Competition is for Losers with Peter Thiel (How to Start a Startup 2014: 5)

all right good afternoon today's speaker is Peter Thiel Peter was the founder of PayPal and Palantir and founders funds and is invested in most of the tech companies in Silicon Valley and he's going to talk about strategy and competition thank you for coming here awesome thanks Sam thanks for inviting me thanks for for having me I I sort of have a I have a single-day Beeks that I'm completely obsessed with in on the business side which is that if you're starting a company if you're the founder entrepreneurs starting a company you always want to aim for monopoly and and that and you want to always avoid competition and so hence competition is for losers something we'll be talking about today I'd like to I'd like to start by saying something about the the basic idea of when you start one of these companies how you go about creating value and this is this question what makes a business valuable and I want to suggest that there's basically a very simple very simple formula that you you have a valuable company two things are true number one that it creates X dollars a value for the world and number two that you capture Y percent of X and and the critical thing that that I think people always miss in the sort of analysis is that x and y are completely independent variables and so X can be very big Y can be very small X can be of intermediate size and if Y is reasonably you big you can still get a very big business so to create a valuable company you have to basically both create something of value and capture some fraction of the value of what you've created and sort of just to just to illustrate this is a as a contrast there's if you sort of compare the US airline industry with a company like Google on search if you sort of measured by the size of these industries you could you could say that airlines are still more important than search if you just measure it say by revenues there's 195 billion in domestic revenues in 2000 2012 Google had just north of 50 billion and this and so and certainly sort of on some intuitive level if you said you were given a choice and said well do you want to get rid of air all air travel or do you want to get rid of your ability to use search engines the intuition would be that air travel is something that's more important than search this is a course of just the domestic numbers you looked at this globally airlines are much much bigger than um then then then searcher than Google is but but the profit margins are quite a bit less you know they were marginally profitable in 2012 I think the entire hundred year history of the airline industry the cumulative profits in the US have been approximately zero no companies make money they episodically go bankrupt they get recapitalized and you sort of cycle and repeat and this is reflected in you know the the combined market capitalization of the of the airline industries maybe something of the US airline industry something like a quarter that of Google so so you have you have a search engine much much smaller than than air travel but much more valuable I think this reflects these very different valuations on x and y so you know if we look at perfect competition you know there are sort of there's some pros and cons to the world of perfect competition on a high level it's always this is what you study an econ one it's always it's easy to model which i think is why econ professors like talking about perfect competition on it somehow is efficient especially in a world where things are static because you have all the consumer surplus gets captured by everybody and and politically it's what what we're what we're told is good in our society that you want to have competition and this is somehow a good thing of course there are a lot of negatives it's it's generally not that good if you're you're you're involved in anything that's hyper competitive because you often don't make money I'll come back to this a little bit later so so I think at one end spectrum you have industries that are perfectly competitive and at the other end of the spectrum you have things that I would say are monopolies and and they're you know they're much stable longer-term businesses you have more capital and and if you get a creative monopoly for inventing something new I think it's symptomatic of having created something something really valuable and so I do think this you know the the sort of the the extreme binary view of the world I I always articulate is that there are exactly two kinds of businesses in this world there are businesses that are perfectly competitive and there are businesses that are monopolies and there's shockingly little that is in between and this dichotomy is not understood very well because people are constantly lying about the nature of the businesses they're in and this is why this is in my mind this is the most important it's not necessarily the most important thing in business but I think it's the most important business idea that people don't understand that there are just these two kinds of businesses and so let me say a little bit about the lies that people tell and so you basically on the basic if you sort of imagine that there was a spectrum of companies from perfect competition to monopoly the the apparent differences are quite small because the people who have monopolies pretend not to they will basically say you know and it's because you don't want to get regulated by the government you don't want the government to come after you so you will never say that you have monopoly so anyone who has a monopoly will pretend that they're in incredible competition and on the other end of the spectrum if you are incredibly competitive and if you're in some sort of business where you will never make any money you will be tempted to tell a lie that goes in the other direction where you will say that you're doing something unique that is somehow less competitive