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

so like many startups we were planning this this morning so just-in-time planning so PayPal today which is a global company it's what 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 after the 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 right and the the kind of funny term with paid PayPal mafia because actually in fact we don't exist as a covert organization we don't exist as a 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 you probably no longer remember called the Palm Pilot to cash in a Palm Pilot and an email payment service to a payments network that became a global platform and 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 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 we're gonna make my balances on the float and then these n MasterCard who were both competitors and also on the platform so in 1998 we 2002 we sold it to eBay because we had to grow it on it's key market and we're gonna ting the gambling business did this mean that we were done no because part of what happened is this network of folks Wow and founded essentially these companies and part of what was interesting in these companies was that the diversity of all of them but none of the content is exactly the same if you look at this LinkedIn is about what kind of professional networking YouTube is about video Tesla electronic 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 if none of these are payments and they're all a bunch of different things so you know what made this kind of go well the question was is is we are all talking to each other about 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 these companies and part of why was this essentially something that we 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'd say well who do you know or who might do this the right way but part of the lessons that we learn from working with each other was being bold this is a precisely part of a thing that Peter is book and zero to one is talking about is doing something that's contrary in which other people may not think is a good idea like PayPal and we started and then having the experience of succeeding in that and so these companies end up creating a lot you know a tremendous amount more value that has launched essentially by our network now part of it what's key is that network 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 a ping that's on the right there that's essentially the PayPal Network has 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 found it in terms of the companies they've invested in that's just out of the essentially the right reddish-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 that 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 network gauge is essentially it's critical to adopt entrepreneurship strategies for the networked age because part of what happens in the network age is its dynamic which means it's changing its 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 Peters book zero to one is so critical for the network day because what he establishes here is the 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 network page 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 well thank you read it's a tremendous honor to be here privilege to be here tonight and certainly um certainly think one before I even talk about my book you know one of the features of the of the networked age is that you know the world is a much smaller place it's a very big place but in some ways also a smaller place there are people there people you meet you work with the relationships matter they last for a very long time you know Reed and I became friends at Stanford University back in 1986 almost I was 29 almost 30 years at this point that we've been even friends and and we you know we remember we were brainstorming in 1994 how to start internet companies right after the Netscape IPO in Silicon Valley and then you know we both took a crack at it in the 90s and work together at PayPal and have worked on many things in the year since and you know one of the one of the ideas that we had when we started PayPal very early on was that you certainly wanted the company to succeed but whether the company was going to succeed or not we hope that the relationships would last we hope that the friendships would outlast the PayPal business because this was where so much value would come and I think while PayPal itself did far better than we thought we thought it was going to do when we found it in 1998 I think the relationships have actually been the much more valuable piece and and so many of these uh 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 work together was certainly true at LinkedIn it was true in many of the other companies that Reed mentioned give a formula for starting a company I think it's always number one team number two a technology or product for time on technology startups and number three is business strategy and I always think you want all three the teams come out of this networked age this is how you how you find the people that you work with it's how you recruit people it's how you build companies you can you cannot I think one of the and one of the questions I often get asked how do you know if you someone's just pitching you want to start up how do you have a sense of whether it's going to 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 you know we start we're starting a company and they asked us well when did you meet who said what we just met a week ago at a networking function we decided to start a company that's a bad prehistory a good prehistory as we've been friends for many years one of us is good at you know 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 you know my single sort of thesis and in business is always that you want to be doing something that's so different that there's no competition at all or that that you put such a distance between yourself and the competition and I think the the really great companies managed to somehow pull away from all competition they end up being monopolies they're in a category of their own and these are 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 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 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 you want to be sort of an a dot on that on that chart where you're where you're not we don't blend in to 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 or 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 not a prophet I can't foretell the future I can give you very stupid answers like there'll be more cell phones in five years or something like this but but one of the one of the answers that I've come up with is that I believe every trend that you hear about is overrated and it's 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 SAS 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 and the reason is that these these are these buzzwords are they're like 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 SAS businesses to bring bring big data to the cloud that's what your company's doing on the fact that you're using all these trendy buzzwords is an indication that you've not differentiated because once you have a buzzword you know it's that you have photo-sharing once you have a buzzwords you know that you have many many different people doing the exact same thing and so it's always I see so so it's always 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 you know one plot 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's it's you know it some people I