Peter Thiel on why Airbnb should be valued way higher than Uber... and why it's not
Last night I interviewed (disclosure: Pando investor) Peter Thiel for one of his eight million appearances to promote his new book, Zero to One. The book, by the way, is excellent, and I have a full review coming soon. A lot of my thoughts from our conversation will be in that.
But at the risk of perpetuating the "Today in what Peter Thiel said..." drumbeat in the tech press of late, I wanted to write something quick about some comments Thiel made on burn rates and private company valuations.
One of the most interesting parts of our conversation was about Uber and Lyft. Thiel already sounded off at Disrupt about his distaste for the ethics of Uber, while disclosing he was a fully biased investor in Lyft. But it wasn't the ethical distinction I wanted to explore. It was the competitive nature of the two companies.
The central premise in Thiel's book-- which he talked about at our PandoMonthly two years ago-- is that competition isn't a virtue. Rather, it's the antithesis of capitalism because it erodes profits and crushes margins to the point where no one can innovate.
Throughout "Zero to One" Thiel describes undesirable slug-fest market dynamics where customers are wooed with little more than discounts because the end product is interchangeable. He sets these up as the worst kinds of businesses to start and fund. And each description sounds to me exactly like what I see everyday between Uber and Lyft.
Sure, there are distinctions between the two. Thiel isn't the only one who believes Uber is morally bankrupt, and I've written about Lyft's expert ability to make hay out of that fact, by posing as the happy, fist-bumping, pro-driver little guy. But to the consumer, the two companies are increasingly the same thing.
Originally I never took Lyft because I didn't like the mustaches and the fist-bumping. But I noticed something: Every Uber I got into in San Francisco also had a Lyft phone. The whole distinction I had between the two companies' drivers, cars, and experiences was lagging actual reality of how the two companies have scaled. In San Francisco-- where Lyft is admittedly bigger than it is in other cities-- drivers regularly swap back and forth depending on which service has a fare for them and users regularly swap back and forth depending on who is closer, who is offering greater discounts or who has the smallest multiple on surge pricing.
That should be a nightmare for Thiel, not an opportunity.
He answered in a way I didn't expect. Rather than explaining how two companies locked in such a battle could possibly justify nearly $2 billion in collected investment and sky high valuations, he made the point that Airbnb in contrast is wildly undervalued at least relative to Uber. Thiel is also an investor in Airbnb-- yet another darling of the sharing economy, valued at a "mere" $10 billion compared to Uber's $18 billion. Unlike Uber and Lyft, Thiel argued, there is no obvious competitor to Airbnb. That in and of itself makes it a more valuable company because of the distraction and profit erosion that he describes throughout his book.
So why doesn't the market reflect that thinking? Thiel gave an amusing answer to that too: VCs like to invest in things they like to use. VCs love getting in black town cars, but they typically stay in five star hotels. Fewer still open up their homes to strangers for extra cash. Uber gets a "yeah! I like this one!" valuation boost.
He doesn't just argue valuations are "low" for companies he's invested in. Someone in the audience asked his views on Snapchat-- a company that I'd argue is the only real independent and growing threat to Facebook, Thiel's biggest hit as an investor. He said he wasn't "part of the conversation" over whether or not Facebook should buy them for a reported $3.5 billion. Competitive dynamics aside, he dismissed the handwringing over Snapchat's recent rumored $10 billion price.
He argued that VCs always say something that increases in value rapidly is overvalued. But they said it when IVP invested in Snapchat at $750 million-- seemingly a pittance at least compared to the market. He didn't claim to know what Snapchat was worth but said while everyone fights about whether it is overvalued or fairly valued there's the third contrarian point of view that the company is even still under valued.
Thiel's thinking on valuations is always distinct from others. For what it's worth, he still argues it's not a bubble because it's still mostly private money in tech stocks. In fact, he thinks the bubble may be in government bonds. He's convinced enough that he has 75% of his personal net worth in illiquid tech companies-- the place that so many people feel is the very epicenter of reckless pricing right now.
I asked him what he thought about the Fred Wilson/Bill Gurley meme that the problem isn't valuations but it's disturbingly high burn rates.
As an entrepreneur, Thiel wasn't a stranger to high burn rates. When Thiel was running PayPal he and Reid Hoffman once calculated they could burn money slower by throwing rolls of hundred dollar bills off the roof.
The problem, Thiel said, isn't how much money per month a company is spending, but how much runway they have-- and that was the trouble PayPal almost got into had it not closed a venture round right before the dot com bubble burst. Time is what matters most for startups, and money only matters because of how much time it can buy you. Some of the companies being called out have raised so much cash-- via these high priced, huge private rounds-- that they can go for years. That's not reckless, he argued.
[Photo credit: Ken Yeung]