Escape the competition, w/PayPal's Peter Thiel

The very best founders I know are brilliant at building systems. They connect teams, they remove bottlenecks, and they eliminate single points of failure. And yet, when it comes to their own wealth, most are running a disconnected stack. A tax accountant here and a state attorney there, a wealth manager who doesn't talk to either one of them. Creative planning was built to fix exactly that. An integrated team of tax professionals, state planners, investment specialists, all coordinated by a dedicated wealth manager who sees your full financial picture and keeps every piece working together. Proactive tax efficiency, state strategy, investments all under one roof. Creative planning where wealth works together. Learn more at creativeplanning.com/mastersofscale. We've all spent money on something that seemed incredible but didn't live up to the hype. A kitchen gadget, a car, when it doesn't deliver, the disappointment is real. Marketers suffer from this too, chasing metrics that look great, but don't translate into revenue. LinkedIn calls that bullspend. Invest in what matters and reach the right buyers with LinkedIn ads. You can target by company, industry, job title, and more. LinkedIn ads also generates the highest row as of all major ad networks. Spend $250 on your first campaign on LinkedIn ads and get a $250 credit for the next one. Just go to LinkedIn.com/scale. That's LinkedIn.com/scale. Terms and conditions apply. AI is full of possibilities, enterprises run on realities. That's why Pega combines the world's most powerful AI with the governance, transparency, and control, enterprises demand. So you can move faster, adapt faster, and scale AI with confidence. All the power of AI, none of the uncertainty. Learn more at Pega.com/AI. Hey there, masters of scale listener. This is Reed. And before we start the show, I have a favorite ask you. If you love the show, I would love you to leave a review. And of course, wouldn't mind a five star rating either. Your review helps other listeners find us, and it helps us learn what you like. We read every review. So I know Joy Chutakov appreciates the candidness of the conversations. And Kevin OSD likes the variety. Thank you, join Kevin, and thanks in advance to each of you for leaving a review. Speed is not manufactured by how fast the feed movement, how much force per step. That's Darryl Woodson, a personal coach to some of the fastest runners in the world. He trains Olympic athletes who have broken one world record, three national records, and claimed ten national titles. Darryl doesn't have a single training regime, foes Olympic medalists. Each runner has unique strengths. Some runners, for example, seem to explode off the block. When Darryl sees that explosive quality, he lights a match under them. It starts in your head. The brain controls 100% of your muscle capacity. Sometimes the runner's brain functions a lot quicker than other people, but it's more natural for them to be just explosive. Now with any runner embodies his explosive quality, it's Natasha Hastings. She's a two-time Olympic gold medalist. They call her the 400-meter diva, and when it comes to starting off the blocks, she's a powder kick. My start is free explosive, but I've even been asked, "Well, why do you start so fast?" Natasha and Darryl spent a lot of time thinking about that first stride. The most important aspect of the acceleration are the first two steps. It does almost kind of manufacture the greatest power I'll put. One of the things that I always think about is those first few seconds is an energy system that you're never going to get back, so why wait for it? Now that's the plan that gets Natasha ahead of the competition. It takes natural talent and training, yes, but also a very specific mindset. And I would argue a similar plan applies to Silicon Valley's fast-growing companies. Their built-for explosive starts. Under teal, the founding CEO of PayPal and one of the Valley's sharpest investors won't back a company if they don't have this kind of potential. He has to believe they can not only get ahead of the competition, but break free of it entirely. I do think that for a really valuable business, you have to, at some point, try to achieve escape from the competition. And so if you could scale incredibly fast, on the one hand, you have to race really hard to scale fast, but the benefit, if you do it, is that you're achieving a escape velocity from the black hole that is hyper-competition. I rarely agree with Peter, but in startups, we find common ground. I believe if you want your company to scale, it's not enough to beat the competition. You have to break free of the competition altogether. You've got to have incredible talent at every position. I believe if you want your company to scale, your goal is not to beat the competition. Your goal is to break free of the competition entirely. In an ideal world, you do this by going where the competition isn't. You invent your own game and master it, but to be clear, this is more of an aspiration than a feasible goal. At best, you'll get a grace period, a fleeting moment when no one believes in your idea. And as soon as your idea takes off, watch your back. Before long, you find yourself where most businesses start, facing competition. Your goal? To break free. That's what happened to PayPal, and I want to share that story with you, because it's easy to say, I'll break free of the