Peter Thiel: A guide to building a successful business
I don’t even know where to start. After watching hours of content and reading dozens of articles, compiling a list of significant lessons I learned was almost impossible! Almost. It’s just that Peter Thiel has been so… out there.
For the last week, I have studied Peter. Reading one article after another and watching video after video, I could not stop. But now, I am about to tell you about some of the valuable insights that I found sifting through hours of content. I hope you learn something!
Aim for a monopoly and avoid competition.
Anti-complacency
As I watched his content, one specific mindset that I noticed he prominently practiced was being anti-complacent. One thing that I noticed from his interviews is that Peter constantly practices not thinking like everybody else and making sure that he is not satisfied with just an answer. He strives to grow and never accept things the way they are.
Throughout his entire book titled “Zero to One”, Peter writes about some of his main takeaways from practicing and perfecting this newfound anti-complacency mindset.
🔑 Complacency — Being satisfied with the way things are right now. Being complacent results in stagnancy.
In fact, in order to test an employee’s level of complacency, Peter asks most of the interviewees the same question. He asks people to “tell [me] something that is true that almost nobody agrees with you on”. Answering this question was the basis of his book which allowed him to further explore the significant lessons he learned in life and while building PayPal.
This question tests a person’s ability to be anti-complacent and in a sense examines how much a person is willing to grow.
Being mindful about not being complacent allowed Peter to analytically extract “secrets” from the world that other people may not have been able to identify. The following is one of those secrets and another significant takeaway from Peter.
Monopoly > Competition
When you think Peter Thiel, you think “Competition is for Losers”. By the way, this was by far one of the most popular quotes that I read almost everywhere. This is a popular quote as it describes one of the biggest takeaways that anyone will learn from Peter, monopoly is better than competition.
Before we continue, here is some more guidance from Peter to consider while building a business:
- You have a valuable business if it creates some value in the economy and it captures some percent of that value;
- You always want to start a company with a small target market; and
- Google is one of the BEST examples of a successful company that people should follow.
The best way to understand these ideas is by asking a vital question to develop a business.
Do we capture a big piece of a small pie or a small piece in a big pie?
The way that Peter makes this easier to understand is using a comparison between Google and all the United States airline carriers combined.
The domestic carrier market has a lot more competitors in the transportation market compared to the competitors for Google in the search engine space. Peter shows the difference between the profit margins given an almost perfect competition with the carrier company compared to a monopoly with Google.
When you look at these companies’ ability to make a profit, you will quickly notice that Google’s margin is 100 times more than the United States airline carriers. This is because monopolies have more pricing power and can generally yield a higher profit margin compared to competitive markets.
Some other pros of having a monopoly include having the incentive to innovate, being stable, long-term, have deeper project financing, and is symptomatic of creation.
Therefore, generally having a monopoly — aka. a big piece of a small pie — builds a more successful business than having a perfect competition — aka. a small piece of a big pie.
How businesses lie
Even though being a monopoly may turn out to make more financial sense and may make a more successful business, monopolies often lie about the actual nature of the industry that they are in. Often monopolies act like they are in a more competitive market than they are in order to run away from government regulations.
Opposingly, business markets that are generally perfectly competitive try to show investors that they are more of a monopoly than they really are in order to make their product, service, or company look more unique. Showing a narrow market a lot of the time can show a greater dominance in space for investors and make investors more inclined to invest in a business with higher market penetration.
Often, companies like Google who have a 66% monopoly in their search industry begin to branch out into much bigger industries, in this case, advertising. Once the government begins slapping Google with regulations, Google can quickly pivot to show how small of a role they play in a much larger market.
Downplaying their monopoly by growing into other sectors allows them to further minimize any chance of government regulations. In this new more wide market, Google only has 3.4% market penetration in the global advertising market.
Develop new companies with a narrow market.
But how do you do it? How do you make a monopoly? Well, Peter also gave some advice on that!
One of the main pieces of advice that Peter gives for new companies or companies trying to make a successful business is starting small and monopolizing smaller markets. Despite popular opinions in business school about having a large market to have a high valuation, that is not the way Peter thinks that businesses should grow. A business should identify a small market first and have a monopoly over that small group and then slowly expand in concentric circles until the company has grown to its maximum potential.