think work harder than anywhere else in the world that's 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 and so you know 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 this issue very hard and I think one of the questions on this 0 to 1 or 1 to and you know we're one day and it's 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 I think this is a complicated question I'm not going to try to to answer it but but I think that I think the history of the last 40 years in China has certainly been that copying things that work has worked incredibly well this has worked it China has done this better than any country in the history of the world globalization is 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 I think there's this history of Japan that's very uh that when I'll always should keep in mind where Japan you know very successfully copied things for decade after decade you know even before but certainly from 1950 to 1990 had 40 very successful years of copying the US and Western Europe and and then they had copied everything and they could not change to doing new things very quickly or right away in Japan sort of hit a wall and it has been sort of a very stagnant place for the last 25 years or so and I think well 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's um it would always be a good idea to also start thinking just 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 know you don't want to be copying 100% and then you just decide one day now we're gonna all innovate that that's not going to work so it has to be sort of somewhat of a gradual transition and I think I think and I've been very encouraged by how engaged people in China have been about this whole question about both both adapting good ideas and then figuring out ways to improve them and make them even better in China thank you very much open up some conversation Thanks to get the ball rolling first of all read aren't you just rolling out a LinkedIn strategy aren't you just copying LinkedIn in China now it should yes now it's working on switches it's a great concept and so we actually have a a kind of two for 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 that there's LinkedIn influencers from around the world people like Bill Gates Richard Branson other folks who essentially bring their particular business expertise and 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 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 there's 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 to what the expectations are for how people connect professionally and it's a building product that it's 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 Derrick 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 you know 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 it's not that good an idea and so you want to prove the concept and then scale it very fast there occasionally are these are very thin viral products where they just grow very quickly so Twitter you know 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't 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 I if you want to frame in terms of two timeframes I always say there's time t1 which is the 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 and so in China t1 is low because people work very fast but t2 is also a small number because people are very fast and copying and so you need to think very hard about how you keep a t1 below t2 if t1 is less than t2 you win if t2 is greater than t1 then it's going to be this very tough competitive dynamic 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 in compounding or they're not that's in your first because one of the metaphors that I frequently use for entrepreneurship as you have the Marines take the beach the army takes the country and the police govern the country of three phases if you can't be gaming an edge at each one which makes it give you a stronger competitive edge you have a problem it's feel don't you talk about entrepreneurship you'll known for being one of the great investors an angel investor what do you look for so I'll give a slightly different slant to but the things that Peter mentioned in terms of team and technology and business strategy are all correct but let me take a tan I'm almost I can go from thirty thousand for the twenty thousand 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 a 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 is 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 that were 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 what the time and it 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 become something unique yep most people think that an idea is a really good idea that's that's telling you that too many people are already doing it and therefore it's a bad idea so so I think I think this is this is sort of the pattern the pattern recognition you know and I did so many the 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 were five venture capitalists and we were supposed to talk about trends for the future and and I remember that the the one trend you know and then the audience voted on it's the most unpopular one was one of the people said there'll be more electric cars in five years time was a very modest prediction actually all four of us voted no the audience was ninety one percent no nine percent yes and I remember as I left that evening I thought you know sheep I just buy some shares in Tesla because nobody likes it it's probably a good investment and and this and and so so I think there are a lot of these these very paradoxical things you know 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 combines you want to be very open-minded but you also have to be somewhat stubborn you know 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 and so it's often these it's often some way in which these things are combined that makes for very powerful companies if you're just on if you just focus too much on one end of it you go badly wrong so it's often like this Zen paradox where it's you're doing two things that are almost the opposite but how do you it strikes me when I think about Facebook hadn't you seen Facebook earlier in an attempt by by Reid and you seen it in a shape and you didn't recognize it but you saw it later well you know I think the the thing that you want to have in all these companies is you want to be both first and last you want the great technology comes are the first ones to do something new but then they're also the last and there category yeah but it's a the terminology is very very tricky so I think you know 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 the last mover is very important but and you could say that there were a number of other people who had done social networking but I think I think that the the the the 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 people know too much about you and so on and so if you label Facebook as a social networking site then you would say was not the first if you characterize it as real identity you'd say it was the first something similar was 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 I say and we already have a search 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 ability to as you 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 the qualifier always gives this as I think you know I don't think pivoting is a great thing to aspire to it's you pivot when you've made a mistake so when you make a mistake you should stop making you should do something else but but you shouldn't aspire to failing to making mistakes is