competition. It's quite another thing to be in the heat of the race, unaware of where your competition stands, or whether you're truly breaking ahead. I want to talk to Peter Teal about this, not only because he guided PayPal through those precarious early days, and went on to invest in company after company that embodied this idea, but also because he has some of the strongest opinions on competition, and well, on almost anything, of anyone I know. I first met Peter at Stanford, and right from the start, we clashed on a lot of issues. Yeah, it's always the joke we have, where you know, you're sort of the socialist, not the capitalist. We were fierce young men back then. I'm pretty sure he saw me as a bleeding heart pincocomy. Hi, I come red. And I'm absolutely certain I saw him as a libertarian wacko, who seemed to have sprung out of Ein Rand's book, The Fountainhead, fully formed. Government is the problem. Our first dorm room debate pretty much consisted of us saying to each other, you can't possibly believe that, and that feisty exchange continued throughout college through the founding of PayPal. And yes, as some of you might know, through the 2016 presidential campaign. I've known Peter for three decades, and I respect him deeply. Although we often spar, he's right more often than I find comfortable. But I still can't predict where the land on many issues. Who would have imagined that my former PayPal colleague and friend would back Donald Trump, not me, yet there he was at the Republican National Convention? I'm Peter Till. I'm not a politician, but neither is Donald Trump. He is a builder, and it's time to rebuild America. Go figure. I'm at Peter in August, and we sidestep our political differences. If you really want to hear us do get out, tweet us at Masters of Scale. We might just be able to arrange a follow-up interview. Peter, consider yourself on notice. On today's show, we're going to show our political disagreements and consider one rare point of consensus that the whole point of scaling fast is to escape your competition. But Peter didn't always try to avoid competition. From most of his life, he thrived on competition, as he himself will tell you. That was incredibly competitive in elementary school, junior high school. I remember eighth grade, one of my friends wrote my eighth grade yearbook. I knew you were going to get into Stanford four years from now, four years later I went to Stanford, and then I got into Stanford Law School, and I ended up at a top law firm in Manhattan. And it was sort of winning one competition after another. So Peter has always had this competitive streak. But another thing you should know about Peter is he also has a very serious contrarian streak. And those two qualities don't sit comfortably together. On the one hand, he wants to race against his peers. On the other hand, he wants to stand apart from him entirely. For most of his childhood, he let his competitive nature get the best of him. He was a champion chess player. He trounced his peers in class rankings and LSTT scores. At last, he had reached his competitive nirvana law school. And then maybe I was attracted to law school because it was sort of my very precisely rank ordered. It was a thing you could go to next after undergraduate. The paradoxical thing that when you compete very intensely, you do get to be very good at the thing you're competing on. But then you often don't ask enough critical questions about whether the thing you're competing on is really worth doing. Good question. Peter didn't have an answer, so he just kept competing. He caught his way to the top of a class. Then he landed a job at a prestigious law firm. All the while, that question, is this worth it? Still not at him. And as his career reached new heights, he had a sinking feeling. He wasn't winning. In fact, he felt trapped. It was this very strange place. The law firm was from the outside. It was a place for everybody wanted to get in. On the inside, it was a place for everybody wanted to get out. When I left after seven months and three days, one of the people down the hall from me said he had no idea anyone could leave this quickly and there was possible to escape from Alcatraz. All that work, all that winning had landed Peter in a prison of his own making. And like any inmate, he began to question his life choices. Then it dawned on him. The root of his problem was an obsession with winning. Who cares how anyone measures up to their peers? Competition he decided is for losers. I'm not overstating his argument. He really says that. Google the phrase competition is for losers. And the top results all point back to Peter Teal. There's his Wall Street journal op-ed headline. Competition is for losers. He said it to me too. By the time I was at Solven and Cromwell five years before we started PayPal, that I came to question conventional competition. I thought that a lot of the conventional ways people competed resulted in too many people do conventional things and then you end up in very competitive dynamics. And then even when you win, it's not quite worth it. So you might get a slightly better paying job than you otherwise would, but you sort of have to sell your soul. And so that doesn't seem like a very good economic or moral trade off. And the kinds of things like that that happen with conventional competition. By the time we started PayPal, I was focused on how do we compete very intensely, maybe to avoid competition all together. I