Competition is for Losers with Peter Thiel (How to Start a Startup 2014: 5)

Summary

In this insightful talk, Peter Thiel emphasizes the importance of creating monopolies rather than engaging in competition, asserting that competition is for losers. Thiel, the co-founder of PayPal and Founders Fund, discusses the value of a business through the lens of creating value for the world and capturing a percentage of it. He critiques the common narratives that distort the nature of markets and stresses the significance of starting with small, niche markets to expand into larger monopolies, using examples from tech giants like Google, Amazon, and Facebook to illustrate his points.

Takeaways

• 🤝 Peter Thiel's central thesis is that businesses should aim for monopoly to avoid competition, as competition is for losers.
• 💡 A valuable company is defined by creating value (X dollars for the world) and capturing a fraction (Y% of X) of that value, with X and Y being independent variables.
• 📉 The airline industry, despite its size, is less profitable and valuable compared to Google's search engine, illustrating the difference between high-revenue and high-profit-margin businesses.
• 🧩 The dichotomy between perfect competition and monopoly is often misunderstood, with people lying about the nature of their businesses to avoid regulation or attract capital.
• 🚀 Startups should target small markets to achieve a monopoly and then expand, rather than starting with a large market which often leads to excessive competition.
• 💡 Monopolies are often created by having proprietary technology, network effects, economies of scale, and strong branding that can last over time.
• 🕊️ The tech industry has been successful financially because it tends to create monopoly-like businesses that can accumulate high cash reserves.
• 🌐 Software businesses are particularly adept at creating monopolies due to their low marginal costs and potential for rapid adoption and scaling.
• ⏳ The value of a business is heavily weighted towards its future cash flows, emphasizing the importance of durability and long-term success over short-term growth.
• 🔍 Thiel criticizes the lean startup methodology, suggesting that great companies often make a quantum leap with unique insights rather than iterating based on customer feedback.
• 💭 The talk concludes with a call to rethink competition, suggesting that it may be a psychological blind spot that leads people to pursue validation through competition rather than focusing on what is truly valuable.

Q & A

What is Peter Thiel's primary business strategy advice for entrepreneurs starting a company?

Peter Thiel advises entrepreneurs to aim for monopoly and avoid competition, suggesting that competition is for losers and that a valuable company is one that creates substantial value for the world and captures a significant fraction of that value.

Why does Peter Thiel believe that competition is not ideal for businesses?

Thiel argues that competition tends to reduce profit margins and can lead to a situation where companies are constantly fighting for survival rather than thriving, which is not conducive to creating long-term value.

According to the transcript, what is the simple formula that Peter Thiel suggests for determining the value of a business?

The formula Thiel suggests is that a valuable company is one that creates X dollars of value for the world and captures Y% of X, where X and Y are independent variables.

How does Peter Thiel compare the US airline industry with Google in terms of value creation and capture?

Thiel points out that while the US airline industry is larger in terms of revenue, Google captures a much larger fraction of the value it creates, which makes Google more valuable despite being smaller in terms of industry size.

What does Peter Thiel suggest about the nature of businesses in the world?

Thiel suggests a dichotomy where there are only two kinds of businesses: those that are perfectly competitive and those that are monopolies, with very little in between.

Why do monopolists and non-monopolists tend to lie about the nature of their businesses according to Peter Thiel?

Monopolists lie to avoid government regulation and non-monopolists lie to attract capital and differentiate themselves. These lies distort the true differences between businesses.

What is the counterintuitive idea Peter Thiel presents about starting a business?

Thiel suggests that startups should aim for small markets first, gain a monopoly in that niche, and then expand outwards, rather than targeting large markets from the beginning which often leads to excessive competition.

What are some characteristics of a successful monopoly business according to Peter Thiel?

Characteristics include proprietary technology that is significantly better than the competition, network effects, economies of scale, and strong branding that creates a unique place in consumers' minds.

Why does Peter Thiel emphasize the importance of being the 'last mover' in a market?

Being the last mover implies that a company has established a lasting monopoly that will not be easily disrupted by competitors, capturing the most value over time.

What does Peter Thiel suggest about the relationship between innovation and financial success in the history of science and technology?

Thiel suggests that many great innovations in both science and technology have not led to financial success for their creators due to the competitive nature of their fields, where the value created is often competed away.

What is Peter Thiel's view on the common business advice of iterating based on customer feedback?

Thiel is skeptical of the lean startup methodology that emphasizes iteration based on customer feedback, suggesting that great companies often make significant advancements by having a clear vision and not being overly influenced by immediate customer opinions.

How does Peter Thiel describe the psychological attraction to competition?

Thiel describes a deep psychological tendency for people to be attracted to competition as a form of validation, often leading to the pursuit of activities that many others are doing, which he suggests can be a sign of insanity rather than wisdom.

Outlines

00:00

🤑 The Pursuit of Monopoly and Avoidance of Competition

In this opening paragraph, Peter Thiel emphasizes the importance of aiming for monopoly in business to avoid competition, which he deems 'for losers.' He introduces the concept that a valuable business is one that creates significant value for the world and captures a substantial percentage of it. Thiel illustrates the independence of value creation (X) and value capture (Y), using the airline industry versus Google as an example to highlight the difference in profitability and market valuation. He challenges the traditional economic view of perfect competition, suggesting that it often leads to businesses that are efficient but not necessarily valuable or profitable.

05:00

📊 The Dichotomy of Business Models: Perfect Competition vs. Monopoly

Thiel presents a binary view of businesses, categorizing them into either perfectly competitive or monopolistic. He argues that there is little in between due to the nature of business owners to misrepresent their market position. Monopolies downplay their dominance to avoid regulation, while competitive businesses exaggerate their uniqueness to attract capital. Thiel discusses the lies businesses tell about their market size, with monopolies expanding their market definition and non-monopolies narrowing theirs. He uses examples from the restaurant and movie industries to illustrate these points.

10:01

🛠️ Building a Monopoly: Starting Small and Expanding

This paragraph delves into strategies for building a monopoly. Thiel suggests that startups should target small markets to achieve a monopoly before expanding outward. He warns against entering large markets initially due to high competition. Thiel cites examples of successful companies like Amazon and eBay that started with narrow market focuses and gradually broadened their scope. He also discusses the counterintuitive nature of targeting small markets that others may overlook.

