A few months ago I attended a talk at Stanford. The room was packed with aspiring entrepreneurs — standing room only — and the atmosphere felt like the Dalai Lama of Silicon Valley was about to arrive. At 8pm, Peter Thiel, a Stanford Philosophy major and alum of the Stanford Law School, took the stage to give a short speech on the future of technology. As an entrepreneur, it was one of the most inspiring talks I had ever been to, and I left with a set of new ways to frame technological problems. While I agree and support many of the beliefs Thiel has on the future of technology, I take issue with his latest initiative to pay students to drop out of school.
In the last few weeks, a heated discussion in Silicon Valley has broken out in response to Thiel’s offer to pay twenty students $100,000 to drop out of school to start a company. Some think it is brilliant (1, 2), others think it is terrible (1, 2), but it is indubitable that Thiel’s offer has been effective: seventeen Stanford undergraduates applied to the 20 under 20 Fellowship.
The two sides of this discussion in the media have come from the viewpoint of journalists and investors. The only student that has written about it (that I know of) has himself dropped out to start a movement. I would like to offer my opinion in this discussion from the perspective of a current student who has co-founded a company in San Francisco before coming to Stanford and just launched ClassOwl as a student.
There are three things that students tend to overlook when they become excited by the Thiel Fellowship and programs similar to it:
1) The most outspoken proponents of this movement have been those who have financial incentives to get students to drop out. The strategy for the Thiel Fellowship provides Mr. Thiel with a trove of self-motivated, hungry, brilliant entrepreneurs who would rather start a company than stay in school. This is not isolated to the Thiel Fellowship applicants: programs like YCombinator and other incubators often fund students who are still in school with the hopes that they will drop out to run their company, generating returns for the fund. They just need one of these students to create a colossal success for them and their fund will be profitable, so it is in their best interests to find the most competent, hungry, brilliant entrepreneurs to create that success story. This leads me to my next point: the great drop out success stories.
2) Enticing students to drop out has proven to be simple: point to great companies that have been started by students who have dropped out. Let us examine the three most common examples that are given: Facebook, Google, and Microsoft. In all three cases, the companies were started at their universities and gained significant traction before the founders realized that dropping out was a necessary condition for their company becoming huge. Most, if not all, of the students applying for these fellowships and talking about dropping out have nothing to drop out for. Some of them have ideas. Some of them have fledgling companies. I am especially unaware of any company at Stanford that has gained enough traction for its founders to drop out (if you do, please comment about it). This creates a situation in which Mr. Thiel and similar programs will have a great deal of control over those they have invested in.
3) Assuming the entrepreneur does not have leverage in the form of a company with traction, the investors will take considerable control of these young people. This is a position that very few entrepreneurs would like to find themselves in. It us also a very convenient feature of the Thiel program: the investors will get more bang for their buck.
Despite these criticisms, there are cases in which it is reasonable to drop out. From the points above, I have formulated three conditions that should be fulfilled:
i) You have a startup that has gained significant traction
ii) You realize that if you don’t drop out, you will miss out on the opportunity of creating something great
iii) You have sizeable leverage with your investors (this will generally follow from (i) and (ii))
Unfortunately, there are very few students, especially undergraduates, who will be able to meet these three conditions. While Thiel’s program seems enticing — $100,000 and mentorship from Mr. Thiel, amongst other incentives — the reasons enumerated above show why dropping out to start a company may be a very reckless decision. To the Stanford students who are thinking about dropping out to start a company right now, I would seriously question your motives and reasoning before making such a radical life choice. Think twice before dropping out.