Peter Thiel is the founder of PayPal, Palantier, and various investment funds including a hedge fund and a venture capital firm. He’s a self proclaimed contrarian thinker who looks at the business world from a very original and logical frame of reference. Because of this there are many opinions and observations made by Thiel that may be difficult to find elsewhere. I am very interested in Peter and have been studying his content for a while. Here are a few of the business lessons that I’ve absorbed while studying Thiel.
Build a Monopoly
Thiel argues that the most successful tech companies are monopolies in disguise. He commonly uses Google as an example of this. Google monopolizes search, but they tout themselves as a tech company in fierce competition with other massive tech companies. This is true for some of their products such as self driving cars (Uber, Detroit, Tesla) and cloud computing (AWS, Azure), but their core product that built the company is search. Google has 90% of the search engine market share worldwide. Hard to argue that isn’t a monopoly. There are countless other examples including Microsoft and IBM.¹
In contrast to this, companies who are entering a fiercely competitive market frequently go the opposite direction and present themselves as a monopoly. For example, a restaurant touting themselves as the only British restaurant in the greater Seattle area. They attempt to propagate the idea that they might be able to monopolize a market (the British restaurant market) when in reality they are entering the fiercely competitive restaurant business. This leads to Thiel’s observation that, “If the monopolists pretend not to have monopolies & the non-monopolists pretend to have monopolies, the apparent difference is very small”.²
People tend to make no money in the restaurant business because all the profits are competed away. Companies that monopolize their market can be massively profitable because of the lack of competition. Hence the largest and most successful tech companies are monopolies. This is a fundamentally contrarian outlook on business. Do what everyone else is not.
When starting a company it is ideal to monopolize a small market initially. For example, Facebook started with Harvard, PayPal started with power sellers on eBay, Tesla started with high end electric sports cars, etc. After you’ve acquired a good percentage of market share in the small market look to expand that market.
A Company Generates x Dollars of Value and Captures y% of that, x and y are Independent Variables
In other words, it is possible to generate a ton of value, but not capture any of it. Conversely it is possible to generate a reasonable amount of value and capture a large percentage of it. Thiel uses scientists as an example for the first case. They can generate massive amounts of value with discoveries, but they usually capture a small percentage of that value. For example, Einstein’s discoveries provide an incalculable amount of value, but he captured a very small percentage of that value.
Airlines are another example of this. If you could choose between having a search engine or having airlines you would probably choose airlines. Revenue reflects this. The combined revenue of the four largest airlines in the United States is 142.37B compared to Google’s 31.15B.³ Therefore, x (dollars of value generated) for airlines is higher than that for search. Despite this, Google’s market cap (805.40B) is almost 8x the market cap of the four largest airlines in America combined (108.95B).⁴ Therefore, the value that you capture (y) is significantly more important than the value that you generate (x). In order to capture more value (increase y) avoid competition and seek to monopolize.⁵
Don’t be the First, be the Last
There were many search engines before Google, but Google was the last. So how do you “be the last”? Thiel argues that if you can create something that is an order of magnitude (10x) improvement from what currently exists, you should be able to beat the competition (I’ve heard Musk say the same). Additionally, it is helpful to have a secret your competitors don’t have. Google’s PageRank algorithm was their secret. It was an order of magnitude better than the algorithms of the other search engines at the time. Google came out on top and is basically the last search engine.
Failure is Overrated
In the startup community today failure is frequently celebrated as a way to learn new things and grow as a person. I agree with this, and I have learned greatly from my failures, but at the same time I hear where Thiel is coming from. I would have rather succeeded every time I failed. Failure can be very demoralizing and can slow you down in many ways. An example of this from my own life is when I was searching for my first job as a software engineer. I had a couple interviews with great companies early on that I didn’t end up getting offers from. Yes, I learned a lot from participating in the interview process with those companies, but I was also very demoralized and depressed by the failure/rejection. My life would have probably been better had I not experienced those failures. That being said, I think it’s very important not to fear failure, and structuring your outlook on failure as a good thing might help you overcome that fear.
- Regarding government intervention in business Thiel mentions that the government is usually late to the party. For example, the government filed its antitrust case against Microsoft in 2001 for allegedly monopolizing operating systems and web browsers. In 2001 most people’s focus had already shifted to the internet, not operating systems. He has a similar argument for the IBM intervention. This is an interesting insight into Thiel’s libertarian origins.
- In order to avoid the trap of thinking that you are monopolizing a market when you are really entering a competitive market, founders must do their best to accurately determine the actual market they are entering.
- Revenue of four largest airlines in America: 41.24B (Delta) + 21.17B (Southwest) + 37.74B (United) + 42.21B (American) = 142.37B
- Market cap of four largest airlines in America: 38.44B (Delta) + 29.89B (Southwest) + 20.22B (United) + 20.4B (American) = 108.95B
- Whether this is good for the consumer is another argument entirely.