15:04

💡 Characteristics of Monopolistic Businesses

Thiel outlines the key characteristics of a successful monopoly, including proprietary technology, network effects, economies of scale, and strong branding. He argues that these elements contribute to a company's ability to capture and maintain a significant market share. The paragraph also touches on the importance of being the 'last mover' in a category, suggesting that companies that can sustain their monopoly over time are the most valuable.

20:05

🕊️ The Illusion of Value in Innovation and the Role of Competition

In this reflective paragraph, Thiel discusses the disconnect between the value created by innovations and the financial rewards reaped by those who create them. He suggests that throughout history, particularly in science and technology, the creators of valuable innovations often capture little of the value they produce. Thiel uses the examples of scientists and inventors who did not profit from their discoveries, such as the developers of the airplane and the creators of special and general relativity.

25:06

🏭 The Historical Context of Monopolies and Wealth Creation

Thiel provides historical context to the creation of wealth through monopolies and innovation. He discusses the First and Second Industrial Revolutions, highlighting the success of vertically integrated monopolies like Ford and Standard Oil. Thiel also touches on the rapid adoption and economies of scale unique to the software industry, which has allowed for the creation of significant monopolies and wealth in Silicon Valley.

30:08

🧐 The Psychological and Cultural Attraction to Competition

Thiel explores the psychological and cultural reasons why people are drawn to competition, suggesting that it is a deep-seated aspect of human nature. He challenges the audience to rethink the value of competition and to consider the benefits of pursuing unique paths rather than following the crowd. Thiel uses examples such as the allure of Hollywood and the intense competition in academia to illustrate his point.

35:11

🚪 Choosing the Path Less Traveled: Embracing the 'Monopoly Mindset'

In the concluding paragraph, Thiel encourages individuals to avoid the crowded path of competition and instead seek opportunities that are less traveled and more unique. He emphasizes the importance of questioning the value of competition and the need to differentiate oneself in meaningful ways. Thiel ends with a call to action for the audience to consider the 'monopoly mindset' and to think critically about the nature of competition in their own lives and careers.

Keywords

💡Monopoly

Monopoly refers to a market condition in which one company has exclusive control over a product or service. In the video, Peter Thiel emphasizes the importance of aiming for a monopoly to avoid competition, which he views as detrimental to business success. Thiel argues that a monopoly allows a company to capture a significant percentage of the value it creates, which is a key to building a valuable business.

💡Competition

Competition is the contention for the same objective or goal among individuals or groups. Thiel posits that 'competition is for losers' by suggesting that it often leads to a race to the bottom in terms of pricing and margins, making it difficult for companies to capture the value they create. The script uses the airline industry as an example of a competitive market with low profitability.

💡Value Capture

Value capture is the concept of a company obtaining a portion of the value it creates for the world. Thiel suggests that a valuable company is one that creates value (X dollars) and captures a percentage (Y%) of that value. This concept is central to the video's theme, as it highlights the importance of not just creating value but also being able to capture it.

💡Perfect Competition

Perfect competition is an economic market structure with many buyers and sellers, where no single entity can influence prices and products are homogeneous. Thiel contrasts perfect competition with monopolies, arguing that in a perfectly competitive market, companies do not make significant profits because the market dynamics drive down margins.

💡Innovation

Innovation refers to the introduction of new methods, ideas, or products. Thiel discusses innovation in the context of creating monopolies, suggesting that innovative companies that invent new technologies or markets can become monopolies by providing significantly better products or services than what existed before.

💡Network Effects

Network effects occur when the value of a product or service increases with the number of people using it. Thiel mentions network effects as one of the characteristics of a successful monopoly business, as they can create a self-reinforcing cycle that makes it difficult for competitors to enter the market.

💡Economies of Scale

Economies of scale are the cost advantages that a business obtains due to expansion and the increased production of goods and services. Thiel points out that businesses with high fixed costs and low marginal costs, such as software companies, can benefit greatly from economies of scale, which can contribute to their monopolistic position.

💡Branding

Branding is the process of creating a unique name, symbol, or design that identifies and differentiates a product or service from others. Thiel acknowledges the power of branding in creating value, even though he admits not fully understanding how it works, and notes that strong branding can be a component of a monopoly business.

💡Last Mover Advantage

Last mover advantage is the strategic benefit of being the final significant entrant in a market, often capitalizing on the mistakes and innovations of earlier entrants. Thiel suggests that being the last mover can be more valuable than being the first mover, as it allows a company to solidify its position and avoid the competitive struggles of early pioneers.

💡Vertical Integration

Vertical integration is a business strategy where a company owns or controls several stages of the supply chain for its products or services. Thiel cites vertically integrated monopolies as a historical example of successful businesses that were able to control costs and increase efficiency by managing all aspects of production.

💡Risk Mitigation

Risk mitigation involves taking steps to reduce or eliminate the impact of risks that might affect a business. Thiel expresses skepticism about the lean startup methodology, which emphasizes iterative feedback to mitigate risk, suggesting that it might not be the best approach for creating a breakthrough company that can dominate a market.

Highlights

Peter Thiel emphasizes the importance of aiming for monopoly and avoiding competition when starting a company.

A valuable company is defined by creating value for the world and capturing a percentage of that value.

The value of a business (X) and the percentage captured (Y) are independent variables, critical for creating a valuable company.

Comparing the US airline industry with Google illustrates the difference in value creation and profit margins despite industry size.

Monopolies are more stable and valuable than perfectly competitive industries.

The dichotomy between perfectly competitive businesses and monopolies is often misunderstood due to industry narratives.

Monopolists tend to downplay their market dominance, while non-monopolists exaggerate their uniqueness to attract capital.

The tech industry's success is attributed to its propensity to create monopoly-like businesses.

Building a monopoly involves starting with a small market and expanding it over time.

Successful companies often start with a small market and grow to dominate larger markets, like Amazon with books or eBay with Pez dispensers.

Chasing large markets from the start is a common mistake that often leads to excessive competition.

Characteristics of a successful monopoly business include proprietary technology, network effects, economies of scale, and strong branding.

Software businesses are particularly adept at achieving economies of scale due to the low marginal cost of software.

The value of a company is heavily weighted towards its future cash flows, emphasizing the importance of durability over growth rates.

The 'last mover' advantage is critical for building a lasting monopoly, as seen with companies like Microsoft, Google, and Facebook.

