Competition is for Losers with Peter Thiel (How to Start a Startup 2014: 5)
Summary
TLDRIn 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
- π€ Peter Thiel's central thesis is that businesses should aim for monopoly to avoid competition, as competition is for losers.
- π‘ 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.
- π 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.
- 𧩠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.
- π 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.
- π‘ Monopolies are often created by having proprietary technology, network effects, economies of scale, and strong branding that can last over time.
- ποΈ The tech industry has been successful financially because it tends to create monopoly-like businesses that can accumulate high cash reserves.
- π Software businesses are particularly adept at creating monopolies due to their low marginal costs and potential for rapid adoption and scaling.
- β³ 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.
- π 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.
- π 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
π€ 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.
π 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.
π οΈ 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.
π‘ 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.
ποΈ 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.
π 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.
π§ 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.
πͺ 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.
Mindmap
Keywords
π‘Monopoly
π‘Competition
π‘Value Capture
π‘Perfect Competition
π‘Innovation
π‘Network Effects
π‘Economies of Scale
π‘Branding
π‘Last Mover Advantage
π‘Vertical Integration
π‘Risk Mitigation
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
5.0 / 5 (0 votes)