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Peter Thiel, Facebook’s first big backer, thinks the future of global innovation may hinge on more entrepreneurial college drop-outs

Posted by Scott Kirsner  November 15, 2010 09:03 AM

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peter_thiel_headshot.jpgI had a chance to spend some time on the phone yesterday with Peter Thiel, the PayPal co-founder, venture capitalist, hedge fund manager — and early Facebook investor. He’s speaking at MIT this coming Tuesday night, at an event organized by the MIT Enterprise Forum of Cambridge.

We talked about Thiel’s new fellowship program, which will provide twenty $100,000 grants to potentially world-changing young entrepreneurs in the for-profit and non-profit sectors; why it might be better for would-be entrepreneurs to drop out of school today than it was when he attended Stanford; whether Facebook could have thrived if it had stayed in Boston; what Thiel sees as a dearth of innovation globally; and the risk tolerance of Boston investors.

(Incidentally, Facebook co-founder Mark Zuckerberg was twenty when Thiel first met him, so he wouldn’t have been eligible for the new Thiel Fellowship, which is open only to people who haven’t yet ticked out of their teens.)

Here's a very lightly-edited transcript of our conversation.

Scott Kirsner: So what will you be talking about Tuesday at MIT?

Peter Thiel: The objective is really just to give a general talk about technology entrepreneurship in the U.S. It’ll basically be a bit of an overview of my thinking about how to start companies. I’ll talk about my PayPal experience, and offer some perspectives on what I see going on in the technology industry in the decade ahead.

And I will probably talk about this fellowship program we just announced for twenty students under twenty to take a couple years off of school and work in a technology start-up-type context.

SK: You’ve gotten a good amount of criticism for the program, which some see as encouraging students to leave school. You went to Stanford, and finished, and then went on to law school and got a degree there, too.

PT: There are certainly a number of things that are quite different from when I went to college a quarter-century ago. The big issue we zeroed in on – which really hit me over the last year or so –is the extraordinary amount of student debt that people are racking up, and the ways that is effectively changing the kind of decisions they can make later in life. When you rack up enormous amounts of debt, it sort of tracks you toward the higher-paying job, but away from something that is less remunerative in the short run, but maybe more entrepreneurial – or a non profit – or something that’d be socially useful.

I think there’s a very significant set of problems around the debts people are amassing. One of my concerns is that that is starting to discourage genuine entrepreneurship. People get super-tracked toward safe things, so they can pay off their debts.

I basically graduated with no debt. I was lucky to have parents who were middle class and could pay for my education.

[For me,] there was a way in which getting educated was actually a way of deferring thinking about the future… Part of our effort is to encourage some thinking about why are people being educated – what is the purpose?

SK: Well, what about someone who is studying chemistry or molecular biology? That seems like an important foundation if you want to develop a new drug.

PT: It depends a lot on the subject matter and the field. But I’m actually not convinced that even in some of these harder technology type areas, the incremental value [of advanced education] is quite high.

SK: So you’re saying that after high school, a kid might be ready to develop an important new cancer drug?

PT: Probably not after high school. But I actually do think the frontier of knowledge is a lot closer than people think. I’m not convinced getting a PhD is necessary. You might learn some in the beginning, in the first year, but then you spend six years of indentured servitude doing various mindless experiments.

I do think that…in the classic areas – like chemistry, biotech, material science, the PhD plus post-doc is probably very wrong. You may need more than just undergraduate, but probably not that much more.

We’re investors in SpaceX, which is developing new rocket technology. That was co-founded by Elon Musk, who also started Tesla Motors. I think he’d dropped out of his physics PhD program on Day 3.

SK: I’m sure he has a few PhDs working with him at SpaceX.

PT: Sure – aerospace is an area where there are enormously talented people. But you may not need the PhD to be the entrepreneur.

Halcyon Molecular, another of our companies, was started by two people who dropped out of their undergrad programs. It involves a real breakthrough, orthogonal approach to some of the genomics problems.

One of the things we see extremely little of is companies where the professors themselves are starting it. …I think academia has been focused on increasingly esoteric problems, and the technology industry has been focused increasingly on short-term, relatively low hanging fruit. There’s a large range of things that are in between that haven’t been done. Academia and the technology industry has gotten further and further apart.

SK: If someone wins one of these fellowships, and they leave Harvard or MIT, do they need to move to Silicon Valley? Are you going to have a shared space for them?

PT: The fellows will be distributed around. We’re going to try to make it as open as possible, and give people the option to do any of a number of different things.

We think we’ll tilt it somewhat toward California. That’s where we have the best network of people who can serve as mentors. But we’re trying to approach it with as open a mind as possible.

People can start their own businesses, or work with existing businesses. They can pursue things that aren’t strictly business. We wanted there to be a lot of flexibility to encourage people to work on breakthrough technologies. The big picture thing is that I think there are not enough breakthrough technologies happening in the U.S.

There’s been innovation on the Internet, but a lot of the harder sciences have slowed significantly. There’s less happening in biotech than we’d like. In alternate energy, there’s a lot of ferment around that – but it has been harder and there’s been less progress than one would like to see. An if you run through the more science fiction-type things from the 50s and 60s – like a Jetson-type robot – people thought we’d have it in 20 years. Nixon declared war on cancer in 1971, and said we’d defeat cancer in five years. There was that degree of optimism about the future. We’re now 39 years closer to defeating cancer, but it’s unthinkable to have someone go on TV and say that we will defeat cancer in five years.

The only optimistic story about the future is one that involves significant technological progress – and that’s what we need to work at restarting in society. My bias is to try to encourage doing it in an early-stage entrepreneurial context.

