Notes on Startups, or How to Build the Future
by Peter Thiel with Blake Masters
As read: November 2014
Table of Contents
- Preface
- 1. The Challenge of the Future
- 2. Party Like It's 1999
- 3. All Happy Companies Are Different
- 4. The Ideology of Competition
- 5. Last Mover Advantage
- 6. You Are Not a Lottery Ticket
- 7. Follow the Money
- 8. Secrets
- 9. Foundations
- 10. The Mechanics of Mafia
- 11. If You Build It, Will They Come?
- 12. Man and Machine
- 13. Seeing Green
- 14. The Founder's Paradox
- Conclusion
PURPOSE: Why does this book exist?
- learn from what Gates, Zuckerberg, etc. have done; don't just copy them
- copying an existing model takes the world from 1 to n
- creating something new takes the world from 0 to 1 (what this book is about)
- just fine-tuning today's models leads to a failed future -- innovation is necessary
"Humans are distinguished from other species by our ability to work miracles. We call these miracles technology."
"[T]his book offers no formula for success. The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative."
- based on Thiel's Stanford course CS183, and renowned notes compiled by Blake Masters
PURPOSE: Why do people think competition is something to love?
- creative monopoly: "new products that benefit everybody and sustainable profits for the creator"
- competition: "no profits for anybody, no meaningful differentiation, and a struggle for survival"
- competition is a pervasive ideology in our society that we preach and internalize even though more competition leaves less for us to gain
- our educational system reflects this by using grades to measure how students compete against each other
- students that get the highest marks receive status & credentials, and every student gets taught the same subjects in the same ways
- "elite students climb confidently until they reach a level of competition sufficiently intense to beat their dreams out of them"
- Thiel missed out on being awarded a Supreme Court clerkship -- the highest prize for a law student)
- if he had got it, PayPal probably would have never been created
- MBA students love war analogies, but it's really competition, not business, that's like war
- the key to success is market dominance (e.g., Google's search monopoly)
- 2 models for understanding conflict
- Marx - difference
- Shakespeare - similarity
- becoming obsessed with your competition is the Shakespeare model
- this is how Apple surpassed Google + Microsoft in market cap
- Square vs. everyone and their brother making a mobile credit card reader
- people that are less susceptible to social conformity become an advantage in the valley
- competition can make people hallucinate opportunities where they don't exist
- ex. the online pet store market (e.g., Pets.com) was overrun w/ competition obsessed w/ defeating each other -- "everybody loses when the war isn't one worth fighting"
- "If you can't beat a rival, it may be better to merge"
- Elon Musk started X.com at the same time and with a very similar feature set to Peter Thiel's PayPal, so they merged to prevent focusing on each other too much before the bubble popped
- fighting is binary: "either don't throw any punches, or strike hard and end it quickly"
PURPOSE: How does one actually build a monopoly business?
- Twitter employs a comparable amount of people to The New York Times, but has 12x its market cap, despite losing money now while NYT made money... because Twitter is expected to generate monopoly profits over the next decade, while a newspaper's time to do so has passed
- "the value of a business today is the sum of all the money it will make in the future" (with future cash flows being discounted to present worth)
- comparing discounted cash flows shows the stark contrast b/t low-growth businesses, like a newspaper or nightclub, and high-growth startups
- tech companies lose money at the beginning because it takes time to build valuable things
- LinkedIn has < $1B revenue and only $21MM net income for 2012, but its $24B market cap is justified by projected future cash flows
- the importance of future profits can be counterintuitive
- you must grow AND endure
- many entrepreneurs focus too much on short-term growth (e.g., weekly active users, monthly revenue targets)
- but longterm endurance is harder to measure
- part of the failure of Zynga and Groupon
"Will this business still be around a decade from now?"
- some combination of: proprietary tech, network effects, economies of scale, branding
- proprietary tech makes your productive difficult to replicate
- should be "an order of magnitude better than its closest substitute in some important dimension to lead to a real monopolistic advantage"
- easiest way to make something that much better is to invent something completely new
- examples
- Google's search algorithms return the best results + proprietary tech for short page load times and highly accurate query autocompletion
- PayPal made buying / selling on eBay significantly better by making payments instant vs. waiting 7-10 days for a check to clear
- Amazon offered 10x the books of other bookstores
- iPad brought superior integrated design to the tablet computing space --> tablets went from unusable to useful
- network effect: a product becomes more useful as more people use it
- even with that, you must start and prove valuable to a small market first (i.e., Facebook beginning with just Harvard students)
- "the initial markets are so small that they often don't even appear to be business opportunities at all"
- economies of scale: a monopoly biz gets stronger as it gets bigger because fixed costs are spread over more sales
- (this is especially dramatic for software startups)
- service businesses are difficult to monopolize (e.g., a yoga studio only has capacity for so many customers; can't provide value to millions of clients the way software engineers can)
- you can create a strong brand (e.g., Apple)
- imitators copy surface features, but Apple has proprietary tech in hardware and software, and dominates the pricing for the materials it buys
- additionally, it enjoys the network effect of having the best app ecosystem --> devs keep writing and users stay
- err on the side of starting with too small of a market so you can dominate
- ex. Paypal first went after eBay's powersellers
- "Any big market is a bad choice... This is why it's always a red flag when entrepreneurs talk about getting 1% of a $100 billion market."
