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Quite The Gamble
Last week, Peter Thiel and the folks at Founders Fund invested in Polymarket, the most popular online prediction market that allows people to bet on real world events, i.e. whether or not Taylor Swift will get engaged in 2024.
The most popular bet is on the U.S. election, where Polymarket gamblers have placed $125M at risk.
Predictive market platforms as a whole have seen regulation hinder their progress.
In January 2022, Polymarket had to pay $1.4M to settle with the Commodity Futures Trading Commission, and they were also forced to shut down markets that did not comply with the Commodity Exchange Act.
Betting on elections is still illegal in the U.S. under federal law, so Polymarket operates as an offshore company.
All things considered, the platform is a prototypical Thiel company.
Let’s get into the weeds on the Founders Fund investing framework.
Zero to 100
Founders Fund was founded in 2005 and currently has $12B AUM.
The company is unique for many reasons, but the first is their generalist, opportunistic approach.
This means:
They invest across every sector - from fintech (Stripe) to aerospace (SpaceX) to artificial intelligence (OpenAI) to consumer social (Facebook).
They invest across every stage of venture - from the earliest stage investments to growth / Pre-IPO.
All of their team members are generalists, rather than assigned to cover sectors, and since there are no constraints, the focus is on finding the best opportunities.
Another principle Thiel and Co. live by is building concentrated positions:
Each fund typically houses a few dozen investments and the team doubles down, triples down, quadruples down, and so forth on the very best ones.
Their concentrated positions make up a significant proportion of each portfolio and can result in $100M-$300M of exposure per position. For context, their smallest check size is $1M and their largest is $300M.
Internally, this approach is viewed as anti-spray-and-pray
At Founders Fund, we focus on five to seven companies in a fund… Whenever you shift from the substance of a business to the financial question of whether or not it fits into a diversified hedging strategy, venture investing starts to look a lot like buying lottery tickets.
When evaluating startups, Founders Fund looks for companies that create their own sectors, led by teams with eccentric, visionary founders who believe their mission is critical to society.
Furthermore, there is an obsession with backing companies that understand “secrets” that others don’t know. For example, Tesla knew that being fashionable was as important to people as being environmentally conscious, a secret the makers of Prius and other EVs either did not know or hoped was not true.
The entire framework is heavily influenced by the power law, more specifically Pareto’s principle… 20% of investments will account for 80% of returns. So the fund aims to only invest in companies that have the potential to return the whole fund, and then they double dip into the founders that keep delivering.
Exit This Way
The firm’s conviction in their investment framework is solidified by their exit history.
Around 2022, Founders Fund publicly stated that they have delivered $10B+ to investors in the last couple years.
Several investment exits delivered billions of dollars to the fund:
Facebook (Meta)
Palantir
Airbnb
While many others brought hundreds of millions:
Wish
Oscar
Affirm
Asana
Postmates
That being said, the portfolio company I want to zero in on today is Polymarket.
The fundraise was a $45M Series B round led by Founders Fund along with Vitalik Buterin and Dragonfly
The $25M Series A was announced simultaneously by CEO Shayne Coplan; a round led by General Catalyst and Polychain Capital.
Polymarket has $202.7M of predictions made by bettors this year alone.
It falls almost perfectly into Thiel’s framework:
Founder is a 25 year old Ethereum aficionado who loves music so much he interned at RapGenius during college. Not a typical corporate manager
Polymarket is branded as “the world’s largest information markets platform”. At first glance it seems as if they are taking what works in sports betting and opening the floodgates to every other event (they have sports predictions as well), but the team views itself as more than that. The platform gives more accurate reads on public sentiments and reliable forecasts. Category creator
Takes advantage of multiple secrets, but the most apparent is that people want to bet on everything. The solution is rather difficult given the regulations in the U.S., but Polymarket is able to skirt around legalistic barriers due to (1) offshore location and (2) using blockchain technology as the platform’s foundation.
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