Thiel challenges the conventional wisdom that competition is inherently good, suggesting it often leads to a race to the bottom.

The talk concludes with a call to rethink the value of competition and the benefits of pursuing unique business models that avoid it.

Transcripts

all right good afternoon uh today's

speaker is Peter teal Peter was the

founder of PayPal and paler and Founders

fund and has invested in uh most of the

tech companies in in silica Valley and

he's going to talk about strategy and

competition thank you for coming Peter

awesome thanks uh Sam thanks for

inviting me thanks for for having me uh

I I sort of have a I have a single eay

FS that I'm completely obsessed with in

um on on the business side which is that

uh if you're starting a company if

you're the founder entrepreneur starting

a company you always want to aim for

Monopoly and um and that uh and you want

to always avoid competition and so uh

hence uh competition is for losers uh

something we'll be talking about

today I'd like to um I'd like to start

by saying something about um the the

basic idea of uh when you start one of

these these companies um how you go

about uh creating value and there's this

question what makes a business valuable

and I want I want to suggest that

there's basically a very simple uh very

simple formula that um um you you have a

valuable company if two things are true

uh number one that it creates X dollars

of value for the world and number two

that you capture y% of X and and the

critical thing that uh that I think

people always miss in the sort of

analysis is that X and Y are completely

independent variables and so um X can be

very Big Y can be very small X can be of

intermediate size and if Y is is

reasonably big you can still get a very

big business so to create a valuable

company you have to basically uh both

create something of value and capture

some fraction of the value of what

you've

created and sort of just to just to

illustrate this as a as a contrast um

there's if you sort of compare the US

airline industry with a company like

Google on search um if you sort of

measure by the size of these industries

you could you could say that airlines

are still more important than search if

you just measure it say by revenues

there's 195 billion in uh domestic

revenues in 201 uh 2012 Google had uh

just north of 50 billion um and so and

certainly sort of on some intuitive

level if you said uh if you were given a

choice and said well do you want to get

rid of air all air travel or do you want

to get rid of your ability to use search

engines the intuition would be that air

travel is something that's more

important than search and this is of

course just the domestic numbers if you

looked at this globally um airlines are

much much bigger than um than uh than

than than than search or than Google is

but uh but the profit margins are quite

a bit less uh you know they were

marginally profitable in 2012 12 uh I

think the entire 100-year history of the

airline industry the cumulative profits

in the US have been approximately zero

the companies make money they

episodically go bankrupt they get

recapitalized and you sort of cycle and

and repeat and this is reflected in you

know the the combined market

capitalization of the of the airline

Industries maybe uh something um of the

US airline industry something like a

quarter that of Google so so uh you have

you have a search engine much much

smaller than than air travel but much

more valuable and I think this this

reflects these very different uh

valuations on X and

Y so um you know if we look at perfect

competition um you know there are sort

of there's some pros and cons to the

world of perfect competition um on a

high level uh uh it's always um this is

what you study in econ one it's always

it's easy to model which I think is why

econ professors like talking about

perfect competition um it somehow is

efficient especially in a world where

things are static because you have all

the consumer surplus gets captured by

everybody and uh and politically it's uh

What uh what we're what we're told is

good in our society that you you want to

have competition and this is somehow a

good thing um of course there are lot of

negatives uh it's it's generally not

that good if you're you're um you're

involved in anything that's hyper

competitive um because you often don't

make money I'll come back to this a

little bit later so uh so I think at one

end of the spectrum you have uh

industries that are perfectly

competitive and at the other end of the

spectrum um you have things that um I

would say are monopolies and um and

they're you know they're much stable

longer term businesses you have more

Capital uh and um and if you get a

creative Monopoly for inventing

something new I think it's symptomatic

of having created something something

really valuable um and so I do think

this you know the the the sort of the

the the extreme binary view of the world

I I always articulate is that there are

exactly two kinds of businesses in this

world there are businesses that are

perfectly competitive and there are

businesses that are monopolies and um

there's shockingly little that is in

between and uh this dichotomy is not

understood very well because uh people

uh are constantly lying about the nature

of the businesses they're in um and this

is why this is in my mind this is the

most important it's not necessarily the

most important thing in business but I

think it's the most important business

idea that people don't understand that

there are just these two kinds of

businesses and so let me say a little

bit about the lies that people tell and

so you basically um the basic uh if you

sort of imagine that there was a

spectrum of companies from perfect

competition to Monopoly um the um the

apparent differences are quite small

because the people who have monopolies

pretend not to they will basically say

uh you know and it's because you don't

want to get regulated by the government

you don't want the government to come

after you so you will never say that you

have Monopoly so anyone who has a

monopoly will pretend that they're in

incredible competition and on the other

end of the spectrum if you are

incredibly competitive um and if you're

in some sort of business where you will

never make any money um you will be

tempted to tell a lie that goes in the

other direction where you will say that

you're doing something unique um that um

is is somehow uh less competitive than

it looks because um because you want to

you will want to differentiate you want

try to attct Capital or something like

that so if the monopolists pretend not

to have monopolies the non- monopolists

pretend to have monopolies the apparent

difference is very small whereas the

real difference I I would submit is is

actually quite big and so there's this

Distortion that happens because of the

lies people tell about their businesses

and the lies are sort of in these these

opposite direction let me let me drill a

little bit down further on the uh the

way these lies

work and so um you know

the the the basic uh lie you tell as a

non-m monopoly is that we're in a very

small Market the basic lie you tell as

the Monopoly is that the market you're

in is much bigger than it looks and so

um and so typically if you want to think

of this in sort of set theoretic terms

you could say that a monopoly tells um a

a lie where you describe your business

as the union of these vastly different

markets and the non- monopolist

describes it as the intersection so that

uh in effect um if you're if you're a

non monopolist you will rhetorically

describe your Market as super small

you're the only person in that market if

you have Monopoly you will describe it

as super big and um and there's lots of

competition in it so uh some examples of

how this how this works in practice uh

so I always use restaurants as the

example of a terrible business this is

always you know sort of my ideaas you

know capitalism and competition are

antonyms um capitalist is someone who

accumulates Capital world of perfect

competition is a world where all the

capital gets competed away so uh you're

opening a restaurant business no one

wants to invest because you just lose

money so you have to tell some

idiosyncratic narrative and you will say

something like well we're the only

British food restaurant in paloalto so

