Lecture 5 - Competition is for Losers (Peter Thiel)

Summary

In this talk, Peter Thiel, co-founder of PayPal and Palantir, discusses the importance of creating a monopoly to build a valuable company. He emphasizes that successful businesses should aim to capture a significant share of the value they create. Thiel contrasts the stability and profitability of monopolies with the cutthroat competition and low margins of perfectly competitive industries. He advises startups to target small markets, achieve dominance, and then expand, using examples like Google and Amazon to illustrate his points. Thiel also challenges the common business school approach, suggesting that true innovation often lies in pursuing unique paths rather than following the crowd.

Takeaways

• 🚀 **Monopoly Mindset**: Peter Thiel emphasizes that entrepreneurs should aim for monopoly rather than engage in competition, as competition often leads to lower profits and less innovative businesses.
• 💡 **Value Creation Formula**: A valuable company is defined by two factors: creating X dollars of value for the world and capturing Y% of that value. The key is that X and Y are independent, meaning a business can create significant value yet capture a small percentage of it.
• 🔍 **Industry Comparison**: Thiel contrasts the airline industry with Google, showing that despite airlines having higher revenues, Google's profitability and market valuation are much greater due to its ability to capture a larger share of the value it creates.
• 🌐 **Monopoly vs. Competition**: He argues that there are essentially only two types of businesses: those in perfect competition and monopolies. Monopolies are more stable and can be more valuable, despite competition being often perceived as a positive societal force.
• 🤥 **The Lies of Business**: People in monopolistic positions tend to downplay their dominance to avoid regulation, while those in competitive markets may overstate their uniqueness to attract investment, leading to a distortion of the true nature of their businesses.
• 🏆 **Starting Small to Dominate**: Thiel advises startups to begin by targeting small, overlooked markets, which can then be expanded to achieve a monopoly, rather than starting with large markets that invite intense competition.
• 🛠️ **Proprietary Technology**: Monopolistic companies often have proprietary technology that provides a significant advantage over competitors, which is a key factor in their ability to capture value.
• 💼 **Network Effects and Economies of Scale**: Successful monopolies may benefit from network effects, where the value of a product or service increases with the number of users, and economies of scale, which allow for lower costs as output increases.
• 🕰️ **The Last Mover Advantage**: Thiel suggests that being the last mover in a market can be advantageous, as it implies that a company has created a lasting monopoly that will not be easily disrupted by new entrants.
• 🔮 **Future Value Focus**: Most of the value of a company lies in its future cash flows, which is why durability and the ability to maintain a monopoly over time are more important than short-term growth rates.
• 🚧 **The Risk of Competition**: Thiel expresses skepticism about the lean startup methodology, suggesting that great companies often make significant leaps rather than incremental improvements, and that focusing too much on competition can lead to a loss of focus on what is truly valuable.

Q & A

What is the main thesis Peter Thiel presents in his talk?

Peter Thiel argues that when starting a company, one should aim for monopoly and avoid competition, as competition is generally not profitable and monopolies can lead to more stable and valuable businesses.

According to Thiel, what is the basic formula for creating a valuable company?

Thiel suggests the formula involves two variables: creating X dollars of value for the world and capturing Y% of X. The critical insight is that X (value created) and Y (percentage captured) are independent variables.

Why does Thiel believe competition is for losers?

Thiel posits that competition often leads to businesses that do not make money, as seen in industries like airlines, which have historically low profit margins and a history of bankruptcy.

What is the difference between perfect competition and monopoly according to Thiel?

In perfect competition, there are many competitors, low profit margins, and businesses are not stable or long-term. Monopolies, on the other hand, are stable, have higher profit margins, and are more valuable because they dominate the market.

Why does Thiel suggest that businesses tend to lie about their market position?

Businesses lie about their market position to either avoid regulation (if they are a monopoly) or to attract capital and differentiate themselves (if they are in a competitive market).

What is the 'small market' strategy Thiel recommends for startups?

Thiel advises startups to start with a very small, niche market, capture the entire market, and then expand outwards. This approach allows for less competition initially and the potential for growth.

How does Thiel describe the characteristics of successful monopoly businesses?

Thiel identifies several characteristics of successful monopolies, including proprietary technology that is an order of magnitude better than the next best thing, network effects, economies of scale, and strong branding.

What is Thiel's view on the importance of being the 'last mover' in a market?

Thiel believes that being the last mover, or the last company in a category, is advantageous because it implies that the company has established a lasting monopoly that others cannot easily disrupt.

Why does Thiel emphasize the importance of capturing value over creating value?

Thiel stresses that while creating value is important, capturing a significant portion of that value is what leads to a business's success and profitability.

What does Thiel suggest about the relationship between innovation and capturing value in the history of science and technology?

Thiel suggests that throughout history, many significant innovations in both science and technology have not resulted in financial rewards for the innovators, indicating that the structure of the industry and the ability to capture value are critical.

What is Thiel's perspective on the lean startup methodology and its focus on iteration?

Thiel expresses skepticism towards the lean startup methodology, arguing that great companies often make a quantum leap with unique insights rather than relying on iterative customer feedback.

How does Thiel view the role of competition in validating business ideas?

Thiel challenges the notion that competition validates the value of a business idea, suggesting that competition itself can be problematic and that it's often better to seek unique opportunities away from the competitive herd.