was something in a very scary

about nuclear bombs and it somehow

didn't fully register till the late

sixties and seventies and I think that's

that's what really triggered the

anti-nuclear stuff are you making

nuclear investments we you know we've

started we started to look at we started

to look at this yeah yeah it's

definitely yeah it's it's all these

challenges but we started looking at it

okay so let me thank you very much okay

thank you all for coming

[Applause]