it's British paloalto and uh and of

course that's too small a market because

people may be able to drive all the way

to Mountain View or even Meno Park um

and there probably are no people who eat

nothing but British food at least no

people who are still

alive and so so that is um that's that's

a sort of a fictitiously narrow Market

um there's there's sort of a Hollywood

version of this where uh the way movies

always get pitched is you know okay it's

like a college football star you know uh

joins an elite group of hackers to um to

catch the shark that killed his

friend um sorry and so that's now that

is a movie that has not yet been

made but um but but the question is is

is that the right category or is the

correct category it's just another movie

in which case you know there are lots of

those it's super competitive incredibly

hard to make money no one ever makes

money in Hollywood uh doing movies or

it's really really

hard and so you always have this

question about

does the intersection does is it real

does it make sense does it have value

that one should ask and of course there

are startup versions of this where you

and the the sort of the bad really bad

versions you just take a whole series of

buzzword sharing mobile social apps you

combine them and you have some kind of

uh narrative and whether or not that's a

real business or not uh is is uh um is

it's generally a bad sign so it's it's

almost this pattern recognition when you

have this rhetoric of the sort of

intersections um it it it generally does

not work the something of somewhere is

really mostly just the nothing of

nowhere and it's like the Stanford of

North

Dakota uh one of a kind but it's not

Stanford um so let's look at the

opposite the opposite lie is um if you

are uh let's say uh the uh the search uh

company that's down the street from here

and has about a happy 66% market share

um and uh is you know is completely

dominant in the search Market um Google

has not just almost never describes

itself as a search engine these days um

and instead it uh it describes itself in

all these different ways so it sometimes

says it's an advertising company so if

it was search you'd say wow this this

like it's it's it has this huge market

share that's really really crazy it's

it's like a incredible Monopoly it's

much bigger than it's much a much more

robust Monopoly than Microsoft ever had

in the 90s maybe that's why it's making

so much money um but if you uh if you

say it's an advertising Market you could

say well there's search advertising is

17 billion and that's part of uh online

advertising which is much bigger and

then you know all us advertising is

bigger and then by the time you get to

Global advertising that's close to 500

billion and so you're talking about 3

and a half% so um a tiny part of uh of

this much larger

market um

or if you don't want to be an

advertising company you can always say

that you're a technology

company

um and so

um sorry let me see um and so the and

and so um and and the technology Market

is something like a one trillion Doll

Market and the narrative that you tell

as Google in the in the technology

Market is um well we're competing with

all the car companies with our

self-driving cars we're competing with

app apple on TVs and iPhones uh we're

competing with Facebook we're competing

with Microsoft on um on Office Products

we're competing with Amazon on cloud

services and so we are in this giant

technology Market where there's

competition in every direction uh you

you look and uh no we're not the

Monopoly the government's looking for

and we should not get regulated in any

way whatsoever and so I think one has to

always be super aware that there are

these uh these very powerful incentives

to uh to distort the nature of these

markets one way or or the

other so um you know the the the

evidence of narrow markets in the uh in

the tech industry is um is if you

basically just uh if you look at sort of

the some of the big tech companies Apple

Google Microsoft Amazon um they just um

they've just been building up cash for

um year after year and you have these

incredibly High profit margins and I

would I would say that the the one of

the reasons the tech industry in the US

has been uh has been so successful

financially is because it's it's prone

to creating all these Monopoly like

businesses and that's that's um and it's

reflected uh by the fact that these

companies just accumulate so much cash

they don't even know what what to do

with it Beyond a certain point um and

so so let me say um let me say a few

things about uh about how to how to

build a monopoly and I think uh I think

the one of the sort of very

counterintuitive ideas that comes out of

this Monopoly a thread is that um you

want to go after small markets if you're

a

startup um you know you want to get to

Monopoly you're starting a new company

you want to get to Monopoly um Monopoly

is you have a large share of a market

how do you get to a large share of a

market you start with a really small

market and you take over that whole

market and then uh and then over time

you find ways to expand that market in

in concentric circles and uh the thing

that's always a big mistake is going

after a giant market on uh on day one

because that's typically evidence that

um that you somehow haven't defined the

categories correctly that and it's it

normally means that there's going to be

too much competition in one way or

another and so I think almost all the

successful companies uh in Silicon

Valley had some model of starting with

small markets and expanding and you know

if you take Amazon you start with you

start with you know just um a bookstore

we have all the books in the world so

it's it's a it's a it's a better

bookstore than anybody else has in the

world when it starts in the 90s it's

online there's things you can do you

can't do before and then you gradually

expand into all sorts of different forms

of e-commerce and other things beyond

that um you know eBay you start with Pez

dispensers you move on to beanie babies

and eventually uh it's it's all these

different um auctions for all these

sorts of different Goods um and uh and

what was very counterintuitive about

what's very counterintuitive about many

of these companies is they often start

with markets that are so small that

people don't think um they don't think

that they're uh valuable at all when

when you get

started um the the PayPal version of

this was uh was you we started with uh

with power sellers on eBay which was

about 20,000 people when when we first

saw this happening in December of 99

January 2000 right after we launched uh

there was a sense that uh that these

were all um it was such a small Market

it was terrible we thought these were

terrible customers to have it's just

people selling junk on the internet why

in the world do we want to be going

after this Market but um but you you

know you there was a way to get a

product that was much better for

everybody in that market you could um

and we got to something like 25 30% you

know Market penetration in two or 3

months and you got some lockin you got

brand recognition and you're able to to

build the business from there so um so I

always think these um these these very

small markets are are quite underrated

uh the Facebook version of this I always

give is that uh you know the initial

Market at Facebook was 10,000 people at

Harvard it went from Zer to 60% market

share in 10 days that was a very

auspicious start um the way this gets

analyzed in Business Schools is always

um that's ridiculous it's such a small

Market it can't have any value at all

and so I think the business school

analysis of Facebook early on or of uh

PayPal early on or of eBay early on is

that the markets were perhaps so small

as to have uh almost no value uh and

they they would have had little value

had they stayed small but it turned out

there were ways to then grow them

concentrically and that's what made them

uh that's what made them so valuable um

now I think the opposite version of this

is always where you have super big

markets and um and I there's so much so

many different things that went wrong

with all the clean tech companies in the

last decade but uh but one one theme

that ran through almost all of them was

they all started with massive markets

and every clean tech PowerPoint