it that's not that's not not the goal in business and so I do think that it's um 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 you try to do everything through a be testing the search space is simply too big and you will never you'll never get to the right 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 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 a sorry I often I think you know 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 it 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 you celebrate learning so when you have entrepreneurs have 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 well when I look at you know the demographics half the world 3.5 billion people living below the poverty dating line are you really messing around here with very with trivia and not really attacking 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 but you know the hope is always that that it will grow and it will scale to to cover more and more people over time and this is true of medicines it's true of computers is true of all sorts of technologies well and in particular one of the things that makes it about technology businesses as technology businesses keep trying to figure out how to get to lower-cost broader distribution and exactly is kind of Peters common is like take for example all the internet technologies well you know when the internet started people didn't think smartphones I didn't think mobile phones would be the way that essentially you'd be bringing you know China you know massively online Africa online a bunch of other places you said well this the the wired infrastructure didn't exactly exist well now as an advantage because you moved immediately to the wireless infrastructure and you start developing new products for that and yet some of those value propositions then get rebuilt for the mobile age and then you move from a billion to two billion a three billion and 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 and so whenever you do that then you are actually going down the curse cost curve or going up the quality curve and certainly though there are some strange things they get more expensive over time and therefore might not get accessible so you know maybe there's some some sort of art that's 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 you never break the cycle of exclusion and so there are certain goods for which this is true but but I define technology as doing more with less so I think it's a it's a problem for many other sectors of the economy but I don't think it's a problem of the technology sector do you think Chinese companies can defeat American startups in a global marketplace by using this king made his strategy you'd spoken about before being dominant player in the market I do think that people in Silicon Valley are very much under estimating China today I think there will be you know a major effort in the next decade by many of the the larger Chinese companies to scale to the rest of the world and I think it's being you know it's it's being very much underestimated China like the United States which it's a challenge because you've such a big market so it's hard to 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 and so and so while I think there always are big cultural challenges and going from China to other countries I think 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 would be much harder to go from there to taking over the whole world yeah I mean fundamentally part of the advantage of Silicon Valley has is that it the companies launched the global English market which includes the US and so having a large market that you first are essentially your first entry then very much helps you globally and I frequently think there are three Internet's there is the Chinese the English and everything else and and part of what happens is I think you'll see a lot more just as for example you know eBay launched earlier what 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 company kind of companies within their country realize that they may have to adapt as they get to other markets so we and Silicon Valley have had decades of kind of thinking about like okay 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 is how you do things that we'll also need to build up in China as China begin as the Chinese companies begin to figure out how are they going to do us Brazil you're up other places so this is a personal question because I need to put some money somewhere what is the what is the future hold where should I be putting my money where should I be investing well you know um look if I could answer that question I would already done this or you know I mean all sorts of all sorts of things like this but you know why I'm not gonna give a direct answer right I think the the answer ain't 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 resting companies why is this a great company and what is it that other people are missing so when I evaluate companies I always um people always focused already on the first question I always try to stress the second one what is about this that we understand that nobody else understands and if there's nothing if everyone understands the 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 and so I always like it when it's okay here's something very important that we understand what other people systematically have a blind spot and that's that's something one should always think through you know Facebook was a very good investment not just when I did it but even for the first leave one reads the venture firm did it in 2006 it was a very good investment you know 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 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 a group our students and Muslims 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 out you'd like to elaborate so this is the first book of 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 what I want to be what are your assets right now what are the market realities eg competition that you steer against and where make it 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 the time most general advice on jobs is to like you know is to follow the the main road you know 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 then to get in the door by essentially doing a volunteer internship you should think about what are the things that you can do on 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 jobless thing 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 networked age is there's a lot more change in dynamism there's also a lot more competition so establishing that it's not what's in that unique edge is critical and that becomes that's that's not generic there's no generic solution to a unique edge you have to think about what you can do to do something unique well gentlemen thank you very much for being here tonight yeah you made a tremendous contribution to the group and I know that they've thoroughly enjoyed it good response thank you much thank you very much for taking the time to be

Channel: China Europe International Business School (CEIBS)

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Keywords: Peter Thiel (Organization Leader), PayPal Mafia, Reid Hoffman (Organization Leader), PayPal (Venture Funded Company), Class, Heroes, Linkedin, China (Country), Shanghai, China Europe International Business School (College/University), CEIBS, Master Class, Master, Silicon Valley, Silicon, Valley, Lesson, mafia, Unicorns, Technology (Industry)

Id: HfqrLJc089A

Length: 37min 34sec (2254 seconds)

Published: Tue Jun 02 2015