Peter Thiel’s Escape Velocity: Not Beating Rivals, but Escaping Competition

The aim is not to beat rivals, but to escape competition entirely—Peter Thiel and PayPal Start fast enough and you can do more than pass your rivals: you can leave them far behind. That is the philosophy of PayPal co-founder Peter Thiel. Thiel's record as an entrepreneur and investor is undeniable, rooted in his uncompromising approach to seizing the initiative. He believes you should either enter an emerging field with no competitors or act so swiftly and decisively that rivals cannot catch up. What matters most is not beating competitors, but escaping competition entirely. Early in PayPal's life, Thiel knew it had to acquire as many customers as possible, as quickly as possible, to stand out. He adopted an expensive strategy. Most companies allocate an advertising budget to attract new users. PayPal took a more direct approach: give the money to users. If a user referred a friend, both would receive US$10. Thiel was not trying to give away all the money. He saw it as the best, most reliable strategy for getting PayPal off the ground quickly. The logic worked for two reasons: First, paying referral bonuses demonstrated PayPal's use case: easy money transfers. Second, though it looked expensive, this was cheaper and more direct than advertising for acquiring users, compared with other consumer internet companies. “We had to scale as quickly as possible,” Thiel said. “Otherwise somebody would beat us, and we would never reach the critical scale needed for a lasting competitive advantage.” PayPal continued growing after the referral campaign ended, though Thiel said this was not certain at the time. “You have to work extremely hard to scale quickly. The benefit is achieving ‘escape velocity’—escaping the black hole of intense competition.” PayPal did not yet even have a complete business model. “My thinking was that we could either scale or design a business model,” Thiel said. He chose scale first, with the model to follow. As users grew exponentially, costs did too. “We were burning more than US$10 million every month.” Many companies postpone profitability, sometimes for years. Over nearly twenty years, Amazon ignored Wall Street investors' complaints while working to escape one retail competitor after another. Even while escaping rapidly, PayPal could not relax. Escape velocity is not fixed: it depends on competitors. Your fastest rival determines how hard you press the accelerator. One formidable rival was eBay, which was launching a new online payment system. Established companies often move more slowly in this situation, giving agile startups an advantage. Reid Hoffman explained: “Your most dangerous competitors are actually seldom big companies like eBay. They hesitate over whether to enter the field and take the same risks. A mistake at PayPal might upset a few thousand users; a mistake at eBay could anger millions and attract close attention from government regulators.” Even if eBay accepted those risks, Hoffman asked: “Why devote so many resources to an online cash register? They were building an entire store—a global online marketplace. But what if a small company took over the cash register? So while eBay's new payment system worried us, we were also encouraged: it took them more than a year to launch it.” Meanwhile, PayPal kept growing and secured a huge user base. Thiel understood that even after starting in a fiercely competitive environment, escape velocity could carry the company toward a position with fewer and fewer challenges. But how do you know you have reached escape velocity? Thiel had his own formula. “I once wrote this equation on PayPal's whiteboard,” he said. He could still recite it: “ut = u0 ext, where u0 is the initial number of users, ut the number at time t, and ext the exponential growth factor. As x increases, the exponential rises faster.” Understood? Here is another way to look at PayPal's x: its user base grew 7% daily. When user numbers and/or revenue keep doubling, the growth chart takes on a hockey-stick shape. PayPal began with 24 users, soon reached 1,000, and had 13,000 after a month. Roughly another month later, it had 100,000; within three months of launch, it had a million. “Although the quotation attributed to Einstein may be invented, compounding really is the most powerful force in the universe,” Thiel said. He expected rewards for early users to harness compounding from the outset, and he was right. “It was a very wild ride.” This underappreciated principle of compounding explains many of Silicon Valley's seemingly overnight success stories. “That is why investors put hundreds of millions of dollars into one company,” Hoffman said. “Once it reaches escape velocity, anyone who understands compounding will keep investing.” As long as they keep financing you, you can keep growing. But maintaining escape velocity requires enormous capital support—and spending it at a remarkable rate. Eventually, PayPal held such an important position in online payments and grew so rapidly that the larger, slower eBay had little choice but to stop competing. In 2002, it acquired PayPal for US$1.5 billion. ----- Robin: “You can postpone profitability for a greater ambition, but you cannot avoid the question of how to make money forever. To earn investors' understanding and support, explain clearly how you will become profitable—how you will persuade them to accept the risk, wait, and eventually earn substantial returns.”