than it looks because because you want it you will want to differentiate you want to try to attract capital or something like that so if the monopolist pretend not to have monopolies the Naumann Oppel is pretend to have monopolies the apparent difference is very small whereas the real difference I would submit is is actually quite baguette so there's this distortion that happens because of the lies people tell about their businesses and the lies are sort of in these these opposite direction let me let me drill a little bit down further on the the way these lies work and so you know the the the basic lie you tell as a non monopolies is that we're in a very small market the basic law you tells the monopolies is that the market you're in is much bigger than it looks and so and so typically if you want to think this in sort of set theoretic terms you could say that a monopoly tells a lie where you describe your business as the union of these vastly different markets and the anon monopolist describes it as the intersection so that in effect if you're if you're non monopolist you will rhetorically describe your market as super small you're the only person in that market if you have monopoly you will describe it as super big and and there's lots of competition in it so some examples of how this how this works in practice so I always use restaurants as the example of a terrible business there's always that you know sort of my idea is that you know capitalism and competition are antonyms capitals someone accumulates capital world of perfect competition is a world where all the capital gets competed away so you're opening a restaurant business no one wants to invest because you just lose money so you have to tell some idiosyncratic narrative and you will say something like well we're the only British food restaurant in Palo Alto so it's British Palo Alto and and of course that's too small a market because people may be able to drive all the way to Mountain View or even Menlo Park and there probably are no people who eat nothing but British food at least no people are still alive and so so that is um that's that's a sort of a fictitiously narrow market there's there's sort of a Hollywood version of this where the way movies always get pitched is you know okay it's like a college football star you know joins an elite group of hackers to to catch the shark that killed his friend sorry and so that's now that is a movie that has not yet been made but but but the question is is is that the right category or is the correct category it's just another movie in which case you know there are lots of those it's super competitive incredibly hard to make money no one ever makes money in Hollywood doing movies or it's really really hard and so you always have this question about does the intersection does it is it real does it make sense does it have value that one should ask and of course there are startup versions of this where you and the sort of the bat really bad versions you just take a whole series of buzz word sharing mobile social apps you combine them and you have some kind of narrative and whether or not that's a real business or not is is a is it's generally a bad sign so it's almost this pattern recognition when you have this rhetoric of this sort of intersections it generally does not work the something of somewhere is really mostly just the nothing of nowhere and it's like the Stanford of North Dakota one of a kind but it's not Stanford so let's look at the opposite the opposite lie is if you are let's say the the search company that's down the street from here and has about a happy 66 percent market share and is you know it's completely dominant in the search market google has not just almost never describes itself as a search engine these days um and instead it it describes itself in all these different ways so it sometimes says it's an advertising company so if it was searched and say wow that's it's like it's it has this huge market share that's really really crazy so it's like a incredible monopoly it's much bigger than its much a much more robust monopoly than Microsoft ever had in the 90s maybe that's why it's making so much money but if you if you say it's an advertising market you could say well there's search advertising is 17 billion and that part of online advertising which is much bigger and then you know all US advertising is bigger and then by the time you get to global advertising that's close to 500 billion and so you're talking about three and a half percent so a tiny part of of this much larger market or if you don't want to be an advertising company you can always say that you're a technology company and so sorry and so the and and so and and the technology market is something like a one trillion dollar market and the narrative that you tell is Google in the in the technology market is well we're competing with all the car companies with our self-driving cars we're competing with Apple on TVs and iPhones we're competing with Facebook we're competing with Microsoft on on office products we're competing with Amazon on cloud services and so we are in this giant technology market where there's competition in every direction you you look and no we're not the monopoly the government's looking for and we should not get regulated in any way whatsoever and so I think one has to always be super aware that there are these these very powerful incentives to to distort the nature of these markets one way or the other so um you know the the evidence of narrow markets in the in the tech industry is is if you basically just if you look at sort of the some of the big tech companies Apple Google Microsoft Amazon they just um they've just been building up cash for year after year and you have these incredibly high profit margins and I would I would say that the that one of the reasons the tech industry in the US has been has been so successful financially is because it's it's prone to creating all these