Seven-year-old Founders Fund isn’t a typical venture firm. It thinks Monday meetings are for suckers. It recoils from the idea that it should help startups do their hiring. (That’s a core function of a startup, as far as the firm is concerned.) Meanwhile, its billionaire co-founder, Peter Thiel, whose ambition is funding startups with the potential to create revolutionary change, recently told the New Yorker: “The Internet — I think it’s a net plus, but not a big one.”
Of course, a little Internet company known as Facebook has made Thiel, who wrote its first, $500,000 check, a very rich man. Facebook will also represent Founders Fund’s biggest exit to date when it goes public. And surely, Facebook played a starring role in Founders Fund’s latest successful capital-raising effort, which has just produced a fourth, $625 million fund, or more than the firm’s first three funds combined.
Earlier today, I chatted with Founders Fund partner Bruce Gibney about how the firm squares its Internet investments with the belief that entrepreneurs should be focusing on truly breakthrough ideas. Gibney argued for why that’s easy, as well as shed new light on what happens inside the firm, and what its road map looks given that it has more money to invest than ever before. Our conversation has been edited for length.
Historically, Founders Fund has invested between $500,000 and $5 million in companies. How does that change with this new, far larger, fund?
We’re stage agnostic and we’re size agnostic so long as we think we can obtain an interesting venture multiple. That’s our basic guideline, so we’ll probably continue to do deals in the $500,000 to $5 million range, but with follow-on [investments] that are considerably [larger] if the companies are working.
What about jumping into a later-stage deal that you missed earlier?
We’ll say yes to anything with a risk-adjusted return prospect, but as a general matter, the stuff we think is most appealing from the perspective of investors are those companies we’ve participated in [prior]. We know a lot about the companies, we have relationships with them, and we feel like we can invest more confidently in those [with which we have a] a long history.
Have you participated in a later-stage round as an outsider?
Not [in a company whose] valuation was over a half a billion dollars. We’re definitely open to it, but we think the thing that makes the most sense for us are follow-on investments.
The firm always positions itself as a Silicon Valley outsider, though you seem like the ultimate insiders. How do you pull that off?
We’re just highly skeptical about most traditional decision-making models, which we think are focused on process and not results. At most venture firms, you have to be at Monday meetings, when maybe you should be meeting with a great company. Everyone has to talk for roughly the same amount of time. And there’s this strange pressure to approve someone’s deal, even if you’re skeptical of it, because you want to get your own deal approved. We think [that approach] doesn’t produce particularly good results.
[We may also be] idiosyncratic in that we have an overlapping social life. If you hang out with each other and spend a lot of time together and your hobbies are the same, then you don’t need a Monday meeting because you see each other all the time. We see each other constantly. I had dinner with [principal] Toby [Prosky] last night. [Partner] Ken [Howery] was my college roommate. And Ken and Luke [Nosek, another partner at the firm] live together.
How do you approve deals? Do you eschew traditional voting systems, too?
The larger the deal, the more consensus [is required]. But you don’t want to be fixed on voting rules. And we seem to achieve consensus on all our significant deals. Those on which we all agree tend to be the best, too.
Founders Fund’s investing thesis centers on backing entrepreneurs who are doing valuable work. But many would argue Facebook is largely a new ad platform, one that’s altering, including in bad ways, the ways that people communicate.
In so far as Facebook has become a mediating influence on our online behavior, that’s quite important. The way we communicate with each other as a species is incredibly important. Even though Facebook has dot.com at the end of its name, it shouldn’t be discounted as frivolous or not influential.
Facebook was a non-obvious investment in 2004. At the time, it wasn’t clear that social networking would be important or big or could even work technologically. You may remember with Friendster – which we also invested in as a fund –- the more popular it became, the slower it became. It turned out that managing these connections was computationally complex. [Figuring that out] was something that we think was important and quite valuable and in that way, it fits in with our core thesis.
Last year, the firm told me that artificial intelligence and robotics were very much a part of its focus, but I haven’t heard of many related investments.
We’re still very interested in robotics and think there’s substantial upside potential in the space. But there are relatively few promising robotics companies, just like a decade ago, there were few promising artificial intelligence companies. Until recently, people hadn’t been going about [robotics] the right way, but people are becoming more commercially disciplined — they’re taking it seriously now as a business rather than as a science project — so we’ll be looking at that more in the next five years.
[As for artificial intelligence], one of the issues over the last 20 years has been that people tried to solve the hardest problem first; they tried to replicate full-blown human intelligence. And that’s not a recipe for success. Now we’re seeing progressive, iterative approaches to developing artificial intelligence [that do merit] interest in the sector. We have three [AI] companies in stealth mode, in fact.
What do you tell your LPs in terms of their return timeline? You’ve had plenty of exits, including IronPort, PowerSet, and Mint, I know. You’re also now focused on incredibly nascent technologies in some cases.
Our investors are comfortable with any company they believe can generate durable returns and that they can externally assess over three to five years. Facebook is nearly 8 years into its life cycle, and there’s been less and less pressure to exit because people understand that it’s been building a durable business and it’s done extraordinarily well. If Facebook had focused on a “reasonable time frame,” it would have taken Yahoo’s $1 billion offer and given up 99 percent of the value of the franchise.
I think our LPs are well aware that given a longer time horizon, you can create a significantly better company that’s harder to compete with.
Of course, in the meantime, they’ll have their Facebook returns. Can you say whether the firm has already sold a portion of its stake to secondary buyers?
I can’t comment on that question, sorry.