often disagree with Peter, but I have to say on this point, he spot on. Competition will make you at best a winner in a losing game. If you really want to scale a business, escape the competition, change the playing field, hang up your jersey. This applies to businesses as well as individuals. Don't try to beat the competitors at their own game. You have to invent a new game and master it. And that's precisely what drew Peter to the idea of online payments. It was 1998. Everyone wanted to sell stuff online, but no one had an easy way to pay for that stuff. Peter saw an opportunity to essentially invent the internet's cash registers. By the time we started PayPal, when I was in a 3031, I was focused on doing something entrepreneurial, doing something that strictly speaking other people were not doing. There's this question about financial cryptography. Could you start a new currency? Could you start some new secure financial product? And so that was sort of an intellectual set of ideas that we were in a very interesting exploring. And then we were also very focused on getting to scale as quickly as possible. How do you get it to grow by word of mouth? Read you and I had many sort of late-night conversations about virality and exponential marketing. After talking with Peter, I realized it is memory of PayPal's early experimental days was of a solitary, heroic struggle to make online payments a reality. But the fact is, we weren't alone for long. eBay had emerged as the leading online marketplace for selling. Well, everything. Their power sellers flocked to PayPal. They caught us by surprise. Who were these users? Not at all the ones we imagined. The way I remember it was the initial reaction was quite negative. It's like, wow, this is like the junkiest stuff being sold on the internet. It's so bad for our brand to be affiliated with all this. Entrepreneurs, take note. Your first users are often not at all what you imagined. They're often less glamorous. Fewer number. Don't be too quick to judge them. They may prove more valuable than they initially seem. Peter changed the tune on the eBay sellers very quickly. In retrospect, it turned out to be this incredibly tight community, a new use case where the alternatives were much worse. The alternatives were typically using a check. It takes seven days to clear. Because people were both buyers and sellers on eBay, it had a natural sort of fluidity to the whole thing where the money went from one PayPal user to another and stayed inside the system and turned out to be quite powerful. Let's say within three to four months of it being used on eBay, something like 30% of the eBay power sellers were using PayPal. eBay executives were mift to see us ambushing their checkout counter. Granted, we made their users happy and accelerated the sales cycle on the site. But who were we to siphon off eBay's business? So began a very strange dance between frenemies. It kind of reminds me of those unusual animal pairings that you see on a nature show. It's an old story. I can almost hear David Attenborough narrating the scene. Incidentally, scientists are still debating whether the Ramora eel had a parasitic harmless or beneficial relationship with its host. That pretty much sums up PayPal's relationship with eBay in the early days. In the long run though, Peter saw trouble. Well, it was the deep leak uncomfortable place to be though. So it worked, but it was uncomfortable because we were the cash registers and you had a different company that ran the store and they were trying to figure out how to get their cash register machines to work. And if they ever figured it out, we'd be in real trouble. We knew we were in trouble when eBay bought a rival online payment service called billpoint and directly integrated it into eBay. So much for Peter's grand escape from competition, things were getting heated. But when I remind Peter of this massive threat, to my surprise, he shrugs it off. We're certainly not alarmed about eBay initially because they did not launch the bill point product that got launched after we got started. They bought the company, but they hadn't done much with it yet. I remember it a bit differently. eBay scared the dickens out of us. And yes, even Peter, because I distinctly recall I'm asking me to sell the company to anyone who would buy it for $600 million. I remember our conversations. You were actually at that time fairly concerned about people think we have this really valuable thing, but we haven't established it yet. It's a house of cards right now. This whole thing could blow over. There was a six to 12 month period where you had me essentially seeing if anyone would buy the company. Well, anyone buy this. Go look for buyers. There's a funny untold story around a vericine head up their bid by $50 million. They may have actually owned PayPal. It's hard to say what would have happened, but certainly there was a lot of uncertainty around all these things. The name was a good name. It was a friendly name. How could you go after poor little PayPal? Just this friendly little company that was helping customers. The remarkable thing in retrospect was how robust it turned out to be. Maybe the kind of counter bailing advice I would try to give would be that you should try to always do something where there's an intense use case where the customers really like what you're doing. And that will protect you up to a certain point. Peter makes a fascinating point here. On