monopolies like businesses and that's that's and it's reflected by the fact that these companies just accumulate so much cash they don't even know what what to do with it beyond a certain point and so so let me say let me say a few things about about how to how to build a monopoly and I think I think the one of the sort of very counterintuitive ideas that comes out of this monopoly thread is that you want to go after small markets if you're a startup you know you want to get to monopoly you starting a new company you want to get to monopolies monopolies you have a large share of a market how do you get to a large share of a market you start with a really small market and you take over that whole market and then and then over time you find ways to expand that market in in concentric circles and the thing that's always a big mistake is going after a giant market on day one because that's typically evidence that that you somehow haven't define the categories correctly that the and it's it normally means that there's going to be too much competition in one way or another and so I think almost all the successful companies in Silicon Valley had some model of starting with small markets and expanding and you know if you take Amazon you start with you start with you know just a book store we have all the books in the world so it's it's a it's a it's a better book store than anybody else has in the world when it starts in the 90s it's online there's things you can do you can't do before and then you gradually expand into all sorts of different forms of e-commerce and other things beyond that you know eBay you start with Pez dispensers you move on to beanie babies and eventually it's it's all these different auctions for all these sorts of different goods and and what was very counterintuitive about what's very counterintuitive about many of these companies is they often start with markets that are so small that people don't think they don't think that they're valuable at all when when you get started the the PayPal version of this was was when we started with with power sellers on eBay which was about 20,000 people when we first saw this happening in December of 99 January 2000 right after we launched there was a sense that that these were all it was such a small market it was terrible we thought these were terrible customers to have it's just people selling junk on the Internet why in the world do we want to be going after this market but but you know you there was a way to get a product that was much better for everybody in that market you could and we got to something like 25-30 percent you know market penetration in two or three months and you got some walk in you got brand recognition and you're able to to build the business from there so um so I always think these on these these very small markets are quite underrated the Facebook version of this I always give is that if the initial market at Facebook was ten thousand people at Harvard it went from zero to sixty percent market share in ten days that was a very auspicious start on the way this gets analyzed in business schools is always that's ridiculous as such a small market it can't have any value at all and so I think the Business School analysis of Facebook early on or of PayPal early on or of eBay early on is that the markets were perhaps so small as to have almost no value and they would have had little value had they stayed small but it turned out there were ways to them grow them concentric Li and that's what made them that's what made them so valuable now I think the opposite version of this is always where you have super big markets and and I there's so much so many different things that went wrong with all the clean tech companies in the last decade but but one one theme that ran through almost all of them was they all started with massive markets and every clean tech PowerPoint presentation that one saw in the years 2005 to 2008 which is sort of the clean tech bubble and in Silicon Valley started with we're in the energy market we're in a market that's measured in hundreds of billions or trillions of dollars and and then you know once you're sort of a a minnow in a vast ocean that's not a good place to be that means you have tons of competitors and you don't even know who all the competitors are and so you want to be you know you want to be a one of a kind company where it's the only one in a small ecosystem you don't want to be the fourth online pet food company you don't want to be the tenth thin film solar panel company you don't want to be the hundredth restaurant in palo alto new restaurant industries a trillion-dollar industry so if you do a market size analysis you conclude restaurants are a fantastic business to go into and it's often large markets large existing markets typically mean that you have tons of competition very very hard to to differentiate so the first very counterintuitive into idea is is to go after small markets often markets that are so small people don't even notice them they don't think they make sense that's where you got to put hold and then and then if those markets are able to expand you can scale into a big monopolies business you know it's um a second sort of there's sort of several different characteristics of these monopolies businesses that I like to focus on and there's probably no no sort of single formula to it now I always think that that in technology there's always a sense that you know the history of technology such that every every moment happens only once and so you know the next Mark Zuckerberg won't build a social network the next the next Larry Page won't be building a search engine the next Bill Gates when we're building an operating system and if you're copying these people you're not learning from them but it's it's and so there is always these very unique businesses that are doing something that's not been done before end up end up having the potential to be a monopoly if you're you know