- once you dominate the niche market, expand into related, slightly broader markets
- Amazon
- Bezo's vision was to dominate all of online retail, but he deliberately started with just books
- "Amazon became the dominant solution for anyone located far from a bookstore or seeking something unusual."
- then, they expanded into CDs, videos, software
- adding categories until eventually becoming the "world's general store"
- eBay
- started with niche markets like beanie babies and small-time hobbyists
- learned that auction format doesn't work for commodities
- disruption used to mean a low-end product at a low price that could overtake incumbents, then become better overtime (for example, what PCs did to mainframe computers)
- disruption: "a self-congratulatory buzzword for anything posing as trendy and new"
- when you plan expansion into adjacent markets, you don't want to disrupt; you want to avoid competition as much as possible
- first mover advantage: the first player can capture significant market share before competitors even start
- but this is only a tactic; what really matters is generating future cash flows
- better to be the last mover, the one that makes the last great development leading to years / decades of monopoly profits
- dominate a small niche and scale up toward your long-term vision over time
- business success is like chess:
"You must study the endgame before everything else."
— Grandmaster José Raúl Capablanca
PURPOSE: How should we approach the future?
- what is success?
- Malcolm Gladwell: "a patchwork of lucky breaks and arbitrary advantages"
- Jeff Bezos: luck + timing + brains
- if success were mostly luck, serial entrepreneurs wouldn't exist
- "Every company starts in unique circumstances, and every company starts only once."
"Shallow men believe in luck, believe in circumstances.... Strong men believe in cause and effect."
— Ralph Waldo Emerson
- "If you believe your life is mainly a matter of chance, why read this book?"
- definite vs. uncertain
- indefinite attitudes on the future are a problem in the U.S.
- indefinite view: assemble a portfolio of various options to be well rounded (or "many-sided mediocrity")
- definite view: be great at one substantial thing; favors firm convictions
- indefinite pessimism: sees the future, but doesn't know what to do, so just reacts to it as it happens (ex. modern Europe)
- definite pessimism: recognizes the future can be known, but is bleak (ex. China)
- China grows fast by "relentlessly copy[ing] what has already worked in the West"
- definite optimism: future will be better than the present if we plan and work to achieve it (ex. Western world from 1600s --> 1960s)
- "Big plans for the future have become archaic curiousities."
- indefinite optimism: future will be better but doesn't know how exactly, so he doesn't plan (ex. U.S. 1982 --> present)
- indefinite optimists work on optimizing existing things instead of building new ones ("the established path")
- TODO: insert paraphrased last paragraph from p69
- "Finance epitomizes indefinite thinking because it's the only way to make money when you have no idea how to create wealth."
- what to do with exit money?
- entrepreneurs → banks → portfolio of institutional investors → diversified portfolio of stocks → companies that try to increase their share price w/ cash flow
- politicians use modern polling to modify their message to match existing public opinion
- ancient philosophers were pessimistic
- modern philosophers are mostly definite optimistic
- late 20th century are indefinite optimistic (John Rawls, Robert Nozick)
- "Arguing over process has become a way to endlessly defer making concrete plans for a better future."
- Eroom's law: "the number of new drugs approved per billion dollars spent on R&D has halved every nine years since 1950"
- biotech startups are struggling compared to software startups... because their research involves lots of random guessing
- "How can the future get better if no one plans for it?"
- progress w/o planning is evolution (i.e., lean startups, MVPs, iteration, ...)
- "Iteration without a bold plan won't take you from 0 to 1"
- "The greatest thing Jobs designed was his business."
- the iPod began the post-PC generation, but most people didn't see it yet
- "A startup is the largest endeavor over which you can have definite mastery... it begins by rejecting the unjust tyranny of Chance."
PURPOSE: How should we invest entrepreneur time and VC money in startups?
- Compound interest is the 8th wonder of the world
- Fund returns follow power law distribution -- most startups fail, but VCs hope to invest in those startups that will exponentially beat the others
- "The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined."
- → "Only invest in companies with the potential to return the value of the entire fund."
- Ex. In Founders Fund 2005 Facebook, then Palantir
- Founders Fund focuses not on diversified hedging, but rather on companies which could be multibillion-dollar businesses "based on unique fundamentals"
- People don't see power law because in early to mid-stage funds, the difference between linear & exponential growth isn't yet clear
- Total VC investment is < 0.2% of GDP but generates revenue equivalent to 21% of GDP
- The 12 largest tech companies are worth ≥ $2 trillion, more than all other tech companies combined
- Entrepreneurs & individuals invest in their companies & careers -- diversification doesn't work because you can't run multiple companies simultaneously, so instead make as few investments as possible
- Don't diversify your skill set: focus relentlessly on something you're good at that will be valuable in the future
- Hesitate to start your own company because joining the very best company while it's growing fast is way more valuable (0.01% of Google >> 100% of nothing)
PURPOSE: How do we find the ideas that lead to world-changing companies?
