Peter Thiel on the biggest lesson he learned in 10+ years of venture capital

Thiel explains how his biggest miss as a VC (not doing Facebook’s full Series B) led to a key insight:

“Once something works, people often underestimate it. And when things aren’t working, they underestimate how much trouble they’re in.”

When he backtested Founders Fund’s portfolio, he found that every time a company had a big up-round led by a smart investor, it was always a good idea to do your pro rata. And it was almost always a bad idea in a down- or flat-round.

In fact, the steeper the up-round, the cheaper it was.

His biggest miss of the last decade was not doing the full Series B at Facebook. It was a 12x up-round in eight months.

“It was the steepest up-round in that amount of time in any company we’ve been involved in. And in retrospect, that was perhaps also the cheapest… And I think one of the reasons it was so underpriced was that… even the people on the inside often underestimate how much things have changed… You have these subtle but very important points where somehow the leverage and dynamics shift very powerfully and they tend to get very underestimated.”

Full video: This Week in Startups “Peter Thiel on being a contrarian” (Mar 2015)