presentation that one saw in the Years

2005 to 2008 which was sort of the clean

tech bubble in in Silicon Valley started

with we're in the energy Market we're in

a market that's measured in hundreds of

billions or trillions of dollars and um

and then you know once you're sort of a

a minnow in a vast ocean um that's not a

good place to be that means that you

have tons of competitors and you don't

even know who all the competitors are

and so you want to be you know you want

to be a one-of-a-kind company where it's

the only one in a small ecosystem you

don't want to be the fourth online pet

food company you don't want to be the

10th thinfilm solar panel company you

don't want to be the H hundredth

restaurant in paloalto um you know

restaurant industry is a trillion dollar

industry so if you do a market size

analysis you'd include restaurants are a

fantastic business to go into and it's

often large markets large existing

markets typically mean that you have uh

tons of competition very very hard to uh

to differentiate so the first very

counterintuitive int uh idea is is to go

after small markets often markets that

are so small people don't even notice

them they think they make sense that's

where you get a foothold and then um and

then if those markets are able to expand

you can scale into a big Monopoly

business um you know um a second uh sort

of there's sort of several different uh

characteristics of these Monopoly

businesses um that I like to um focus on

and U there's probably no no sort of

single formula to it and I I always

think that uh that in technology there's

always a sense that you know the history

of technology is such that every every

moment happens only once and so you know

the next Mark Zuckerberg won't build a

social network the next uh uh the next

Larry Page won't be building a search

engine the next uh Bill Gates won't be

building an operating system and if

you're copying these people you're not

learning from them but it's it's and so

um there is always um these very unique

businesses that are doing something

that's not been done before end up um

end up having the potential to be a

monopoly if you're you know the the the

opening the opening line in um Anna

kenina is that all happy companies sorry

all happy families all happy families

are alike all unhappy families are

unhappy in their own special way and the

opposite is true in business where I

think all happy companies are different

because they're doing something very

unique all unhappy companies are alike

because they fail to escape the

essential sameness that is competition

and so so one one sort of characteristic

of a monopoly technology company is some

sort of proprietary technology um my

sort of crazy somewhat arbitrary rule of

thumb is you want to have a technology

that's an order of magnitude better than

the next best thing so Amazon had over

10 times as many books I it's maybe not

that Hightech but you figure out a way

to sell 10 times as many books in an

efficient online way you know PayPal the

alternative for PayPal was using um was

using uh uh checks to uh send money on

eBay took 7 to 10 days to clear PayPal

could do it more than 10 times as fast

so you want to have some sort of very uh

very powerful Improvement in some um on

in some order maybe an order of

magnitude Improvement on some key

Dimension um of course you know if you

if you actually come with something

totally new um it's it's it's just like

an infinite Improvement so I would say

the the iPhone was the first smartphone

that worked and so that's you know

that's like maybe maybe not infinite but

it's sort of definitely an order of

magnitude or more of an improvement so I

think uh the the technology is designed

to give you a massive Delta over over

the next the next best thing I think um

I think there often are network effects

that can kick in that really help the

thing that's very um and these these

lead to monopolies over time the thing

that's very tricky about Network effects

is uh they're often uh they're often

very hard to get started and so um so

even though everyone understands how

valuable they are uh there's always this

incredibly tricky question why is it

valuable to the first person who's doing

something um economies of scale uh if

you have something that with very high

fixed costs very low marginal costs uh

that's typically a monopoly like

business and then um then there's this

thing uh of of branding uh which is sort

of like just uh this idea that gets

lodged in people's brains I I never

quite understand how branding Works uh

so I never invest in companies where

it's just about branding but it is I

think a real phenomenon that uh that

creates uh that creates real value I

think one of the things I'm going to

come back to this a little bit towards

the end but one of the things that's

very striking is that software

businesses are often um are for some

reason uh very good at some of these

things they're especially good at the

economies of scale part because uh the

marginal cost of software is zero and so

if you get something that works in

software um it's often significantly

better than the existing solution and

then you have these tremendous economies

of scale and you can scale fairly

quickly so even if the market start

small um you can grow your business

quickly enough to uh stay um stay at the

same size as the growing market and uh

and maintain the sort of Monopoly uh

Power now the critical thing about these

monopolies is um is it's it's not enough

to have a monopoly for just a moment the

critical thing is to have one that lasts

over time um and so you know in s value

is always the sort of idea that you want

to be the first mover and I I always

think it's it's in some ways um the

better framing is you want to be the

last mover you want to be the last

company in a category those are the ones

that are really valuable Microsoft was

the last operating system at least for

many decades uh Google is the last

search engine Facebook will be valuable

if it turns out to be the last social

networking site and um and one way to

one way to think of this uh last mover

uh value is this IDE that most of the

value in these companies exists far in

the future um if you do sort of a

discounted cash flow analysis of a

business you look at you have sort of

all these profit streams you have a

growth rate the growth rate is much

higher than the discount rate and so

most of the value exists far in the

future I did I did this exercise at

PayPal in March of 2001 we had been in

business for about 27 months and um and

we sort of had you know the growth rate

was 100% a year we were disc counting

future cash flows by about

30% and it turned out that about 3/4 of

the value of the business as of 2001

came from cash flows in years 2011 and

Beyond and um and whenever you do the

math on any of these tech companies you

get to an answer that's something like

that so if you are trying to analyze any

of the tech companies in Silicon Valley

Airbnb Twitter uh Facebook um any

emerging internet companies all the ones

in y combinator um the math tells you

that 34 80 85% of the value is coming

from cash flows in years 2024 and Beyond

it's very very far in the future and uh

and so one of the things that uh we

always overvalue in Silicon Valley is

growth rates and we undervalue

durability because uh growth is

something you can measure in the here

and now and you can always track that

very precisely um the question of

whether a company's still going to be

around a decade from now that's actually

what what dominates the value equation

and that sort of is a much more uh

qualitative sort of a thing and so if if

we um if we went back to this idea of

these characteristics of Monopoly uh

proprietary technology Network effects

economies of scale um um you can think

of these these characteristics as ones

that exist at a moment in time where you

capture a market and take it over but

you also want to think about are these

things going to last over time and so

there's a Time Dimension to all these

characteristics so Network effects often

have a great time element where as the

network scales the network effects

actually get more robust and so if you

have a network effect business that's

often one that uh um can become a um a

bigger and stronger Monopoly over time a

proprietary technology is always a

