What We Can Learn from PayPal: Start Small and Monopolize

“The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin will not make a search engine. If you are copying these guys, you are not learning from them,” said Peter Thiel

Recently, I have been reading an interesting book, “Zero to One” by Peter Thiel, who is the CEO of PayPal. In his book, he explains many interesting ideas on how to build the future and what startups need to know to succeed in a competitive world.

Start Small and Monopolize

Every startup is small at the beginning. Every monopoly dominates a significant portion of its market. Therefore, startups should start with a small market for a simple reason. It is easier for a startup to control a small market than a big market. However, the small market does not mean nonexistent. In the beginning, PayPal wanted to expand its services in a vast market. PayPal introduced a new way to send and receive money through PalmPilots because it was a new technology back then. However, PalmPilots had millions of scattered users around the world. PalmPilots did not have a concentrated market where customers can use their device on a daily bases. Therefore, PayPal failed the mission to succeed and ended with no customers.

Later, PayPal changed its target by focusing on a smaller marketplace. In late 1999, eBay had few thousands of customers, where PayPal attempted to implement its service in eBay. After three months, 25% of the eBays customers started using PayPal. Then, PayPal realized that it is easier to reach a few thousand people who needed the service than to try to compete for the attention of millions of scattered users.

Scaling Up

Once you create a small market, then you should gradually expand into related markets. The best example to think about is Amazon. It is true that Amazon had a great vision that one day would dominate the entire online market. However, Amazon did not start with its long-term vision. Instead, Amazon deliberately began with selling books online. There were millions of books that was easy for Amazon to sell due to its size and shape to ship. In no time, Amazon became the most significant online bookstore in the world. Once Amazon dominated the book market, then it started expanding to its adjacent markets. The expansion started with the most similar markets: CDs, videos, and software. Gradually, Amazon began adding new categories to its platform until it becomes the world largest online store.

Another example would be eBay, which started dominating small markets. In 1995, eBay launched its auction marketplace. eBay did not start listing sports cars in their platform. Instead, it started with small items until it became the most reliable marketplace for people to sell and buy items. PayPal implemented its service into eBay because the market was quite concentrated. Gradually, PayPal started expanding its market to adjacent markets until it dominated a large portion of the world’s market.

Avoid Disruption

The best example of “disruption” is Silicon Valley. Initially, the word disruption used to describe how firms can use new technology to introduce low-end products that can compete with high-end products. Today, we can see the disruption a lot in the mobile devices market. Regularly, new budget phones are coming to compete with high-end phones. These phones are also called “flagship killers” because it competes with high-end phones at lower prices. This could be dangerous for any startups or companies because disruption means they see themselves through older firm’s eyes. For instance, PayPal could be disruptive. However, PayPal did not try to compete or challenge larger competitors, such as Visa. It is true that PayPal took some business away from Visa, which revolutionized Internet payments. However, PayPal expanded the overall market for payments. Therefore, PayPal gave far more business than they took from Visa. Another lesson we can learn from PayPal is as you plan to expand to adjacent markets, do not disrupt. Avoid disruption as much as possible.

The Last Will Be First

You are probably thinking to be the first mover in the market because you may capture a significant portion of the market share while competitors are seeking to get started. However, you should always remember moving first is a tactic, not a goal. The most important thing is to generate cash flow in the future. Even if you become the first one in the market, there is always a chance for someone else to enter the market to compete you. It is much better to be the last mover so that you make the final significant development in a specific market and enjoy years of monopoly profits. Nevertheless, you should dominate a small market and gradually scale up from there.

“You must study the endgame before everyone else,” said Jose Raul

Thanks for reading! Hope you liked it!