the opening the opening line in Anna Karenina is that all happy companies sorry all happy families all happy families are alike all unhappy families are unhappy in their own special way and the opposite is true in business where I think all happy companies are different because they're doing something very unique all unhappy companies are alike because they fail to escape the essential sameness that is competition and so so one one sort of characteristic of a monopoly technology company is some sort of proprietary technology my sort of krei a somewhat arbitrary rule of thumb is you want to have a technology that's an order of magnitude better than the next best thing so Amazon had over 10 times as many books and it's maybe not that high-tech but you figure out a way to sell 10 times as many books in an efficient online way you know PayPal the alternative for PayPal was using was using cheques to send money on eBay took 7 to 10 days to clear PayPal could do it more than 10 times as fast so you want to have some sort of very very powerful improvement in some in some order maybe an order of magnitude improvement on some key dimension of course you know if you if you actually come with something totally new it's it's just it's just like an infinite improvement so I would say the the iPhone was the first smartphone that worked and so that's you know that's like maybe not infinite but it's sort of definitely an order of magnitude or more of an improvement so I think the the technology is designed to give you a massive Delta over over the next the next best thing I think I think there often are Network effects that can kick in that really help the thing that's very and these these leaked monopolies over time the thing that's very tricky about network effects is they're often they're often very hard to get started and so so even though everyone understands how valuable they are there's always this incredibly tricky question why is it valuable to the first person who's doing something economies of scale if you have something that with very high fixed costs very low marginal costs that's typically a monopoly like business and then then there's this thing of branding which is sort of like just this idea that gets lodged in people's brains I ever quite understand how branding works so I never invest in companies with just about branding but it is I think a real phenomenon that that creates a that creates real value I think one of the things I'm gonna come back to this a little bit towards the end but one thing that's very striking is that software businesses are often are for some reason very good at some of these things they're especially good at the economies of part because the marginal cost of software is zero and so if you get something that works in software it's often significantly better than the existing solution and then you have these tremendous economies of scale and you can scale fairly quickly so even if the markets start small you can grow your business quickly enough to stay on stay at the same size as the growing market and and maintain the sort of monopoly power now the critical thing about these monopolies is is it's not enough to have a monopoly for just a moment the critical thing is to have one that lasts over time and so you know in Silicon Valley is always the sort of idea that you want to be the first mover and I always think it's it's in some ways the better framing is you want to be the last mover you want to be the last company in a category those are the ones that are really valuable Microsoft was the last operating system at least for many decades Google is the last search engine Facebook will be valuable if it turns out to be the last social networking site and and one way to one way to think of this last mover value is this idea that most of the value in these companies exists far in the future if you do sort of a discounted cash flow analysis of a business you look at you have sort of all these profit streams you have a growth rate the growth rates much higher than the discount rate and so most of the value exists far in the future I did I did this exercise at PayPal in March of 2001 we've been in business for about 27 months and and we sort of had you know the growth rate was a hundred percent a year we were discounting future cash flows by about 30 percent and it turned out that about three quarters of the value of the business as of 2001 came from cash flows in years 2011 and Beyond and and whenever you do the math on any of these tech companies you get an answer that's something like that so if you are trying to analyze any of the tech companies in Silicon Valley Airbnb Twitter Facebook on any emerging internet companies all the ones in Y Combinator the math tells you that three-quarters eighty 85% of the value is coming from cash flows in years 2024 and beyond it's very very far in the future and and so one of the things that we always overvalue in Silicon Valley is growth rates and we undervalue durability because a growth is something you can measure in the here and now and you can always track that very precisely the question of whether a company's still going to be around a decade from now that's actually what what dominates the value equation and that sort of is a much more qualitative sort of a thing and so if we if we went back to this idea of these characteristics of Monopoly proprietary technology network effects economies of scale you can think of these these characteristics as ones that exist at a moment in time where you capture market and take it over but you also want to think about are these things going to last over time and so there's a time dimension to all these characteristics so network effects often have a great time element where as the network scales the network effects actually get more robust and so if you have a network effect business that's often one that can become a bigger and stronger monopoly over time proprietary technology is always