As part of my (attempted) daily workout regimen, I’ve been listening to the Tim Ferriss show on Spotify for a productive burst of entrepreneurial motivation while I exercise. I’ve sorted the episodes chronologically and have been listening through them from episode one, so I’m still going through the 2014 interviews at present.
One of the earlier episodes (episode 28) featured Peter Thiel who is most widely known as one of the co-founders of PayPal and, more recently, Palantir. As someone who has only recently developed an interest in the tech industry and started learning to code, I didn’t actually know of him before this podcast. Given his background as a law grad turned tech startup founder, it was fascinating to hear his takes on topics such as technology’s role in the future, investing and education.
Thiel gave some thoughtful responses, but my top takeaway quote from the interview was:
“You don’t have to wait to start something. If you’re planning to do something with your life – if you have a ten year plan of how to get there – you should ask, ‘why can’t you do this in six months?'”Peter Thiel (The Tim Ferriss Show – Episode 28)
This is the sort of statement you might expect to hear from a motivational speaker intended to stir excitement in an audience of aspiring entrepreneurs, yet here it is made by Thiel without emotion. Given his level of experience in the tech field, I was surprised that this fairly idealistic statement was presented almost as a matter of fact.
I like to set goals and deadlines for achieving them, but hearing this from Thiel made me question whether the timescales I was setting to complete those goals were too long. For example, in my last post where I’m discussing my New Years’ resolution progress I have identified several completely different goals, yet I have arbitrarily set the same 12 month deadline for each. When you have goals with such long time horizons, it’s very easy to slip into the mindset that “I can skip practice/writing/learning this one time – I have 11 months to make it up“.
This brings to mind Parkinson’s Law:
“Work expands so as to fill the time available for its completion.”Parkinson, Cyril Northcote (19 November 1955). “Parkinson’s Law”. The Economist. London (and copied from Wikipedia’s page on parkinson’s law)
As Thiel suggests, perhaps the better option for goal setting is to decide on what a reasonable timescale for meeting a certain goal might be and then reducing that by 70, 80 or even 90%. I think there may be something to this, so I will be reconsidering the 12 month time allowance I’d previously allotted for my New Years’ resolutions as a little experiment to see whether this actually expedites their completion. There may be a post on this in the near future.
Anyhow, that’s the backstory to how I heard about this book. After reaching the end of the Tim Ferriss interview with Thiel, I proceeded to download his audiobook, Zero to One, on Audible.
Based on Zero to One’s subtitle, “Notes on Startups or How to Build the Future”, you might expect that the book would be a step by step tutorial on starting a tech company. However, the book’s purpose is less a tutorial and more an analysis of the attributes shared by those exceptional startups which have grown to the point of being above all competition.
In simple terms, Thiel’s argument for what will be a successful startup is a company which will become a monopoly. He uses monopoly here in the positive sense – not a company that has achieved and maintained its position through corruption or the bullying of its competitors, but one that overlaps its competitors repeatedly through innovation and ingenuity (amongst other reasons explored below).
Thiel cites the airline industry as an example on the opposite end of the spectrum – where fierce competition is rife. Although at the time of writing this industry generated far more revenue than, for example, Google, the level of competition between the airlines resulted in their profit margin being dwarfed by comparison to the tech company. In 2012 for example, Thiel states that Google’s profit margin was more than 100 times the airline industry’s profit margin that year.
This is perhaps one of the reasons why highly competitive industries with low barriers for entry are so prone to failure e.g. the restaurant sector. Where there is only a minor or small differentiation in the product or service offered with little to no opportunity for innovating your way ahead of your competitors, increased supply will drive prices down and ultimately eliminate all profits. Only once some of the competitors fold will prices be able to return to sustainable levels for those that remain.
“Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.”Peter Thiel, Zero to One (2014)
Thiel’s warning not to build an undifferentiated commodity business reminds me of Mary Buffett’s explanation of Warren Buffett’s system for separating the mediocre business from the exceptional in her book Buffettology:
“To facilitate his thinking, Warren divided the business world into two separate categories:
1. The basic commodity-type business, which he found consistently produced inferior results
2. The excellent business, which possesses what Warren calls a consumer monopoly“Mary Buffett, Buffettology (1997)
Although I’m not likely to be founding a tech company any time soon, I think these comments on the superiority of innovation over duplication are worth remembering for my own entrepreneurial pursuits for side-income. It’s very easy to read about others’ successes, fixate on replicating what they did and forget to think for yourself.