- Pythagoras' theorem was a secret for millenia
- secret: "what valuable company is nobody building?"
| conventions | secrets | mysteries |
|---|---|---|
| easy | hard | impossible |
- The Unabomber's Manifesto argued that all secrets ("hard problems") have been solved, and the remaining problems are either easy or impossible -- both unsatisfying
- He posited that if we destroyed everything & all the tech, people could work on hard problems again
- Hipsters basically do this in their clothing style, filtering photos, etc. (whoa)
- "All fundamentalists think this way, not just terrorists and hipsters."
- We can't be explorers anymore, because National Geographic has showed us virtually every explorable place -- "the unknown seems less accessible than ever"
- 4 social trends have conspired to make us not believe in secrets:
- Incrementalism (esp. schools, academia)
- Risk aversion
- Complacency
- Flatness: globalization making the world homogeneous
- People don't "take unorthodox ideas seriously today and the mainstream sees that as a sign of progress"
- the existence of hidden injustices in society implies there are still secrets left
- the view that slavery is evil was a secret in the early 19th century
- HP rode a rollercoaster (in market cap) from late 90s to present with massive decline in the late 90's when it "stopped inventing things"
- "You can't find secrets without looking for them"
- "If you think something hard is impossible, you'll never even start trying to achieve it. Belief in secrets is an effective truth."
- "Great companies can be built on open but unsuspected secrets about how the world works."
- sharing economy startups captured untapped supply:
- Airbnb
- Lyft
- Uber
- "Few people imaginged that it was possible to build a billion-dollar business by simply connecting people who want to go places with people whilling to drive them there."
- 2 kinds of secrets
- natural secrets: found by studying undiscovered aspects of the physical world
- human secrets: things people don't know or hide about themselves
- "The best place to look for secrets is where no one else is looking... schooling impart[s] conventional wisdom."
- ex. the field of nutrition yields secrets, because it isn't yet institutionalized, and major studies from decades ago are flawed
- "Unless you have perfectly conventional beliefes, it's rarely a good idea to tell everybody everything you know."
- the golden mean between telling no one and everyone is forming a company: build a business around a secret hidden from the outside
- "A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator."
PURPOSE: What's the difference between a startup team and a cult?
- Employees love their work so much that formal business hours become obsolete, open workspace, comfort, relaxation, pets, etc.
- But perks don't work without substance
- "No company has a culture; every company is a culture."
-
PayPal Mafia: the team at PayPal that went on to found seven $1B companies (SpaceX, Tesla, LinkedIn, YouTube, Yelp, Yammer, Palantir)
-
The exact list varies, but often includes:
- Chad Hurley (YouTube)
- Dave McClure (500 Startups)
- David O. Sacks (Yammer)
- Elon Musk (SpaceX, Tesla)
- Jawed Karim (YouTube)
- Jeremy Stoppleman (Yelp)
- Max Levchin (Slide)
- Peter Thiel (Clarium Capital)
- Reid Hoffman (LinkedIn)
- Roelof Botha (Sequoia Capital)
- Steve Chen (YouTube)
- Yishan Wong (reddit)
-
Its culture was strong enough to transcend PayPal itself
-
You don't get this by hiring the most talented free agents, because durable, tight-knit relationships are important too
-
People we hired "had to be talented, but even more than that they had to be excited about working specifically with us"
- Recruiting skilled people who work cohesively together is a core competency, not something to outsource
- Talented people have many options: they don't need you...why should they join you?
- Every startup has valuable stock, smart people, and challenging problems
- A good answer revolves around your mission and/or team
- Why will no one else achieve this?
- Are these the kind of people I want to work with?
- The startup t-shirt is a uniform connecting "a tribe of like-minded people fiercely devoted to the company's mission"
- It's easier for startups to work quickly & efficiently with a shared understanding of the world
- Ex. PayPal obsessed over creating a digital currency controlled by individuals
- The optimization problem of matching talents to tasks breaks down because of how fast roles changes & conflict in competing for responsibilities
- Every person was assigned one unique thing to be responsible for & evaluated against
- Startups fail of external causes but internal conflict can create the vulnerability in the first place
- cult: "Cultures of total dedication look crazy from the outside."
- A consulting firm is the opposite of a cult: no defined mission & lacking longterm connection to the company they're creating things for
- Company culture is a spectrum: consultants (nihilism) <--> cults (dogmatism)
- The best startups can be considered like cults, except they're "fanatically right about something those outside it have missed"
PURPOSE: What will we make of the future?
- recurrent collapse: neverending cycle of prosperity <-> ruin
- plateau: world will converge to the level of today's rich countries
- extinction: devastating collapse / no survival
- takeoff: we make new tech to make a much better figure (that hockey stick curve --> winner)
- the singularity: accelerating progress leads to new tech so powerful it's beyond our understanding
- Ray Kurzweil predicts it will occur ~2045
"Our task today is to find singular ways to create the new things that will make the future not just different, but better––to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future."