a little bit of a tricky one so you want something it's order of magnitude better than the state-of-the-art in the world today and that's how you get people's attention that's how you initially break through but then you don't want to be superseded by somebody else and so there are all these areas of innovation where there was tremendous innovation but no one made any money so you know describe manufacturing in the 1980s you couldn't you could do it better just build a better describe than anybody else you could take over the whole world and two years later someone else would come along and replace yours and in the course of 15 years you got vastly improved disk drives so we had great benefit to consumers but it didn't actually help the people who started these companies and so there's always this question about having a huge breakthrough in technology but then also being able to say explain why yours will be the last breakthrough or at least the last breakthrough for a long time or will you make a breakthrough and then you can keep improving on it at a quick enough pace that no one can ever catch up so if you have a structure of a structure of the future where there's a lot of innovation and other people will come up with new things in the thing you're working on that's great for society it's it's actually not that good for your business typically and then economies of scale where I talked about so so I think anyway so I think this last mover thing is very critical I'm always tempted you know that I don't want to overdo the chess analogies but you know the first mover in chess is someone who plays white white is about a 1/3 of a pawn advantage so there's a small advantage to going first you want to be the last mover who wins the game and so as the kappa blanka world champion a chess champion cattle blanco line you must begin by studying the endgame and and I do think that's why I wouldn't say it's the only thing you should study I think this uh the sort of perspective of asking these questions why will this still be the leading company 10 15 20 years from now is a is a really critical one to try to think through let me um let me sort of I want to sort of going to slightly other directions with this monopoly versus competition idea and I think so I think this is the the central idea in my mind for business for starting business for thinking about them and and there are some very interesting perspectives I think it gives on the whole you know on the whole history of innovation and technology and science because you know we've lived through we've lived through you know 250 300 years of incredible technological progress in you know many many different domains you know steam engine - railways to telephones refrigeration household appliances you know the computer revolution aviation all sorts of different areas of technological innovation and then there's sort of analogous thing that one can say about science where we've lived through centuries of enormous amounts of innovation in in in science as well and and the the thing that I think people always miss when they think about these things is is that because x and y are independent variables some of these things can be extremely valuable innovations but the people who invent them who come up with them do not get rewarded for this and and certainly if you go back to UM you need to create X dollars in value you capture Y percent of X I would suggest that the history of science has generally been one where Y is zero percent across the board the scientists never make any money they're always deluded into thinking that they live in a just universe that will reward them for their work and for their inventions and this is probably the fundamental delusion that the scientists tend to suffer from in our in our society and and even in technology there are sort of many different areas of Technology where where there were great innovations that create a tremendous value for society but but people did not did not actually capture that much of the of the value and so I think there is a sort of whole history of science and technology that can be told from the perspective of how much value was actually captured and and certainly to our entire sectors where people didn't capture anything so you you're the smartest physicist of the 20th century you come up with special relativity you come up with general relativity you don't get to be a billionaire you don't even get to be a millionaire it just it just somehow doesn't work that way the railroads incredibly valuable most them just went bankrupt because it was too much competition right brothers you fly the first plane you don't make any money and so I think there is sort of a structure to these industries that's that's very important and I think the thing that's actually rare are the success cases most so it's actually you really think about the history in this in this 250 year sweep it's on you why is almost always zero percent it's always zero in science it's almost always in technology and so it's very rare where people made money you know the early uh the late 18th early 19th century the first Industrial Revolution was the textile mills at the steam engine he sort of automated things and you had these relentless improvements that people improved efficiency of textile factories of manufacturing generally at a clip of 5 to 7 percent every year year after year decade after decade you had 60 70 years of tremendous improvement from 1780 to 1850 but even in 1850 most of the wealth in Britain was still held by the landed aristocracy the workers didn't you know the workers didn't make that much the capitalists didn't make that much either it was all competed away there were hundreds of people running textile factories it was an industry that just the structure of the competition prevented people from from making any money and so I think there are in my mind there probably are only two broad categories in the entire history