Vertical progress aka 0 to 1 = technology (creating something new)
Horizontal progress aka 1 to n = globalization (taking something already working to new places)
“What important truth do very few people agree with you on?”
“How much of what you know about business is shaped by mistaken reactions to past mistakes?
“What valuable company is nobody building?” Creating value is not enough - a company has to be able to capture that value. I.e. Airlines create a huge amount of value, but only capture a very small amount of it.
Perfect competition (price according to market demand, economic profits not possible) vs monopoly (firm chooses price).
There are only these two binaries of competing. Reality seems different, because both types of firms are forced to lie. Functional monopolies understate their monopoly (present a union of large markets i.e. search engine U mobiles U wearables), while firms in heavy competition, overstate their differentiation (present an intersection of markets i.e. British Food Π Restaurant Π Palo Alto).
Look at every possible type of competitor, not just a “direct” one.
“In business money is either an important thing or it is everything”
Monopolists have the leeway to care about employee welfare and ethics. Firms in heavy competition can only afford to care about the bottom line.
Monopolies are bad in a static world. But in creative monopolies, where new firms can overtake incumbents, companies are forced to innovate to maintain their monopoly. This creates abundance of choice and progress in society. Monopoly is the condition of every successful business.
The more we compete, the less we gain. We get stuck in competition due to its pervasiveness as a concept in our culture. Higher education is the place where people who had big plans in high school get stuck in fierce rivalries with equally smart peers over conventional careers like management consulting and investment banking.
All Rhodes Scholars had a great future in their past.
It’s competition - not business - that is like war.
Shakespeare posits that all combatants look more or less alike. That is a good guide for business, as everyone gets stuck comparing themselves to rivals. Rivalry forces us to focus on old opportunities and copy what has worked in the past.
It seems as if individuals with Asperger’s-like social ineptitude are at an advantage in SV, as they are less susceptible to social cues, and do not try to copy.
Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground; either don’t throw any punches, or strike hard and end it quickly.
Personal honor is destructive in business.
The value of a business today is the sum of it’s future cash-flows, discounted to their present worth. I.e. restaurants might have strong cash flows in the next couple years, but they will dwindle by consumers switching to trendier places. A company must grow and endure, rather than just focus on short-term profits. Repeat customers are important.
Characteristics of a monopoly:
* Proprietary technology that's at least 10x better than the closest substitute, or is something completely new, or 10x better than the existing solution
* Network effects, attracting a critical mass, starting through a small market
* Economics of scale, software startups can achieve dramatic economies of scale because the marginal cost of creating more copies of their product is close to zero. On the contrary, service businesses are hard to achieve any meaningful economy of scale
* Branding, as a strong brand can drive people to consume it - but there has to be substance underneath, branding alone can't do anything
Building a monopoly:
* Start small and monopolize, always err on the side of starting to small - it's easier to reach a few people that really need your product, than capturing dispersed millions
* Scaling up, capture your initial niche first, and slowly start moving to other similar niches, until you have a big market. Sequencing markets is underrated and gradual expansion takes patience
* Don't disrupt, as disruption, even as a term, puts too much focus on competition - don't compete, create
You must study the endgame before anything else. Being a first-mover doesn’t mean anything if after a while someone comes and takes your customers.
Thiel disagrees on the fact that success in startups is based on luck. Jack Dorsey twitted “Success is never accidental”.
Four views of the future:
* Indefinite pessimism - looking towards a bleak future, without any idea what to do about it (i.e. Europe today)
* Definite pessimism - bleak future, but planning for it (i.e. China today)
* Definite optimism - actively planning and working for a better future
* Indefinite optimism - expecting a good future, but not knowing what to do for it (i.e. baby boomers of 1950s, 1960s, they were born in a world constantly developing and economy growing, things came easy to them)
We’re currently stuck in an “indefinite philosophy”, that focuses on process, rather than a specific goal.
Lean-startup is a methodology, not a goal.
Thiel supports definite and careful, long-term planning, rather than keeping options open and indefinite. Founders with indefinite visions sell, but founders with definite concrete goals, tend not to.
Einstein said “compound interest is the 8th wonder of the world”. Never underestimate exponential growth.
Venture returns are not normally distributed, thus diversifying a portfolio of investments, might end up in all of the ventures failing. VCs should focus on the few companies that might outperform all the others.
The biggest secret in venture capital is that the best investment in a successful fund, equals or outperforms the entire rest of the fund combined.
You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
Think based on the power law - a carefully selected path will outperform all others. This is also why joining the very best startup, might be a better way to do something great, rather than creating your own.
Why people are afraid of secrets:
* Incrementalism, where from school and up till academia, we are encouraged to progress incrementally and with small steps
* Our fear of being wrong, risk aversion
* Complacency
* The "flatness" of the world, our perception of a global marketplace makes us doubt that we can think of something new
To say that there are no secrets left today, is to say that there are not injustices and no improvements to be made.