the one hand, he says, "Avoid competition." On the other hand, he seems to concede that competition is tolerable so long as your customers have an intense attachment to your product. And it may sound like he's contradicting himself. He isn't. Here's how he sees it. They're companies that are purely competitive. They do not make any money. Think a restaurant. You never want to be in the restaurant business. I'm sure right now you're thinking of a restaurant that makes money. So spend your disbelief for a moment and hear them out. And then there are businesses that do not compete. They are monopolies and they do very well. And even though this is not the way people want to talk about it on the inside, you always want to have a monopoly on the inside. You're probably thinking, don't we regulate monopolies out of existence? Well, yes, the unscrupulous kind. Most people associate monopolies with the robber barons of the late 19th century. You know the type wearing a top hat, chopping on a cigar, and lounging on a pile of money bags. Peter, on the other hand, sees monopolies in the here and now. They're camouflaged as competitors. Look closely, says, and you'll find even the most classic examples of competition are not what they seem. You could say that Coke and Pepsi compete very intensely. On the other hand, you could say that there's somehow quite differentiated from a brand so that in practice, different people prefer Coke or prefer Pepsi and there are actually a much smaller set of people who view them as interchangeable products. So I think measuring how much actual competition is happening is not always a straightforward thing to do because just as people want to have monopolies, they want to also downplay them. And so they will suggest that they're facing enormous amounts of competition everywhere, whether or not that happens to be true. Once you think of a monopoly, as simply absence of competition, you might start noticing a few yourself. What's a patent, if not a monopoly, backed by the government? And what about those companies that monopolize a market by pursuing a wildly original idea? Elon Musk's SpaceX is pretty much the only company on a mission to send people to Mars. Anyone want to take them on? No? Well, that's precisely what spurs Elon onward and upward. You have to invent a new game, seek out a fresh new field, but you don't have to go to Mars to discover a new terrain. We sent our producer Dan Kedmi to perhaps the most competitive landscape on Earth. The bakeries of Manhattan's West Village to see how a baker breaks free of the pack. I'm actually trying to get into a remarkably crowded market. I mean, there is, if people will look at this and think that I'm crazy, you can't swing a dead cat without hitting a bakery. That's Umura Maud, founder of Mazdaidar Bakery. You can swing a dead cat from her front door and hit Patisserie Claude with his legendary croissants, or Dominique Enzel Kitchen, where the Kronut, that's half croissant, half donut, was born. Competition doesn't get tighter than that. And so I said, all right, well, there has to be a point of differentiation. If there isn't an opportunity in a crowded market, then Ford, NGM, and Toyota, and Mercedes, and Tesla, and all these other people wouldn't exist in the same market. There's opportunity, there's always opportunity. And I believe that very strongly, I don't believe that you have to be the singular owner of a market in order to be successful. Umura knew what she was up against. She's a former Wall Street banker, and she knows how to hedge her bets. So she started selling baked goods online. I said, how do I minimize my costs? And I rather than build a million dollar space and build a huge kitchen and all these things and hope someone will show up. I said, let me figure out there's even an even traction here. And so I started with an online business. Once she had repeat business, she gained a toehold in a coffee shop. I said, you know, where are the people that I care about? Where are my customers shopping today? Where are my customers living? I went to those brands, and I said, I want to work with you. And one of the first brands was Intelligencia Coffee. So that was my first wholesale contract. And then she took to the skies. I was approached by JetBlue Airlines. So JetBlue had just introduced Mint Service. It's like their first class. At the end of the contract, we were packaging pastries for 22,000 passengers a month. So that for me was also a really great way to do two things, test a large brand partnership, and also figure out what customer conversion looked like. If we could get customers to convert to us directly through a partnership like that. So I kept trying to find the partnerships which would give me access to the customers that I wanted to become my own. Along the way, she discovered her point of differentiation. She would never make anything as newfangled as a croissant cross with a donut. Leave that to Dominique Ensel. Her bakery ever so subtly elevates the familiar flavors from childhood. What we really want to do is we want to have whispers of new things in sort of the pillow of something that is familiar. A great example of that is our spinach and feta hand pie. It's kind of like our version of a grown-up pop tart. But it's savory. And it's made with sauteed spinach and Greek feta. But then I season it with zatha. And so zatha is a spice that's used very commonly in the Middle East. And so it's somewhat unexpected