Thiel’s many cash cows

In the next 12 months, legendary venture capitalist Peter Thiel will enjoy one of the biggest tech pay days in history.

The man famous for giving Facebook its first $US500,000 of seed funding retains a 3% stake in the social media behemoth, which is currently valued at $US70 billion.

Right now, Thiel’s stake is worth about $US2.1 billion, but if the float goes as expected next year and Facebook hits the boards with a valuation of up to $US100 billion, the value of Thiel’s stake could rise to $US3 billion or higher.

But while Thiel remains a close confidant of Facebook founder Mark Zuckerberg – and believes Facebook could be worth as much as $US150 billion – his tech interests spread well past Silicon Valley, even stretching Down Under.

No, not this Down Under. Thiele’s focus is the Down Under to the east of us: New Zealand.

According to a recent interview in the New Zealand Herald, Thiel has a special relationship with New Zealand, which started 18 years ago on a trip to Christchurch.

He’s connection has grown closer in recent years. Thiel owns property in the upmarket Auckland suburb of Parnell and is looking at buying in Queenstown, the adventure travel capital of the South Island. Thiel also donated $1 million to relief efforts from the Christchurch earthquake.

But Thiel has turned his attention to New Zealand’s tech sector through his vehicle Valar Ventures.

In October 2010, Thiel spent $NZ4 million to acquire a stake in Wellington-based accounting software provide Xero.

The software-as-a-service company, founded by serial NZ entrepreneur Rod Drury (who was interviewed by SmartCompany back in February 2010) has received support from prominent tech company founders including MYOB founder Craig Winkler and Sam Morgan, founder of the Fairfax-owned NZ auction site TradeMe.

The company has rapidly built a strong position in the Australasian cloud computing market and has big plans to tackle this in the US.

“Millions of small- and medium-sized businesses need an online accounting solution, especially in this time of increasing regulatory and tax complexity,” Thiel said at the time of his investment.

“Xero’s tight focus, robust product and strong team should enable it to expand tremendously in the United States.”

As well as Thiel’s money, Xero got a slice of Thiel’s time – he sits on the company’s US advisory board.

As Drury said at the time of Thiel’s investment, access to his extensive networks could prove vital in taking on the US accounting software market leader, QuickBooks.

Thiel made his second investment in the Kiwi tech sector in January, buying an undisclosed sum in Pacific Fibre as part of a $NZ5.5 million funding round.

Pacific Fibre, based in Auckland, has a plan to build undersea fibre cables connecting Australia, New Zealand and the US. It reckons it will need $300-400 million to break ground on the project; Thiel’s investment was designed to help the company go to the US to raise further funds.

So why New Zealand? It appears to be a mix of business and pleasure.

“There’s a lot of incredibly talented people in New Zealand,” Thiel told the New Zealand Herald.

“You look around and you see the small businesses and it’s very entrepreneurial. It’s not dominated by [long traditions] that say, ‘This is the way you have to do things’.

“New Zealand has some very interesting opportunities and it’s also a place that’s pleasant to spend some time in.”

He even seems to understand the intense rivalry between Australia and New Zealand, delivering a not-so-subtle shot at our tech sector – and our entire economy.

“Australia is a sort of strange developed country where it’s all about exporting commodities to China. Talented people in Australia don’t really need to try that hard.”

“It seems like it’s a plus, but I don’t know if it is in the long-term. I think New Zealand is more attractive on the tech side than Australia would be.”

Thiel’s investments in these Kiwi firms are big news for one very good reason – his record as a tech talent spotter is impressive.

Thiel made his first fortune as a co-founder and major investor in PayPal (he took a $55 million cut when the business was sold to eBay in late 2002) and went on to be amongst the first investors in LinkedIn and, of course, Facebook.

He also co-founded a venture capital fund called Founder’s Fund, which concentrates on web start-ups needing $500,000 to $5 million in capital. The fund had notable successes with investments in Slide (acquired by Google for a reported $US228 million), Powerset (bought by Microsoft for $US100 million) and IronPort (bought by Cisco for $US830 million).

Thiel’s biggest misstep has been with a fund called Clarium Capital Management, which has seen its assets fall from $US6 billion to below $US500 million since mid-2008 thanks to bad bets on oil prices and the US dollar.

With his Facebook fortune behind him, Thiel is prepared to use his investment firepower to push some boundaries.

His investments range from a company trying to commercialise space travel (called SpaceX) to a company trying to build new colonies for people to live out at sea (called the Seasteading Institute).

In May, Thiel courted controversy when a venture called The Thiel Fellowship: 20 Under 20 paid 20 students under the age of 20 $100,000 to drop out of school and start a business.

“Our world needs more breakthrough technologies,” Thiel said when announcing the fellowships.

“From Facebook to SpaceX to Halcyon Molecular, some of the world’s most transformational technologies were created by people who stopped out of school because they had ideas that couldn’t wait until graduation. This fellowship will encourage the most brilliant and promising young people not to wait on their ideas, either.”

However, the idea didn’t resonate with everyone and a string of bloggers and commentators rubbished Thiel’s idea.

But as some bloggers have pointed out, the criticism doesn’t mean this isn’t a smart financial play. As Peter Cohen of Forbes argued (in a piece criticising the fellowships) Thiel only needs two of his two investments to come off and he could get a handsome return.

So far, Thiel’s New Zealand investments appear to be performing well. Shares in Xero have increased almost 48% since his investment in October 2010, taking the market capitalisation of the company to about $NZ190 million.

It’s not Facebook, but Thiel is showing his investment nous works isn’t restricted to Silicon Valley.