Lecture 5 – How to Start a Startup: Competition is for Losers

Presenter – Peter Thiel

Capturing Value

  • A business creates X dollars of value and captures Y% of X. X and are independent variables
    • The key here is that X and Y are completely dependent. You need to capture some of the value you have created.
  • A big piece of  a small pie
  • Perfect competition
    • Pros
      • Easy to model
      • efficient in a static world
      • Politically salable
    • Cons
      • Psychologically unhealthy
      • Irrelevant in a dynamic world
      • preempts question of value
  • Monopoly
    • Pros
      • incentive to innovate
      • stable, long-term planing
      • deeper project financing
      • symptomatic of creation
    • Cons
      • lower output, higher prices
      • price discrimination
      • stifle innovation
      • tying
  • Thiel argues that there is little between the perfect competition monopoly businesses.

The Lies People Tell (for more see Zero to One)

  • Monopolies pretend not to have monopolies, because they do not want to get hit from antitrust laws
    • “We’re in a huge market”
  • Perfectly competitive companies want to pretend that they have something unique about them.
    • “We’re in a narrow market”
  • There are very powerful incentives to not be seen as a monopoly

How To Build a Monopoly

  • The right size
    • Start small and monopolize
      • It is easier to dominate a small market than a big one
      • DO NOT go after a large market from day 1
      • A lot of these companies start with markets so small, you would’t realize it was even significant to look at.
      • Grow the small market concentrically
    • Clean tech bubble
      • Started in a huge market – minnow in a vast market and got killed.

Last Mover Advantage

  • Characteristics of a monopoly
    • Proprietary technology
      • you want a technology that is an order of magnitude better than the alternative
        • PayPal could clear checks more than 10X as fast
    • network effects
      • Difficult to get started, but need to make it valuable to the first person to do something (think Facebook)
    • economies of scale
      • High fixed costs, low variable costs – easy to scale
      • Software has incredible economies of scale
    • branding
  • It is not enough to have a monopoly for the moment- it has to last the test of time: MSFT, Google, Facebook, etc.
  • Realize that most of the value exists far into the future – PayPal had about 2/3 of the value coming from about 10 years out – even at a 30% discount.
  • One thing we overvalue is growth rates, and undervalue the durability. Growth rate is much more quantitative, while durability is much more qualitative. Put the time dimension to all of the elements of the monopoly
    • be able to explain why yours will be the last breakthrough for a long time, or why you will be able to innovate further

History of Innovation

  • Historically, scientists never make any money since they do not capture the value
    • Einstein
    • Wright Brothers
    • etc.
  • The first industrial revolution was steam power, textiles, etc. 60-70 years of tremendous improvement, but the competition prevented people from making any money in these areas.
  • Where people did make money
    • Vertically integrated complex monopolies – capital intensive, complicated,
      • Standard Oil
      • Ford
      • SpaceX is a new version of this (without a 10X improvement)
    • Software
      • Economies of scale
      • Low marginal costs
      • The world of bits vs the world of atoms which can create a fast adoption rate

Psychology of Competition

  • It is an intellectual and psychological blindspot that we want to compete.
    • See competition is a form of validation
  • When the objective differences are small, you need to compete more to stand out. This is true for highly competitive things.
  • Don’t let your identity get caught up in these competitions. Competing will make you better, but make sure what you are competing for is what is truly important.
    • “Don’t go through the tiny door that everyone is trying to rush through, go around the corner and go through the vast gate that nobody is taking”

Q&A

  • Don’t wait long enough to figure out what your doing is something people want. You will be at risk of losing any lead you had
  • The tendency to see competition as validation is very deep, but the starting point is to never underestimate how much you are effected by it.

RG

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