A mini case study example of this strategy working is Facebook. In just 10 days, Facebook identified and captured 60% of their target market. They identified a small group of students in Harvard of almost 10,000 people and quickly captured almost 6,000 of them. And now, years later, they have finally grown into a successful global social network company.
🔑 High market penetration in short bursts of time is a lot more valuable for businesses short term rather than targeting a larger market.
This is what business school is doing wrong. Peter expressed some of his opinions on how a business school would approach this analysis: The problem is that companies are told that they have low value if they identify smaller target markets because most of the time people are unable to properly value smaller market penetration.
The problem with cleantech and how they screwed up creating a business.
Many cleantech companies based in California just about 12 years ago were unsuccessful because they were unable to identify a specific market.
Even in the beginning, they started by targeting the energy market which was a hundred billion or trillion-dollar industry. From that point, everything began to fall apart partly due to their inability to properly market and create the right competition for themselves.
By targeting such a large market where other companies also have the potential to compete, the cleantech companies dug their own grave by joining an already competitive market which was growing at an unbelievable rate. At some point, it must have even become difficult to identify their competition.
In the wise words of Peter Thiel,
“A world of perfect competition is a world where all the capital is competed away”.
All happy companies are different because they are doing something unique and all unhappy companies are the same because they are unable to escape the sameness that is competition.
Unlike globalization, technological advancement is not something that should be replicated or copied. In some way, replicating or copying Facebook to create a new social media site means you are not learning from it.
“Every moment in business happens only once. The next Bill Gates will not start an operating system. The next Larry Page won’t make a search engine. And the next Mark Zuckerberg con’t create a social network. If you are copying these guys, you aren’t learning from them.”
As Peter likes to say, “Globalization is copying things that work… going 1 to n” where China is a paradigm example. Unlike globalization, “technology requires intensive progress and doing new things… going Zero to One” where any unique or innovative company is a paradigm example.
One characteristic of a monopoly is having some proprietary thing that is an order of magnitude better than the status quo.
When you are trying to create a business, how do you know it is a successful monopoly? This is a question you should constantly ask yourself while building a company which is how a successful business is built.
Consider Paypal, for example. When they first got into the e-payment industry, they completely disrupted the way that online payments worked. Creating their proprietary technology was orders of magnitudes better than what was currently available for the online payment industry.
Their technology to connect online payment strategies with credit and debit cards made them the forerunner in the payments industry and left them at a comfortable monopoly at the time.
In the e-commerce industry, one company dominated the entire payment processing market for small American businesses, PayPal. Processing over 5 billion transitions annually, it was difficult for any other business to go online and find another payment processor at a time. PayPal had already acquired such a large market share so quickly and controlled the market as a monopoly which meant that all new companies were forced to use PayPal.
According to members of the PayPal mafia, the company spent 60 to 70 million dollars in a year on email and friend referrals alone. At one point, they were just handing out $20 for just setting up an account. Despite losing millions of dollars, this resulted in a massive growth rate… like 10% per day and just after a year of this crazy marketing campaign, PayPal achieved the market monopoly that Peter was hoping for.
Achieving economies of scale.
Another significant characteristic of a monopoly. Making sure that that there are high fixed costs and low marginal costs is another way to make your business more profitable and most importantly usually signifies a monopoly.
In more understandable terms, this means that the one time costs are relatively high and the cost to continue selling a service or product is low and may even decrease with increased demand. This is generally the case with software companies and allows for faster scaling.
Generally, thousands or even millions of dollars are spent on developing software as a one time cost and there is no extra cost to actually sell the product. This is why many software companies are also monopolies like Google because it is very easy for them to continue distributing their technology at low costs. This means that they can continue being highly profitable while developing more and more technology.
Thank you so much for reading my article. These are just some of the things that I have learned over the past week as I have been looking into and researching Peter Thiel. I definitely recommend taking a deeper look into what he has accomplished and read his book for a deeper insight into most of these ideas.
I hope you learned something new from this article and I hope you take even just an hour to read up on this entrepreneur or watch some of his content. If you really enjoyed reading this post follow me on LinkedIn and hit this article with some claps 👏! Thanks for reading.