of the last 250 years where people have actually come up with new things and made money doing so one is these sort of vertically integrated complex monopolies which people did build in the Second Industrial Revolution at the end of the 19th and started the 20th century and so this is like Ford it was the vertically integrated oil companies like Standard Oil and what these are vertically integrated monopolies typically required was this very complex coordination you got a lot of pieces to fit together in just the right way when you assembled it you had a tremendous advantage this is actually done surprisingly little today and so I think this is sort of a Business Forum that when people can pull it off is very valuable it's typically fairly capital intensive we live sort of an in a in a culture where it's very hard to get people to buy into anything that's super complicated and takes very long to build but I you know when I sort of think about my colleague Elon Musk from PayPal success with Tesla and SpaceX I think the key to these companies was the complex vertically integrated monopoly structure they had so if you sort of look at Tesla or SpaceX I guess you know was there sort of a single breakthrough and they certainly innovated on a lot of dimensions I don't think there was a single 10x breakthrough and battery storage or you know they may be working on some things in rocketry but they hadn't there was no sort of single massive breakthrough but what was really impressive was integrating all these pieces together and and doing it in a way that was more vertically integrated than most of their competitors so Tesla you also integrated the card distributors so they wouldn't steal all the money as has happened with the rest of the car industry in the US or SpaceX you basically pulled in all the subcontractors where most of the large aerospace companies have single source subcontractors that are able to sort of charge monopoly profits and make it very hard for the integrated aerospace companies to make money and so vertical integration I think is sort of a very under explored modality of technological progress that people would would do well to look at more and then I think there is there is something about software itself that's very very powerful software has these incredible economies of scale these low marginal costs and there is something about the world of bits as opposed the world of atoms where you can often get very fast adoption and and the fast adoption is critical to capturing and taking over markets because even if you have a small market if the adoption rate is too slow there'll be enough time for other people to enter that market and compete with you whereas if you have a small to mid-size market and have a fast adoption rate you cannot take over this market and so and so I think this is one of the reasons Silicon Valley has done so well and why a software has been of this phenomenal industry and what I what I would suggest what I would want to leave you with is there are sir these different rationalizations people give for why certain things work and why certain things don't work and I think these rationalizations always obscure this question of I'm creating X dollars in value and capturing Y percent of X so the science rationalization were always told is that the scientists aren't interested in making money they're doing it for charitable reasons and that you're not a good scientist if you're motivated by money and I'm not even saying people should always be motivated by money or something like this but I think we should we should be a little bit were critical of this as a rationalization we should ask is this a rationalization to obscure the fact that y equals 0% and the scientists are operating in this in this sort of world where all the all the innovation is effectively competed away and they can't capture any of it directly and then the the software distortion that often happens is because people are making such a vast fortunes and software we infer that this is the most valuable thing in the world being done full-stop and so if people at Twitter make billions of dollars it must be the Twitter is worth far more than anything Einstein did and and and what that sort of rationalization tends to obscure is again that x and y are independent variables and there are these businesses where you capture a lot of X and there are others where you don't and so and so I do think I do think the history of innovation has been this this history where the the microeconomics the structure of these industries has mattered a tremendous amount and when on and and and and there is sort of this this story where some people made vast fortunes because they were in industries with the right structure and other people made nothing at all because because they were in these sort of very competitive things and we shouldn't just rationalize that away I think it's worth understanding this better and then finally let me come back to this this this sort of overarching theme for this talk this competition is for losers idea which is always this provocative way to to title things because we always think of the losers as the people who are not good at competing we think of the losers as the people who are slow on the sports on the track team in high school or who do a little bit less well on the standardized tests and don't get into the right schools and so we always think of losers as people who can't compete and I want us to really rethink and and revalue this and consider whether it's possible that competition itself is off that we'd sort of it's not just the case we don't understand this monopoly competition dichotomy intellectually so the sort been talking about why why you wouldn't understand it intellectually because some people lie about it it's distorted with all these the history of innovation rationalizes what's happened in all these very very strange ways but I think it's more than just an intellectual