little bit of a tricky one so you want

something that's an order of magnitude

better than uh the state-of-the-art in

the world today and that's how you get

people's attention that's how you

initially break through but then um you

don't want to be superseded by somebody

else and so there are all these areas of

innovation where there was tremendous

Innovation but no one made any money so

uh you know dis Drive Manufacturing in

the 1980s um you could you could do a

better dis build a better dis Drive than

anybody else you could take over the

whole world and two years later someone

else would come along and replace yours

and in the course of 15 years you got

vastly improved disc drives so it had

great benefit to Consumers but um it

didn't actually help the people who

started these companies and so there's

always this uh question about having a

huge breakthrough in technology but then

also being able to say explain why uh

yours will be the last breakthrough uh

or at least the last breakthrough for a

long time or will you make a

breakthrough and then you can keep

improving on it at a quick enough Pace

that no one can ever catch up so if you

have a structure of um structure of the

future where there's a lot of innovation

and other people will come up with new

things in the thing you're working on um

that's great for society it's um it's

actually not that good for your business

typically um and then um economies of

scale uh I talked about so so I think

anyway so I think this last mover thing

is is very critical I'm always tempted

you know I don't want to overdue the

chess analogies but you know the first

mover in chess is someone who plays

white white is about a one-third of a

pawn Advantage so there's a small

advantage to uh going first you want to

be the last mover um who who wins the

game so there always the Kappa Blanca

world champion chess champion Kappa

Blanca line you must begin by studying

the end game and and I do think that's

um well I wouldn't say that's the only

thing you should study I think this uh

the sort of perspective of asking these

questions why will the still be the

leading company 10 15 20 years from now

is a uh is a really critical one to to

try to think

through let me um let me sort of uh I

want to sort of go in two slightly other

directions with this uh monop versus

competition idea and I think um so I

think this is the the central idea in my

mind for for business for starting

business for thinking about them and U

and there are some some very um

interesting perspectives I think it

gives on the whole you know on the whole

history of innovation and technology and

science because um you know we we've

lived through um we've lived through um

you know 250 300 years of incredible

technological progress in you know many

many different domains uh you know steam

engine to Railways

to telephones Refrigeration household

appliances um you know the computer

Revolution Aviation all sorts of

different areas of technological

innovation and then there's sort of

analogous thing that one can say about

science where uh we've lived through

centuries of of enormous amounts of

innovation in in in science as well and

um and the the thing that I think um

people always miss when they think about

these things is um is that um because X

and Y are independent variables um some

of these things can be extremely

valuable Innovations but uh the people

who invent them who come up with them do

not get rewarded for this and uh and

certainly if you go back to um you need

to create X dollars in value you capture

y% of X I would suggest that the history

of science has generally been one why is

0% across the board the scientists never

make any money um they're always duded

into thinking that they live in a just

universe that will reward them for their

work and for their inventions and this

is probably the fundamental delusion

that uh that scientists tend to suffer

from in our in our society um and and

even in technology there are sort of

many different areas of Technology where

um where there were great innovations

that created tremendous value for

society but uh but but people uh did not

uh did not actually capture uh that much

of the of the value and so I think there

is this sort of whole uh history of um

science and technology that can be told

from the perspective of how much value

was actually captured and um and

certainly there are entire sectors where

people didn't capture anything so you

you're the smartest physicist of the

20th century you come up with special

relativity you come up with general

relativity you don't get to be a

billionaire you don't even get to be a

millionaire um it just it just somehow

doesn't work that way um the railroads

incredibly valuable most of them just

went bankrupt because it was too much

competition um right Brothers um you fly

the first plane you don't make any money

and so I think there is sort of the

structure to these industries that's uh

that's very important um and I think the

uh the thing that's actually rare are

the success cases most the so it's

actually you really think about the

history in this in this 250 years sweep

um it's unus Y is almost always 0% it's

always zero in science it's almost

always in in technology and so it's very

rare where people made money you know

the early uh the late uh 18th early 19th

century the first Industrial Revolution

was the textile mills you had the steam

engine you sort of automated things and

you had these Relentless improvements

that people improved efficiency of

textile factories of manufacturing

generally at a clip of 5 to 7% every

year year after year decade after decade

you had 60 70 years of tremendous

improvement from 1780 to

1850 um but even in 1850 most of the

wealth in Britain was still held by the

landed aristocracy uh the workers didn't

you know the workers didn't make that

much the capitalists didn't make that

much either it was all competed away

there were hundreds of people running

textile factories it was an industry

that just uh um the structure of the

competition prevented people uh from

from making any money um and so I think

there are in my mind there probably are

only two broad categories in the entire

history of the last 250 years where

people have actually uh come up with new

things and made money doing so um one is

uh these sort of vertically integrated

complex monopolies which people uh did

build in the Second Industrial

Revolution at the end of the 19th and

start of the 20th century and so this

was like Ford it was the vertically

integrated oil companies like Standard

Oil um and what these vertically

integrated monopolies uh typically

required was this very complex

coordination you got a lot of pieces to

fit together in just the right way uh

when you assembled it you had a

tremendous Advantage this is actually uh

done surprisingly little today and so I

think this is sort of a business form

that um when people can pull it off is

very valuable it's typically fairly

Capital intensive uh we live sort of in

a in a in a culture where it's very hard

to get people to buy into anything

that's super complicated and takes very

long to build uh but I you know when I

sort of think about my colleague Elon

Musk from PayPal success with Tesla and

SpaceX uh I think the key to these

companies was the complex vertically

integrated Monopoly structure they had

so if you sort of look at Tesla or

SpaceX if you ask you know was there

sort of a single breakthrough I mean

they certainly innovated on a lot of

Dimensions I don't think there was a

single 10x breakthrough in battery

storage or

you know maybe working on some things on

rocketry but they hadn't there was no

sort of single massive breakthrough but

what was really impressive was

integrating all these pieces together

and um and doing it in a way that was

more vertically integrated than most of

their competitors so Tesla you also

integrated The Car Distributors so they

wouldn't uh steal all the money as has

happened with the rest of the car

industry in the US or SpaceX um you

basically uh pulled in all the

subcontractors um uh where most of the

large aerospace companies have single

Source subcontractors that are able to

sort of charge Monopoly profits and make

it very hard for the integrated

aerospace companies to make money um and

so uh vertical integration I think is