However, the position of a company as a monopoly is not cited by Thiel as being an evergreen situation. With progress and innovation, better monopoly businesses replace existing monopolies, so there is no time to rest on your laurels even if you are ahead. Thiel gives the timeline of IBM, Microsoft and Apple as an example.
“In the real world, outside economic theory, every business is successful exactly to the extent that it does something others cannot.”PETER THIEL, ZERO TO ONE (2014)
What is interesting about Thiel’s own story is that the company he originally co-founded, Confinity Inc, did have a direct rival in its early days – Elon Musk’s X.com. Rather than continue with destructive competition in trying to outdo one another, the two companies decided to eradicate the competition by merging on 50:50 terms. The newly merged company changed its name to Paypal.
There are four characteristics which Thiel states startups must have a combination of in order to stand a chance of becoming monopolies far into the future:
- Proprietary technology. The startup needs to have the intellectual property rights to technology which is an order of magnitude greater than any competitors and which are difficult or impossible to replicate (e.g. Google’s search algorithms);
- Network effects. The startup needs to grow organically through the universal adoption of its product/service (e.g. Facebook, Whatsapp, Zoom etc.);
- Economies of scale. The startup’s fixed costs must be capable of being spread out over an ever increasing quantity of sales. Software companies are at a particular advantage as the marginal cost of producing another copy of their product as sales increase is close to zero. On the other hand, service businesses can only serve a certain number of customers and are more difficult to make monopolies. More employees can be hired and more offices can be bought or leased, but margins will remain fairly low as costs keep pace with the increasing customer base.
- Branding. Not only marketing, but also product design, events and the perception of the startup’s product or services are key to building a brand with substance. Apple is given as the example, with its focus on minimalist design, superiority in both its software and hardware and clean advertising campaigns to name but a few examples (which have all been subject to subsequent imitation by its competitors).
Thiel’s explanation for why exceptional companies become monopolies is interesting, but when he is citing examples like Apple and Facebook, it can feel a little out of reach listening to this as an individual. However, when he moves on to discuss how to go about building a successful startup, the principles seem much more actionable for the individual entrepreneur.
The first step he puts forward is to target your audience:
“Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one.”PETER THIEL, ZERO TO ONE (2014)
Paypal’s target market in 1999 was the few thousand power sellers on eBay, whose alternative up until that point had been to wait for their buyers’ cheques to clear. As Thiel states, it was much easier to reach these few thousand people than compete for the attention of millions of scattered individuals.
eBay also started out in a similar manner, with one of its first monopolised groups being beanie baby collectors and other esoteric interest groups.
Once you have succeeded in your niche market, gradual scaling can then be implemented. Amazon is cited as the example in this regard (not a particularly relatable example, but a good one none the less). They started out selling books and after making a success of this, they gradually ventured into CDs, videos and software until finally becoming the world’s general store.
Next, do not adopt the role of disruptor:
“Don’t disrupt. Avoid competition as much as possible.”PETER THIEL, ZERO TO ONE (2014)
This rule appears to follow on from the warning about entering into heavily saturated and undifferentiated industries. If you will be entering into the same sector as established incumbents but you know that your product/service is an order of magnitude greater than those competitors, it shouldn’t be necessary to adopt a belligerent attitude.
Finally, for those concerned that they are too late to the party to bring anything new to the table, Thiel states that there is an advantage to being the last to move:
“It’s much better to be the last mover. That is, to make the last great development in a specific market and enjoy years, or even decades or monopoly profits.”PETER THIEL, ZERO TO ONE (2014)
This isn’t used as an example by Thiel, but the supplanting of MySpace by Facebook comes to mind. Even companies which are seemingly untouchable monopolies are vulnerable to losing their crown if they become complacent and fail to innovate in the face of a hungry up and comer.
I’ve only touched upon a small part of the book here, but I think that even though Thiel is exceptional in his entrepreneurial success and gives exceptional examples throughout, the advice offered can still be applied to more everyday entrepreneurial endeavours.
My overall takeaway from Zero to One is to focus your efforts on being innovative and not to get discouraged by the thought that everything has already been done. Certain sectors will inevitably be saturated (whether you’re a prospective tech startup or just thinking about starting an online side business), but if you narrow down your target area you may just find that market where you can confidently provide much more value than is currently on offer.