Part 5 of Stanford’s How to start a startup class. Presentation by Peter Thiel (co-founder of Paypal) explaining his theory that startups should always try to become monopolies, starting with small markets and expanding from there.
Previous week’s notes are grouped in a single page here.
– if you start a company, you should always aim for a monopoly and avoid competition, “competition is for losers” [easier said than done…]
– two types of business: businesses in a very competitive environment, and businesses with monopolies
– differences between these two types of businesses not obvious, but enormous
monopoly: will downplay its dominance to avoid being regulated
perfect competition: will always pretend to be doing something unique to stand out or raise capital
– Monopolies say “we’re in a huge market”
Non-monopolies say “we’re in a narrow market”
– “the something of somewhere is often the nothing of nowhere”.
MONOPOLY? DEPENDS ON HOW YOU LOOK
– Google has 66% of search traffic -> monopoly?
– but if you consider Google as an advertising company:
$17b = US search advertising
$37b = US online advertising
$150b = US Advertising
$495b = global advertising
So actually Google becomes a company competing with others for a share of a larger pie
START SMALL & EXPAND
– Build a monopoly in a small market, then expand to other markets
– Facebook: was addressing a super small market (10k people at Harvard), but went from 0 to 100% market share in a few days.
– Amazon: started with book store, slowly expanded to other markets
– Paypal: started with power sellers on ebay, expanded to the general public
– Many people miss these big companies because they start small. If you’d assess Paypal or Facebook back in the days, you’d think their market was way too small
– Companies that failed: people who wanted to address huge markets, who had tons of competitors who they didn’t even know who they were. Large existing markets = lots of competition
THE MANY WAYS TO BUILD A MONOPOLY
– The next Bill Gates won’t be building an OS. The next Larry Page won’t be building a search engine. You need to find a totally new market, or…
– Building a monopoly is not about being the only one: it can also be about being so much better you differentiate radically. Amazon was different/monopoly cause it was selling 10 times more books than its closest competitors
– Network effect can also create a monopoly
– Regulation / high fixed costs that prevent new entrants from coming in
– Proprietary technology
– Build a complex, vertically integrated structure. Examples: Tesla, SpaceX, no real innovation but very good at making different things fit
– You don’t want to be the first mover, you want to be the last mover. Google is the last mover, Facebook is the last social network.
– You want to be the last breakthrough for a long time (ex: Google’s search algorithm outpacing competition, hasn’t been surpassed since)
– Keep improving on your product faster than people can catch up
– Economies of scale
– Most of the value of these companies exists far in the future. Paypal: most of the value in 2001 was in the cash brought by the business 10 years later. 85% of the value of good companies happens 10 years down the road
– Value for entrepreneur = X * Y, X = market size, Y = market share
– technological innovation -> people coming up with innovation can get some of the value
– scientific innovation -> inventors rarely come up with value for their inventions. X = 0
– Structure of your industry is what defines your potential for success
PSYCHOLOGY OF COMPETITION
– We find it reassuring if other people do what we do
– Competition is a form of validation [This is where we go into cultural differences. True in the US, probably not as much in Europe]
– Competition does make you better
– But competition makes people lose sight of the bigger question: is what I’m competing for worth my time?
– when investing: don’t focus on the narrative market, but on the real market
– Google had all four advantages of a monopoly: network effect (ad network), proprietary technology (page rank technology), economies of scale (storage), brand
– successful companies didn’t really do market testing and lean startup methodology. Founders had better ideas that differentiated them from the rest of the pack. If you take too much time to figure out what people want you risk missing the boat