Citizen Thiel spots an Asymmetric Opportunity

There’s been quite a lot of kerfuffle in New Zealand about the fact that Peter Thiel has been granted Citizenship. Given his background in PayPal, Facebook and other startups, I don’t think it’s that controversial that NZ would want to attract someone like Thiel to get involved in our economy. I also don’t think someone’s political views should be a factor in the decision.

That’s not to say there isn’t legitimate concern. Also revealed is that Thiel was the beneficiary of a pretty sweet deal that the NZ government extended to Thiel and his Valar Ventures partners via the Government-owned New Zealand Venture Investment Fund (NZVIF). The arrangement included a generous buy-back option, where Thiel and his private partners could cheaply buy out the governments stake after the risk had been significantly reduced.

This arrangement reduced the downside, by sharing the downside risk with New Zealand taxpayers, whilst making it possible for Thiel et al to take all of the potential upside. This is a classic asymmetric payoff option.

The deal also nicely illustrates the value of information. If you were able to buy the information about whether an idea (and startup team) would succeed or fail, that information is worth a lot of money. If you can find a government who is willing to shoulder some of the risk while you go about collecting that information, even better!

Of course Thiel and partners exercised this option. Only an idiot wouldn’t. Whoever penned the deal was either desperate to get Thiel involved, or they weren’t the smartest deal-maker.

Source: New Zealand Herald