Two types of secrets: secrets of nature, and secrets about people. Ask yourself what is taboo? What are people not allowed to say?
Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know. That’s how the best businesses function - with a secret shielded from the outside world. A company is a conspiracy to change the world.
As a Founder, your first job is to get the first things right, because you cannot build a company on a flawed foundation. This includes selecting the right partners and the right hires.
Founding Matrimony: Choosing a co-founder is like getting married - you need to have a history together.
**Ownership**: who legally owns the company's equity?
**Possession**: who runs the company on a day-to-day basis?
**Control**: who formally governs the company's affairs?
Most conflicts in a startup erupt between ownership and control - founders and board members. Founders might want to stay private and grow the business, while board members might want to go public and get an ROI.
Who you have on your board is important. The ideal size, in terms of effectiveness, is three - though that creates an issue in terms of the board having the capacity to forcefully remove the founder. Max number is five (except if you are a public company)
Either on the bus, or off the bus: Part-time doesn’t work (some exceptions), remote doesn’t work, whoever is not fully invested in your company, will have misaligned interests.
Cash is not king: A CEO shouldn’t earn too much - ideally he would earn less than his employees. Companies that do this, seem to perform better. Too high a compensation to employees, also makes them focus more on the status quo, than betterment of the company.
Vested Interests: By giving out equity to early (and important, later employees) instead of cash. Though never disclose how much each person holds, it’s dangerous and can create resentment.
A company has no culture, a company is a culture.
Working with people you don’t like and on a transactional basis is not rational and it’s a waste of time.
Recruiting is a core competency of a company. It should never be outsourced.
On the outside, it should look as if everyone in your company is different in the same way. In the very beginning, it’s very important to make sure that everyone is as personally similar to each other as possible. Same hobbies, same world-views, etc.
On the inside, everyone should be distinguished by their work. Establishing individual responsibilities, reduces conflict within the company, and helps avoid strife.
Consultants are professional nihilists with no connection to the company or their colleagues at all. Cults are on the other end of the spectrum, but they are fanatically wrong. Startups should be fanatically right, and doesn’t matter if ordinary people believe it or not.
Sales are more important than people think. Even the best product needs to be distributed well.
People overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss, is that it takes hard work to make sales look easy.
Sales and advertising play a role in everything - even cancer research.
If you’ve invented something new, but don’t have a way to sell it - you have a bad business.
Superior sales and distribution can create a monopoly by themselves, even with no product differentiation. That’s not true the other way around.
Two important metrics: Customer Lifetime Value (CLV) = The net profit earned on average during the length of a relationship with a customer; Customer Acquisition Cost (CAC) = The amount spent to acquire a new customer
Sometimes in sales, you need to start small before selling to a bigger client from the get-go.
There is a price-level (i.e. 1000 dollars) where a dead-zone is created. The price level is too low to justify personal sales, and trying to convince SME owners that they need such a service/software.
Marketing and Advertising is good for relatively low-priced products that can have mass appeal.
Viral marketing is when a product’s core functionality invited their friends to become users too.
Getting even one distribution channel to work, can be much more valuable than targeting multiple at once.
A company, apart from its product, also has to sell itself to employees and investors.
Andy Kessler purports that the best way to increase productivity, is to “get rid of people”.
The most valuable businesses of coming decade will be built by entrepreneurs who seek to empower people, rather than make them obsolete.
Globalization (more competition between people) means substitution, technology means complementarity.
Man-machine complementarity can drive the business of the future. I.e. Paypal’s “Igor” that flagged possibly suspicious transactions, and then human analysts would decide on whether these were fraudulent.
Better technology in law, medicine, and education, won’t replace professionals, it will allow them to do even more.
How can computers help humans solve hard problems?
Big data without analysis by a human, is dumb data.
The Seven Questions that every business must answer:
* The Engineering Question (can you create breakthrough technology instead of incremental improvements?)
* The Timing Question (is now the right time to start your particular business?)
* The Monopoly Question (are you starting with a big share of a small market?)
* The People Question (do you have the right team?)
* The Distribution Question (do you have a way to not just create, but deliver your product?)
* The Durability Question (will your market position be defensible 10 and 20 years into the future?)
* The Secret Question (have you identified a unique opportunity that others don't see?)
Entering a slow-moving market can be a good strategy, but only if you have a plan and strategy to take it over.
Huge markets are highly competitive, not highly attainable.
Every entrepreneur should plan to be the last mover in his space. He can do that by asking how will the market look like in 10 and 20 years.
The Founder’s Paradox Founder’s traits tend to follow an inverse normal distribution. Founders can be eccentric. They can be incessant jerks and full of charisma at different times. Famous and infamous. Poor in cash, rich on paper. They are “insiders/outsiders”.
The single greatest danger for a founder is to become so certain of his own myth, that he loses his mind. But an equally insidious danger for any business, is to lose all sense of myth, and mistake disenchantment for wisdom.