blind-spot I think it's also a psychological blind spot where we find ourselves and very very attracted to competition in one form or another we find it reassuring if other people do things the word a poor reading the time of Shakespeare meant both primate and imitate and there is something about human nature that's deeply mimetic imitative ape like sheep like lemming like curd like and it's this very very problematic thing that we need to always think through and try to overcome and and there is always this question about competition as a form of validation where we we go for things that lots of other people are going for and it's not that there is wisdom and crowds it's not when lots of people are trying to do something that that's proof of it being valuable I think it's when lots of people are trying to do something that is often that is often proof of insanity there twenty thousand people a year who moved to Los Angeles to become movie stars about twenty of them make it I think the Olympics are a little bit better because you have a you know you can sort of figure out pretty quickly whether you're good or not so there's a little bit less of a deadweight loss to society you know you know you're you're the sort of educational experience at a place the the priest Stanford educational experience there's always sort of a non-competitive characterization I think most of the people in this room had machine guns they were competing with people with bows and arrows so it wasn't exactly a parallel competition when you were in junior high school in high school there's always a question does the tournament make sense as you keep going and this is uh and so there is always this question if people go on to grad school or post postdoctoral education does the intensity the competition really make sense there's the the you know classic Henry Kissinger line that describing his fellow faculty at Harvard that the the battles were so ferocious because the stakes were so small describing sort of academia and and and you sort of think on one level this is a description insanity you know why would people fight like crazy when the stakes are so small but it's also I think simply a function of the logic of the situation when it's important to differentiate yourself from other people when the differences are when the objective differences really are small then you have to compete ferociously to maintain a difference of one sort or another that's often more imaginary than real there's always sort of a personal version of this that I tell where I was sort of hyper hyper tracked I in my eighth grade junior high school yearbook when my friends wrote in you know I know you'll get into Stanford in four years as a sophomore I started winning just going to Stanford four years later at the end of high school went to Stanford Law School you know ended up at a big law firm in New York where from the outside everybody wanted to get in on the inside everybody wanted to leave and and you had and it was this very strange dynamic where after I sort of realized this was maybe not the best idea and I left after seven months and three days you know one of the people down the hall from me told me it's really reassuring to see you leave Peter I had no idea that it was possible to escape from Alcatraz which of course all you had to do was go out the front door and not come back but but so much of people's identities got wrapped up in in winning these competitions that they somehow lost sight of what was important what was valuable you know competition does make you better at whatever it is that you're competing on because when you're competing you're comparing yourself with the people around you you're figuring out how do I beat the people next to me how do I do somewhat better at whatever it is they're doing and you will get better at that thing I'm not I'm not questioning that I'm not denying that but but it often comes at this tremendous price that you stopped asking some bigger questions about what's truly important and truly valuable and so I would I would say that don't always go through the tiny little door that everyone's trying to rush through maybe go around the corner and go through the vast gate that no one's taking thank you very much this is time for John take a few questions Oh yep people want to take I'll take a few questions with few minutes time yeah well I'd say the question I'm I always try to focus on is what is the actual market so not what's the narrative of the market because you always tell a fictional story about a market that's much bigger or much smaller but what is the what is the real objective market so it's always yeah you always try to figure it out and you realize people have incentives to powerfully distort these things yeah well they have they have Network effects with the yeah Network they had proprietary technology that gave them the initial lead because they had the the PageRank algorithm which was sort of an order of magnitude better than any other search search engine you have economies of scale because of the need to store you know all these different sites and at this point you have brands so Google has all four maybe maybe the proprietary technology somewhat weaker at this point but definitely it had all four and maybe three and a half out of four now yeah that's this sort of a set of companies that are doing different copycat payment systems on on mobile phones or square there's PayPal sort of they have they're just they just have sort of different shapes that's how they differentiate themselves one is trying that one is a square and so you know maybe at some point the Apes weren't out of shapes or something like that but um but I think um no Palantir we started with focus on the intelligence community's small sub market you had a proprietary technology that used a very very different approach where it was focused on the human computer synthesis rather than the substitution which is I think is