when you bite into it because you're not sure, you're like, what is that flavor? And then you think, gosh, it elevates this. And it kind of intensifies the experience of the pastry in a way that I wasn't expecting. Some of my favorite comments from customers are, this reminds me of my grandmother or the thing that I grew up with or I was on this vacation and you're taking me back and you're helping me sort of remember and experience that. And for me, that's my dream because what happens then is I've now created a link and I've created a connection with you and I've got you. She's got you as much as a baker can capture a customer. At the very least, she can go on scaling her business even as the baker next door invents the hottest new thing since sliced bread. For her, the goal isn't so much to break free of the competition, but to differentiate enough that she carves out her own mini monopoly. How much do you have to differentiate? It depends on the size of the market, the speed of your competition and your own aspirations for scale. How big do you want to be? Umber knows exactly who her competitors are. All she has to do is look at the storefronts around her. At PayPal, it wasn't so cut and dry. eBay appeared to be our true competitor and as a startup founder, you'll often hear potential investors asking, isn't some gargantuan company on the verge of doing whatever it is you're doing? The presumption being that with all of their money and talent, they'll squash you. But the reality is your most dangerous competitors are rarely the big guys. The big guys like eBay are hesitant to storm the field and fumble alongside you. A fumble for PayPal risked blowback from a few thousand users. This sucks. A fumble for eBay, however, could angered users in the millions and draw the watchful eye of government regulators. And even if eBay were willing to take those risks, why would they burn so much creative energy on the online equivalent of a cash register? Think about it. They're building the store, a global marketplace for online commerce. So what if a little company is hijacking the checkout counter? So while we were ringing our hands over eBay's new payment system, we were also encouraged to see that they took more than a year to roll out Bill Point. When you've built substantial wealth through your business, it's often tied up in a single equity position. The upside is real, but so is the risk and knowing when to act isn't always obvious. Creative planning works with business owners to build a strategy around concentrated equity, when to diversify how to manage tax risk and how to protect what you've spent years building. Learn more at creativeplating.com/mastersofscale. We all know the disappointment that comes when a grand gesture falls flat. Something that seemed impressive in the moment, but didn't deliver the results you expected. Marketing budgets too often fall into that trap, aiming for big impressions, big reach, but without the revenue to back it. LinkedIn has a name for it, bullspend. LinkedIn ads generate the highest row ads of all major ad networks. They target by company, industry, job title, and more. That's LinkedIn.com/scale, terms and conditions apply. Stripe Treasury is your new financial operating system built for what's next. With Stripe Treasury, the place your business accepts payments is also where you can store balances, move funds, and pay vendors worldwide. If you're building for global scale, get a business bank account that lets your money move instantly whenever and wherever you need it. Learn more at Stripe.com/treasurey. Stripe is not a bank banking services provided by fifth third bank National Association member FDIC. Now we get to one of Peter's key ideas on escaping competition. It's the central idea that drove not just PayPal success, but nearly every successful scale company. We needed to achieve escape velocity. We needed to grow so quickly that it would discourage anybody from even trying to compete with us. If you could scale incredibly fast, on the one hand, you have to race really hard to scale fast, but the benefit, if you do it, is that you're achieving escape velocity from the black hole that is hyper competition. So you can start in something that's very competitive, but then over time get to a place that's less and less competitive. So you can say Amazon was incredibly competitive, but over time it's becoming more and more of the retail monopoly. And that's why people value the company so highly because when they look into the future, they envision Amazon having destroyed all other retail stores and making all the profits. Now this is a big idea, escape velocity. How do you know you're hitting it? Peter has a formula. You know, I used to have this equation on the PayPal whiteboards. So U sub T equals U sub zero, E to the X T, where U sub zero is the initial users. U sub T is the users of time T and E to the X T is sort of the exponential growth factor and X is growth. If you get X, I'll use the exponential. Yes, he did just recite that equation off the top of his head. You don't have to understand any of it. The equation simply helps Peter detect whether users are growing exponentially. It comes down to what Peter calls the X factor. Translation, watch for exponential growth. The X factor in the exponent was growing at about something like 7% a day. And even when you start with only 24 people that are the compounding dominates. And so you go from 24 to a thousand by