sort of a a very underexplored modality

of of technological progress that people

uh would uh would do well to look at

more and then I think there is there is

something about software itself that's

very very powerful um software has these

incredible economies of scale these low

marginal costs and there is something

about the world of bits as opposed to

the world of atoms where you can often

get very fast adoption and and the fast

adoption is critical to capturing and

taking over markets because even if you

have a small Market if the adoption rate

is too slow there'll be enough time for

other people to enter that market and

compete with you whereas if you have a

small to midsized Market and have a fast

adoption rate you can uh take over this

market and so and so I think this is one

of the reasons Silicon Valley has done

so well and why software has been this

phenomenal industry and what I what I

would suggest uh what I would want to

leave you with is there are sort of

these different rationalizations people

give for why certain things work and why

certain things don't work and I think

these rationalizations always obscure

this question of um creating X Dollar in

value and capturing y% of X so the

science rationalization we're always

told is that the scientists aren't

interested in making money they're doing

it for charitable reasons and that

you're not a good scientist if you're

motivated by money and I'm not even

saying people should always be motivated

by money or something like this but I I

think we should we should be a little

bit more critical of this as a

rationalization we should ask is this a

rationalization um uh to obscure the

fact that y equals 0% and the scientists

are operating in this uh in this sort of

world where all the uh all the

Innovation is effectively competed away

and they can't capture any of it

directly and then the the software

Distortion that often happens is because

people are making such vast Fortunes in

software we infer that this is the most

valuable thing um in the world being

done full stop and so if people at

Twitter make uh billions of dollars it

must be that Twitter is worth far more

than anything Einstein did um and um and

uh and what that sort of rationalization

tends to obscure is again that X and Y

are independent variables and there are

these businesses where you capture a lot

of X and there others where you don't

and so uh and so I do think um I do

think the history of innovation has been

this uh this history where uh the the

the the microeconomics the structure of

these industries has mattered a

tremendous amount and when um and um and

and and there is sort of this this story

where some people have made vast

fortunes because they were in Industries

with the right structure and other

people uh made uh nothing at all because

um because they were in these sort of

very competitive things and we shouldn't

just rationalize that way I think it's

worth understanding this better and then

finally let me come back to this this uh

this sort of overarching theme for this

talk this competition is for losers idea

which um is always this provocative way

to to title things because we always

think of the losers as the people who

are not good at competing we think of

the losers as the people who are um slow

on the sports on the track team in high

school or who do a little bit less well

on the standardized tests um and don't

get into the right schools and so we

always think of losers as people who

can't compete um and I want us to really

rethink and and revalue this and

consider whether it's possible that

competition itself um is off that we we

we're sort of it's not just the case

that we don't understand this Monopoly

competition dichotomy intellectually so

sort of been talking about why why you

wouldn't understand it intellectually

because um people lie about it it's

distorted we have all these uh the

history of innovation rationalizes

what's happening in all these very very

strange ways but I think it's more than

just an intellectual blind spot I think

it's also a psychological blind spot

where we find ourselves you know very

very attracted to competition in in one

form or another um we find it reassuring

if other people do things the word ape

already in the time of Shakespeare meant

both primate and imitate uh and there is

something about human nature that's

deeply mimetic imitative aplike

sheeplike leming like cd-like um and

it's this very very problematic uh thing

that uh we need to always think through

and and try to overcome and and there is

always this question about um

competition um as as a form of

validation where we we go for things

that lots of other people are going for

and um it's not that there is wisdom in

crowds it's not when lots of people are

trying to do something that that's proof

of uh it being valuable I think it's

when lots of people are trying to do

something that is often um that is often

proof of insanity there 20,000 people a

year who moved to Los Angeles to become

movie stars about 20 of them make it um

I think the Olympics are a little bit

better because you have a you know um

you can sort of figure out pretty

quickly whether you're good or not so

it's there's a little bit less of a dead

weight loss to society um you know um um

you know your your the sort of

educational experience at a place uh the

the the pre- Stanford educational

experience um there's always sort of a

non-competitive characterization where I

think most of the people in this room

had machine guns they were competing

with people with bows and arrows so um

it wasn't exactly a parallel competition

when you were in junior high school and

high school um there's always a question

does the tournament make sense as you

keep going and this is uh and so um

there is always this question if people

go on to grad school or post

post-doctoral educations does the

intensity of the competition really make

sense there's the uh the you know

classic uh Henry Kissinger line that uh

um describing his fellow faculty at

Harvard that the uh um the battles were

so ferocious because the Stakes were so

small describing sort of Academia and um

and and you sort of think on one level

this is a description of insanity you

know why would people fight like crazy

when the stakes are so small but it's

also I think simply a function of the

logic of the situation when it's imp

really hard to differentiate yourself

from other people when the differences

are when the objective differences

really are small then uh you have to uh

compete ferociously to maintain uh a

difference of one sort uh or another um

that's often more imagin than real

there's always sort of a personal

version of this that I I tell where um

you I was sort of hyper hypert tracked I

you know my e8th grade Junior High

School yearbook one of my friends wrote

in you know I know you'll get into

Stanford in four years as a sophomore I

sort of went into went into Stanford

four years later uh at the end of High

School uh went to Stanford Law School uh

you know ended up um at a big law firm

in uh New York uh where from the outside

everybody wanted to get in on the inside

everybody wanted to leave um

and and you had um and it was this very

strange Dynamic where after I uh sort of

realized this was maybe not the best

idea um and I left after 7 months and 3

days you know one of the people down the

hall from me uh told me um it's really

reassuring to see you leave Peter I had

no idea that it was possible to escape

from Alcatraz which of course all you

had to do was go out the front door and

not come back but um but so much of

people's identities got wrapped up in um

in winning uh these competitions

that they somehow lost sight of what was

important what was valuable you know

competition does make you better at

whatever it is that you're competing on

because when you're competing you're um

comparing yourself with the people

around you you're figuring out how do I

beat the people next to me how do I do

somewhat better at whatever it is

they're doing and you will get better at

that thing I'm not I'm not questioning

that I'm not denying that but um but it

often comes at this tremendous price

that uh you stop asking some bigger

questions about what's truly important

and truly valuable and so I would I

would say that uh don't always go

through the tiny little door that

