Peter Thiel is one of the founders of the payment company, PayPal. Thiel taught a course at Stanford University to help young entrepreneurs learn how to start a new businesses with a better than average chance of survival. His book, Zero to One, is written in large part based on that class.
With the help of Instaread Summaries, here is a digest of some of his thoughts. We should point out that Thiel is not universally respected, even in Silicon Valley, for reasons you will quickly grasp. But still, his thoughts are stimulating.
Here are five of Thiel’s key insights on becoming a successful Early Stage Company:
- Aim to Create a Monopoly – Thiel’s view is that the most profitable businesses organize their business in a way which controls pricing. To do this, they often start with a small market. For example, EBay started by “owning” the market for collections of Beanie Babies and PEZ dispensers. The rest is history. By contrast, the CleanTech bubble during the early 2000’s started “big”. The idea put forward by most startups was that this is such a big market, you can’t fail, even with a small idea. Very few of those players were ever successful.In Thiel’s view, monopoly does not mean you should build an evil company that gains a monopolistic position through corruption and exploitation of customers. Rather, he encourages Early Stage companies to build a product that is so much better than its competitors that it has no competition. For example, Thiel believes Google holds a monopoly on the search engine market by virtue of its superior technology. Its competitors, like Bing®, have struggled to succeed despite massive investments.
- Avoid Markets With Perfect Competition – When beginning a startup company, Thiel says it is important to understand the difference between perfect competition and monopoly. Perfect competition is when a company has a product that is essentially the same as another company’s, or several other companies’. In perfect competition, the price is set by the market with various competitors offering about the same product at ever lower prices. With similar product performance, price is the only way to build market share. Monopoly eliminates this type of market-driven price setting. When a company has a monopoly over the market with a product that is nothing like what other companies offer, they can set their price at any level buyers are willing to pay.
- Durability Counts – In Thiel’s view, first mover advantage isn’t everything. You can’t just launch a product based on a small improvement and believe this should be the basis for a company. What you launch has to be a big enough improvement to be industry notable and sustainable — in a word, durable.
- Keep Your Secrets – Companies of value have knowledge of a secret. It is something that is unknown and important as well as difficult but doable. Most people don’t believe valuable secrets exist because they think everything worth finding has already been found. Thiel points out, however, that all advances in technology and social progress were once secrets.
- The telegraph, the telephone, the television, and the combustion engine were once secrets.
- Newton’s Three Laws of Motion were a secret and so was Georges Lemaître’s Big Bang Theory of creationism — until they revealed them.
- The General Theory of Relativity was always there, but it was a secret before Einstein reduced it to practice.
This works in the startup world. For example, it was obvious to entrepreneurs and venture capitalists that a professional networking service, like LinkedIn, should exist. LinkedIn is a network that becomes valuable as more people join the network. So LinkedIn is not particularly useful to the initial group of users. What was not obvious was how to kick-start the network so it could get to a critical mass of one million users. Reid Hoffman, LinkedIn’s founder, had a special distribution plan to meet this goal: He got people to “nominate” their friends. In this way, it can be said that LinkedIn’s distribution and growth plan was its secret. LinkedIn is today a monopoly in the professional networking space.
- Guard Yourself From Your Own Brand – Successful startup companies are run by individuals who are unique and unusual. Entrepreneurs are simultaneously insiders and outsiders. They have drive, self-reliance, patience, high energy, flexibility and focus — as well as the willingness to fail before finding success.
But they also have to protect the business from themselves. A founder must weather an incredible number of changes, and do it with their public persona intact. They have to avoid the tarnishing of the company’s brand because of his or her personal problems. Let’s remember that Steve Jobs, co-founder of Apple, was a genius with lots of personal problems. For example, Jobs had a daughter he refused to acknowledge as his own until she was an adult. This is only one of many erratic behaviors Jobs displayed in his lifetime, behaviors that became public and had impact on Apple, both positive and negative. A successful startup founder will learn a lesson from Jobs’ successes and failures, as well as those of other unique, charismatic founders. Become the type of founder who can be successful both in business and in society.
The net of all this: Thiel’s view of the path to success is based on what has worked for him and the people he has observed. But like everyone, his view is shaped by the color of the lens through which he sees the world. Like the EPA always says about automobile fuel mileage, your experience may be different!
Source: Adapted from Instaread Summaries © 2015