mid-November, we're up to 13,000 by end of December 99 by early February of 2,000, we're up to 100,000 by mid-April of 2,000, we're up to a million. If you're wondering how Peter remembers every date and every metric from 17 years ago, your guess is as good as mine. Maybe it's because the daily movement of those numbers hinted at a radically altered future for our company. Exponential growth is simple to grasp, but really hard to believe in. The sooner you can detect it, the better you understand whether you're hitting escape velocity. Think about the moment Peter detected our blister and growth rate. We had only 24 users. Every day they grew by 7%. If the trend held, we could break free of every competitor in a span of a few years. In short, eat dust eBay. There's an Einstein line that compound interest, they may be apocryphal, maybe Einstein didn't actually say it, but it's to the effect that compound interest is the most powerful force in the universe. And so there was this question, how do we get some sort of powerful compounding to work? And we concluded that linking money with email and maybe giving people some money to sort of accelerate the process would really get it started. It was made for a very crazy ride. This underappreciated rule of compound growth is why Silicon Valley seems to spawn so many overnight successes. It's why investors pour hundreds of millions of dollars into a whisp of a company. So long as your startup is hitting escape velocity, anyone who understands the power of compound growth will keep funding you. And most of those investors tend to reside in Silicon Valley because they've seen compound growth with their own eyes and they believe it. Take for example, the time that Peter and I invested in Facebook, we weren't blown away by Mark Zuckerberg's pitch as we recalled. I don't know if you remember two features of that meeting which were pretty funny. One was, Zuck was, he's grown into his articulateness. He's very articulate now, but back then, there was a lot of staring at the desk, not saying anything. So, like, what are the right words to say, well, Zuck didn't save him much, right? The second part is, remember, he said, well, if you don't like this one, I have this other business, Myra Hogg. Myra Hogg was a file sharing service created by the Facebook founders. Do you remember the, do you remember the peer-to-peer file distribution? Yes. What? Get rid of that. Not interested. No, not interested. So, why did we invest? The X Factor. Facebook expanded from one college campus to the next at a speed that was unprecedented among his competitors, like Friendster or MySpace. We still had a million questions about whether the network could ever break out of college campuses and spill into the wider world, but there was no denying that Facebook's user engagement was unreal. If memory serves me right, when Facebook launched to a new college campus within six weeks, 80% of the students were essentially using the service. And by using the service, I mean, they checked it more than four times a day. That X Factor mattered more to us than whatever Mark said or didn't say about his business. The story I always tell was that you always tell sort of the shark tank image of this and what did they say and what were the right magic words to use to get money. And I think the answer was much more that the two of us and maybe you more than me had done our homework for at least a year, maybe a decade before that, and we're primed to invest. And that's actually what you want to be able to do. Suppose you've hit escape velocity, user growth compounds by the day, investors back you and round upon round of financing, you've mastered a game of your own making. Now the pressure is on, not just to gain a competitive edge, but to escape the competition entirely. The very same force that enabled you to secure huge sums of capital will compel you to spend at an alarming rate. If you want to break free of your competitors, get ready to burn money. When you had a burn rate north of 10 million a month from March to September of 2000, that was pretty uncomfortable. Yes, you heard that right. We spent upwards of $10 million a month. You might think that making sure your business has a steady stream of cash should be the priority. But when you face intense competition, you often have to spend to leave your competition far behind, and you might have to spend a lot. In Silicon Valley, competition can be downright lethal. Think of all the late 90s search engines. Remember Asgees? Oh, hello. Atba, Infosheak, direct hit, then Google comes along and it was like, nope. See you later. That's it. No soup for you. And that's just the nature of the game. The stakes are neatly summed up by my favorite line from the movie Glen Gary Glen Ross. The first prize is a Cadillac Eldorado. Second prize is a set of stig knives. Third prize is your fired. Except in Silicon Valley, it's usually first prize is the whole Cadillac dealership. Second prize is your footnote in history. And that's one reason Peter agreed to run a costly experiment that was pretty much unheard of at the time. Most companies paid advertisers to reach users. We took a more direct route. We paid the users themselves if an existing PayPal customer referred our service to a friend that each got $10 online cash on the house. Peter wasn't exactly gun hoe of this idea. Here's why he decided to pay users despite his misgivings. We had to get to scale as quickly as