SK: I saw you interviewed about the Facebook movie “The Social Network,” and you said that the one good thing about it, even if it isn’t accurate, is that it lets people know that Silicon Valley is a great place to build a company. Do you feel like it’s game over, Silicon Valley — or do you see there being successful clusters in Boston, Seattle, or wherever?

PT: I do think Silicon Valley has been the most successful area, over the last decade, in the U.S. I am more skeptical of it as an emerging market thing. In a lot of countries, technological innovation is not that critical. In China and India, it’s about trying to get 19th century plumbing and 20th century railroads. I’m actually quite skeptical of the tech story as applied to emerging markets.

Within the U.S., I think you have various different places – certainly there’s the Boston area, Austin, some pockets in southern California. I’d say within the U.S., in general there is less going on than people think, and less than is desirable. I’m sort of biased toward Silicon Valley, but I think there’s less happening there than people think – and less happening in Boston than people think. It’s a general problem. We tend to think of ourselves of living in an age dominated by technology and technological progress, but that’s not actually the way we are set up.

If you ask the question, how will people in the U.S. be better off in twenty years from now than today — well, we generally don’t ask that question. I think the only answer is major technological innovation. One of the reasons there’s this general pessimism in the U.S. – it feels like things are recovering, but very slowly — is because implicitly, people don’t really believe in technological progress.

SK: But if we are talking about where young people go in the U.S. if they want to be tech entrepreneurs, that tends to be Silicon Valley, doesn’t it?

PT: Silicon Valley, relatively speaking, is still the best place. There still is innovation that is happening. But as a society, we need to think about why progress is stalled.

SK: Could Facebook have grown in Boston and been successful, if it had attracted funding here – or does Silicon Valley provide some necessary atmosphere for growing an Internet business?

PT: My guess is, the answer is yes. It’s hard to actually prove, because you can’t run the Facebook experiment twice. I think there was more hesitation in Boston, and more openness in Silicon Valley. One of the things that is true about Boston is that there is an academic bias that Boston has, that cuts against an entrepreneurial thing. There was probably some sense in which it was not respectable to do [Facebook] in Boston. There would be questions about your credentials, and whether you have a PhD in social networking. There are probably a variety of social things that cut against it.

SK: I think where Boston likes to think it is strongest is in funding hard technology — something that may take a few years to prove, but has some defensible intellectual property around it.

PT: I’m very sympathetic to that as a general bias. I do think one of the questions, though, even with respect to hard technology companies, is how many are actually being produced in Boston. The tough question to ask to VCs in the Boston area would be, “What have the returns been like over the last decade of doing this? How well has this model actually been working?”

SK: But I’d point out that A123 Systems, an MIT spin-out, was the biggest IPO of last year, in terms of amount raised. A hard technology company, based entirely on chemistry.

PT: It closed its first day at $20, and it’s now trading at $9. That’s not what you want to have as Exhibit A from a financial perspective. It’s valued at $947 million. If A123 were the most successful tech company in Boston, then I could tell you that probably every single venture firm in Boston is losing money.

SK: As you know, though, investors start to sell as soon as the lock-up period is over.

PT: By the time the six month lock-up was over, it would’ve been down to $12. I don’t want to say anything super-negative about A123. I don’t know much about them. But you need to actually be able to invest in businesses that are really transformative and potentially very big. …That’s not what we’ve been doing enough of as a society.

If people [in Boston] want to have things that are solid and defensible, that’s good. But you could reframe that slightly, and say that people want things that are certain and safe. Technology is not certain and safe. It involves high risks of failure, and things going wrong. To the extent that that’s culturally not acceptable, you wind up defaulting to things that are safe. The default would be to stay in school, get your PhD, do your post-doctoral work, work at an existing tech company, and spin out a product that is incrementally better and has incremental value. It’s likely that even in the cases where it works, it won’t be radically transformative. That’s my theory on why things have gone wrong in many places, including Boston. I think Silicon Valley is somewhat better on the willingness-to-take-risks dimension. But even Silicon Valley isn’t willing to take enough risks.

SK: Every time I see you quoted about Facebook’s valuation, you seem to think people are undervaluing it. Is Facebook the most valuable company in the world right now, in your view?

PT: I actually shouldn’t speculate too much on Facebook’s valuation. I was extremely bullish on Facebook early on, and it has done better than I had thought possible three or four years ago. I think that on a relative basis, I think it is probably still the most undervalued of the larger Internet properties. If you compare Facebook and Google, Google’s worth about seven times as much as Facebook’s shares [when Facebook shares trade] on the secondary market. That undervalues Facebook. I don’t think it’s worth more than Google. It’s hard to know how much Facbeook is ultimately worth. Today, it’s not worth more than Google. It has a lot of potential, and there are a lot of execution challenges the company has to meet in the year ahead. But of the larger Internet properties, and of the Web 2.0 companies, I think it is probably the most undervalued.

SK: Would your advice to a young person ever be to go off and work somewhere before starting your own company? Like, go work at a photovolatics developer before starting your own solar company, or work at Tesla before starting your own car company?

PT: I’m not sure dropping out of school to start a company is the right model. I think people will get the best experience in a start-up context that tracks reasonably well — people work very hard, it’ll be intense, and they’ll learn a tremendous amount about a lot of things. That’s probably a good learning experience. I think there are a lot of things to be said in favor of staying school or working at bigger companies, but I tend to think those experiences don’t translate as well if you are looking to start a new company.

Being young and starting tech companies – I wouldn’t go so far as to say it’s a plus, but it is not a minus. In a break-through technology, you’re fundamentally doing something new. Established institutions, whether corporate or academic, will encourage you to do the same things as before, or things with incrementalist improvements.

(Peter Thiel Headshot by The Thiel Foundation is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.)

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About Scott Kirsner

Scott Kirsner was part of the team that launched in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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