everyone's trying to rush through maybe

go around the corner and go through the

vast gate that no one's taking thank you

very

much I guess time for you want to take a

few questions

or

S oh yeah uh people want to take I'll

take a few questions we have a few

minutes time yeah go ahead um since yeah

as you mentioned earlier often

monopolies and competition often look

similar because of the narratives people

tell the Nares we tell

ourselves do you have any ways to easily

determine the difference when you're

looking at an idea or evaluating your

own idea well I I'd say the question I'm

I always try to focus on is what is the

actual market so not what's The

Narrative of the market because you can

always tell a fictional story about a

market that's much bigger or much

smaller but what is the what is the real

objective market so it's always yeah you

always try to figure it out and you real

people have incentives to powerfully

distort these

things yeah so which of the aspects of

monopolies that you mentioned would you

say software comp like Google

Excel um well they have uh they have

Network effects with the the ad Network

they had proprietary technology that

gave them the initial lead because they

had the the page rank algorithm which

was uh sort of an order of magnitude

better than any other search search

engine you have economies of scale uh

because of the need to store you know

all these different uh sites and at this

point you have brand so Google has all

four maybe maybe the proprietary

technology is somewhat weaker at this

point but definitely it had all four and

maybe three and a half out of four now

yeah how does this apply to paler and

second what's you like second is what

but with the iPhone uh headph oh this is

that's that's a that's a there sort of a

set of companies that are doing

different copycat payment systems on on

mobile phones there's square there's

PayPal sort of they have just they just

have sort of different shapes that's how

they differenti themselves one as a

triangle one is a square um and so you

know um maybe at some point the Apes

will run out of shapes or something like

that but um but I think um no palente

here we we started with a focus on on um

the um intelligence Community which is

small submarket um you had a proprietary

technology that used a very very

different approach um uh where it was

focused on the human um computer uh

synthesis rather than the uh uh sub

substitution which I think is the

dominant Paradigm so there's a whole set

of things I would say on the on the

market approach and the and the

proprietary

technology uh yes um we have design

thinking methodology and uh lean uh

startup thinking um which is used to

mitigate Risk by not creating things

that people don't want but how do young

innovators uh have inspiration to create

complex systems that last can you repeat

the question yeah so the question is um

what do I think about lean startups uh

um itera of thinking where you get uh

feedback from people uh versus uh

complexity that may not work so I I am

personally quite skeptical of all the uh

Lean Startup methodology I think the the

the really great companies um did

something was sort of somewhat more of a

Quantum Improvement that really

differentiated them from everybody else

um they they typically did not do

massive you know customer surveys the

people who ran these companies uh

sometimes not always suffered from Wild

forms of bers so they were not actually

that influenced not that easily deterred

by what other people thought or told

them to do um so I I do think we're

we're way too focused on um iteration as

a modality and not enough on trying to

um have um you know um a virtual ESP

link with the public and figuring it out

ourselves um I I would say that uh let

me see um I would say that uh the um I

I'm not quite the risk question I think

is always a very tricky one because

there are um you know there there it's

it's not it's often I think it's often

the case that you don't have enough time

to really mitigate risk if if you're

going to take enough time to figure out

what people want um you often will have

missed the boat by then um and um and

then of course there's always the risk

of of doing something that's uh that's

not that uh significant or meaningful so

you know you you could say a track in um

in law school is a low-risk track from

one perspective persective it may still

be a very highrisk track in the sense

that maybe you not um have a high risk

of not doing something meaningful with

your life so we have to think about risk

in these uh in these very complicated

way I think risk is for of this very uh

complicated concept yes you talking

about the last move Advantage but then

doesn't that imply that there's already

competition to begin with on chest piece

on the chest

board um yeah so there's always this

terminology thing so I would I would say

that uh there are uh there are

categories in which people sort of are

bundle together I would say the Monopoly

businesses were in in effect they really

were a big first mover in some sense you

could say you could say Google was not

the first search engine there were other

search engines before but on one

dimension they were dramatically better

than everybody else so they were the

first one with page rank with with sort

of a automated approach um Facebook was

not the first uh social networking site

my friend Reed Hoffman started one in

1997 they called it social net so they

already had the name social network

uh in the name of their company s years

before Facebook uh their idea was that

it was going to be this virtual cyers

space where I'd be a dog and you'd be a

cat and we'd have all these different

rules about how we'd interact with each

other in this virtual alternate reality

Facebook was the first one to get real

identity so it was so I'd say I hope

Facebook will be the last social

networking site it was the first one in

a very important Dimension people often

would not think of it as the first

because they' sort of lump all these

things together I have one more question

okay one more question let's take one

here uh if you're theoretically someone

who uh worked at Golden Sachs out of

college and left out six months and is

now studying computer science at

Stanford uh how would you recommend

rethinking uh of

that um you know I don't I don't have a

I don't have a great um I'm not great at

the Psychotherapy stuff so I don't I

don't quite know how to I don't quite

know how to uh how to solve this that

there are these um you know there are

these very odd studies they've done on

people who go to um business school

there's one they've done at Harvard

Business School where um it's sort of

the anti- asger um personality we have

people who are super extroverted uh

generally have low convictions uh few

ideas and you have sort of a hot house

environment you put all these people in

for two years and at the end of it uh

they systematically end up the largest

cohort systematically ends up doing the

wrong thing they try to catch the last

wave you know uh 1989 everyone at

Harvard tried to work for Mike milin it

was one or two years before he went to

jail for all the junk bond stuff they

were never interested in Silicon Valley

OR tech except for 99 2000 when they

timed the dotcom bubble peing perfectly

um they did uh and then you know 05 to7

was housing uh private Equity stuff like

this so so I do think um I do think this

uh tendency for us to see competition as

validation is um is very deep um I don't

think there's some any sort of easy

psychological formula to uh to avoid it

so I don't I don't quite know how to uh

what sort of therapy to to recommend but

um but my my my first my first starting

point which is only like it's maybe 10%

of the way is to never underestimate how

big a problem it is we always think this

is something that afflicts other people

so it's easy for me to point to people

in Business Schools or people at Harvard

or people on Wall Street I think it

actually does afflict all of us to a

very profound degree we always think of

advertising as things that work on other

people how who are all these stupid

people who fall for All Those ads on TV

they obviously work to some extent and

they work to a disturbing extent on all

of us and it's something we we all

should work to

overcome thank you very

[Applause]

much