possible. And if we didn't get to scale, maybe somebody else would beat us and we wouldn't achieve escape velocity. And we didn't know that there would still be a rapid organic growth even when we stopped giving customer the referral bonuses, for example. And then similarly, I also thought that we either could get to scale or figure out our business model. So we should get to scale and then see if the business model worked, rather than see if the business model worked and then scale it. Yes. And Bernadette and Exponentiating. Right. Exponentiating. Exponentiating. And then it was certainly there were no revenues yet. Because the funny thing is there's a flip side which we'll go into a little bit of the positive exponential curve, but the negative exponential curve was one of the things that we were also. Well, the robot. Yes. Exponentiating. Exponentiating. Exponentiating. Yes. Exactly. Plenty of wildly successful businesses defer profitability for years. Amazon chugged along for roughly two decades, ignoring the occasional gripes from Wall Street, that their whole operation seemed to be a money pit. In fact, they were breaking free of their competition in one retail sector after the next. You'd think just as PayPal was hitting its ride, we'd also rest easy. I wish. At no point did we say to ourselves, "Relax Peter, we've hipped escape velocity. Sign that $10 million check already. In fact, we worried without end." Our concern was grounded in a humbling truth. Escape velocity is not a fixed speed. It's always and forever relative to your competitors. Your fastest competitor determines how hard you hit the gas. Peter suspects the majority of Silicon Valley startups could gun at a little harder. Post-2000, the main post-mortem was that you shouldn't scale too quickly. And you had to do it fast, but not too fast. And if you think about businesses that have failed because they scale too quickly, there have been very few post-2000. I think there have been a few companies I can point to in the last one or two years. So perhaps, as of 2015, 2016, people finally got over the hangover from 99-2000. But if you think about scaling, there's obviously a lot of businesses that scale too slowly. You'd expect there to be a lot that are scaling too fast. And it's striking how few have scaled too fast in the last 17 years. So how quickly can a competitor sneak up on you? Brian Cheskey, the co-founder and CEO of Airbnb, has a cautionary tale. Now Brian invented a wildly new game that was so strange he didn't really have a single competitor. If you listen to Master's Scale regularly, you may recall my initial response to Airbnb, and the idea that strangers would open their homes to other strangers. Oh, someone's going to rent a couch or room from someone else? Like who are the freaks on both sides of that transaction? Bear in mind, this is coming from the guy who invested in Airbnb. Fortunately, the people on both sides of that transaction weren't freaks at all. And now you can find them in just about every city around the globe. Brian and his co-founders had basically invented the eBay for extra rooms and empty homes. And as a new mover in that space, Airbnb scaled fabulously. Brian thought he had escaped velocity around the middle of 2011. They had users. They had investors. They had no competitors. And then as inevitably happens, they did. And then all of a sudden, we had gone clones. We had to expand really fast internationally. By cloned, Brian means websites that had cropped up across Europe and Asia that looked and worked a lot like Airbnb. They were backed by behemoth of a company, Rocket Internet, based in Germany. Brian recognized the competitive threat, thanks to some sage advice from Michael Moritz, a partner at the venture capital from Sequoia. Brian and his co-founders invited Michael to their headquarters to discuss Airbnb's expansion strategy. Back then, Airbnb's headquarters was just a dingy apartment with a no shoes policy. We make him take his shoes off. It was like the funniest thing. He's like he's used to going to these offices, he has to take a shoes off in our apartment to meet with us. Thank you. And we had to get advice from him. And we had two choices for international expansion. We could either go to the football cities or international expansion. And the football cities are basically where in the United States are, like, small, medium to large size cities, there's a football team. And we could expand to, like, you know, St. Louis and like Baltimore and Boston, Chicago, or we could do something else. Michael Moritz said plant flags. What does that mean? He said, "Pick the most important markets in the world and imagine you lost them. Which ones couldn't you lose?" And we thought, "London, Paris, Barcelona. We kind of stayed in Europe. Asia was maybe a later chapter. Rio." And to be started planting flags. Ryan planted flags across Europe. He literally hopscotched from one European capital to the next, scrambling to get users on his site. Ultimately, a wildly original idea only buys you a grace period from the competition. As soon as it works, you have a target on your back. And in the early 2000s, PayPal was an increasingly juicy target freebay. They did all sorts of things to rattle us. Like a promotion with Visa that made it free for sellers to accept payments from credit cards. Who knows, maybe one day they would have just booted us from a site. That day never arrived, and it's because we found the