Peter Thiel is a contrarian’s contrarian. As cofounder and former CEO of online
payments pioneer PayPal, Thiel successfully took the company public in 2002
during one of the worst capital-raising environments for tech stocks in history,
and sold it to eBay for $1.5 billion later that year. He subsequently launched
Clarium Capital Management, a San Francisco-based global macro hedge fund that
has grown to $2.1 billion in assets. While up only modestly this year, it
boasted a 56 percent return in 2005 on the back of long energy and long dollar
positions. Last year, he also cofounded the Founders Fund, a small venture
capital vehicle that has invested in, among others, social networking website
Facebook. Thiel spoke with Worth editor-in-chief Dwight Cass about the dangers
of too much capital chasing too few good deals, the tenuous sources of that
capital and what to expect when the housing bubble it has inflated finally
bursts. You are best known for founding PayPal and for your hedge fund. But you
recently set up a venture capital vehicle. What prompted that?
As a result of my Silicon Valley connections from having led PayPal, I’d been
doing some small venture capital investing on the side for the last five or six
years.  The basic challenge with venture capital, and with private equity, is
that you have basically too much capital chasing too few good opportunities. We
decided to do a small fund because there are a limited number of good deals. But
even so, I don’t think you can deploy anything more than $5 million to $7
million a year in capital; anything beyond that, your returns really start to go
down.
What do you look for in a venture capital investment? The most important thing is the caliber of the people starting a company,
because at an early stage in these tech companies, the plan often changes. You
can change the business plan much more easily than you can change the people, so
you want the right ones. You look for people who are both quite visionary and
also somewhat open-minded. You just try to make some judgment as to what it’s
going to be like to work with them, because once you write the check, you’re
always pretty much stuck as an investor. One thing I ask is the salary of
the CEO. The general rule I’ve found is: below $100,000, almost always great;
above about $180,000, almost always bad. The basic question is: Are they going
to be aligned with you—do they believe the equity is going to have any
value? Secondarily, but still very important, you ask just how big is the
idea. Is it something that can inspire other people to work on it? If not, to
attract good people, the business will have to offer high salaries, which is
difficult for young companies. What should an investor who wants to put money into a private equity fund
look for? At this point in time, people should not be putting any money into any
private equity deal whatsoever. Returns are just not there. You have too much
capital chasing too few good opportunities.
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