the dominant paradigm so there's a whole set of things I would say on the on the market approach and the UH the proprietary technology yes yes design thinking methodology and startup thinking which is used to mitigate risk by not creating things that people don't want but young innovators complex systems yeah so the question is what I think about lean startups iterative thinking where you get feedback from people versus a complexity that may not work so I I am personally quite skeptical of all the Lean Startup methodology I think the the really great companies did something was sort of somewhat more of a quantum improvement that really differentiated them from everybody else they did they typically did not do massive you know customer surveys the people who ran these companies sometimes now always suffer from mild forms of Asperger's so they were not actually that influenced not that easily deterred by what other people thought or told them to do so I do think we're we're way too focused on iteration as a modality and not enough on trying to have you know a virtual ESP link with the public and figuring it out ourselves I would say that let me see um I would say that the I'm not quite the risk question I think is always a very tricky one because there are you know they're it's it's not it's often I think it's often the case that you don't have enough time to really mitigate risk if you if you're gonna take enough time to figure out what people want you often will have missed the boat by then and and then of course there's always the risk of doing something that's that's not that significant or meaningful so you know you could say a track and in law school is a low risk track from one perspective it may still be a very high risk track in the sense that maybe you not have a high risk of not doing something meaningful with your life so we have to think about risk in these uh in these very complicated way I think risk is for this very complicated concept yes advantage but then design by there's really common you um yeah so there's always this terminology things I would I would say that there are there are categories in which people sort of are bundled together I would say the monopoly businesses were in effect they really were a big first mover in some sense you could say you could say Google was not the first search engine there were other search engines before but on one dimension they were dramatically better than everybody else so they were the first one with PageRank with sort of a automated approach Facebook was not the first social networking site my friend Reid Hoffman started one in 1997 they called it social net so they already had the name social networking in the name of their company seven years before Facebook their idea was that it was going to be this virtual cyberspace where I'd be a dog and you'd be a cat we'd have all these different rules about how we'd interact with each other in this virtual alternate reality Facebook was the first one to get real identity so it was so I'd say I hope this will be the last social networking site it was the first one in a very important dimension people often would not think of it as the first because they sort of lump all these things together okay one more question let's take one here you know I don't I don't have a I don't have a great I'm not great at the psychotherapy stuff so I don't I don't quite know how to I don't quite know how to how to solve this that there are these um you know there are these very odd studies they've done on people who go to business school there's one they've done at Harvard Business School where it's sort of the anti Asperger personality we have people are super extroverted generally have low convictions few ideas and you have sort of a hothouse environment you put all these people in for two years and at the end of it they systematically end up the largest cohort systematically ends up doing the wrong thing they try to catch the last wave you know 1989 everyone Harvard try work for Mike Milken it was one or two years before he went to jail for all the junk bond stuff they were never interested in Silicon Valley or tech except for 99 2000 when they timed the dot-com bubble peaking perfectly they did and then you know five 2:07 was housing private equity stuff like this so so I do think um I do think this tendency for us to see competition is validation is is very deep I don't think there's some any sort of easy psychological formula to to avoid it so I don't I don't quite know how to what sort of therapy to recommend but but my my my first my first starting point which is only like it's maybe 10% of the way is to never underestimate how big a problem it is we always think this is something that afflicts other people so it's easy for me to point to people in business schools or people at Harvard or people on Wall Street I think it actually does afflict all of us to a very profound degree we always think of advertising is things that work on other people how core all these stupid people who fall for all those ads on TV they obviously work to some extent and they work to disturbing us down on all of us and it's something we we all should work to overcome thank you very much you you

Channel: Y Combinator

Views: 948,919

Rating: 4.9097934 out of 5

Keywords: YC, Y Combinator, Startup, Lecture, Stanford, Class, Sam Altman, How to start a startup, startup school, peter thiel, advice

Id: 3Fx5Q8xGU8k

Length: 50min 27sec (3027 seconds)

Published: Wed Mar 22 2017

Reddit Comments

[u/GoldPitch]

A couple applications of the Thiel philosophy to public equities that come to mind:

1) Paul Andreola on Tobias Carlise's podcast: "The best places are obscure little, almost niche markets where there’s no industry. It’s so new it doesn’t have an industry."

2) Amazon ($AMZN) creating AWS, basically creating a new business line (cloud computing)

I'm sure there's plenty of others, would be happy to hear what you all come up with!