ultimate escape plan. We sold PayPal to eBay for $1.5 billion and got out of the online payments competition. Why? If you ever do invent a new game, fumble through it, master it, grow at an exponential rate, hit escape velocity, even after all of that, you may still come crashing back to Earth. There's a much older adage that you should always have in the back of your head. If you can't beat them, join them. And after all that hard work, it can be a Peter Pell swallow. Just sell your company? We still question the decision. Do you have any additional thoughts on whether or not selling the eBay was a good idea or not? Well, I think it was still the right idea because there were so many regulatory constraints on that business, and we were not really achieving escape velocity from eBay. You know, eBay was growing fast. We were growing on eBay, so we were growing maybe 100% annualized on eBay. And so to diversify away from eBay, we had to grow the non-EBAY business by more than a hundred percent a year. And I think that was extremely hard to do. We'll never know whether eBay would have gained on us. Maybe we could have achieved escape velocity, or maybe we could have held out for more growth or a higher bid. The PayPal founders to this day have differing opinions, and I don't claim to have the right answer. But one thing we did learn from that experience is that competition is just a drag. As investors, Peter and I both look for that founder who aspires to break free as much as possible. As Peter says, he always comes back to a fundamental question. Will this founder re-shape the future? Yeah, I always, I always, I've gone back and forth over the years, how much is the people, versus the technology, versus sort of the business strategy. But if you sort of ask people what they are trying to do, and if it's not that ambitious, and if they're not trying to win in that significant away, that's probably a relatively bad sign. And then of course, if it's ambitious, then you have to sort of calibrate how realistic it is. It's a little bit unrealistic, but there's a lot of calibration around that. But there's something around that I think is very underestimated, where the future is the future that we will. We decide what future we wish to create, and if you want to ask what kind of future is going to happen in a given company, you just ask the people, and they will tell you. And all you need to do is ask, so my version of that is you have a very ambitious future, like you have an ambitious goal, and you at least have a plausible theory about how you get there. Right? It's not just we will get there. It's a, this is what I recognize the path looks like, these are some of the risks, these are some of the techniques. Yes, so that's the good one, and the bad patterns tend to be either no ambitious future, or winning the lottery, sort of ambitious desires, but no pathways. These people who want to reshape the future, but also understand how hard it is to get there and plan accordingly, they're exceedingly rare. Most of the things you imagine what the future are wrong, and that's why people tend to vie for excellence on the same well-worn playing field. There's a deep comfort in knowing the rules of the game, and no harm in it either if that's your thing. But if you stop for a moment and realize that you can't find a single member of the herd you aspire to be, then perhaps that's the first sign that you're ready to break free of the competition. And to that I say, game on. I'm Reid Hoffman, thanks for listening. Next week on Masters of Scale. Sometimes when we were on our boat, we would play this game where someone would be up on the very front pulpit, and then people would be on either side, and they'd call right, left, you know, starboard port. There's a crab, and see if you could catch it while the boat was, you know, moving at about five knots. And once she could steer her boat above a skittish crab, a moving target less than a foot across, she was unstoppable. We could catch, you know, hundreds of them if we wanted and sell them by the bushel and make good money. One thing you should know about Diane, she's not just a master crabber, she's also a master of scale. Masters of Scale is a weight-wet original. Our executive producers are June Cohen and Darren Tripp. Our producers are Dan Kedmi, Chris McCloud, Jenny Kataldo, and Ben Manila. Our supervising producer is Jay Punjabi. Original music and sound design is by the holiday brothers. Mixing in mastering, by Brian Pugh, special thanks to Chris Ye, say to Cepieva, Alisa Schreiber, David Sanford, and Stephanie Kent. Visit Masters of Scale.com to find the transcript for this episode. Global hiring is such a headache when you're building fast, but don't let payroll compliance or onboarding slow you down. Companies like 11 Labs and Mistral are scaling globally and effortlessly with Deal. 11 Labs quadrupled their headcount in 2025 and Mistral pays 364 employees across 15 countries, all from one system. Build your global team with Deal. Visit Deal.com/mos and start expanding your business today. That's D-E-L.com/mos. Every business hits the same wall. The moment your business outgrows the systems that got you here. Spreadsheets everywhere, five different logins, data scattered across entities that don't even talk to each other. If your finance team spends more time finding data than using it, that's when you need the Intuit ERP. 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