Lecture 5, How to Start a Startup: Peter Thiel

Lecture 5, How to Start a Startup: Peter Thiel(startupclass.samaltman.com)

226 points by stasy 11 years ago | 79 comments

This is a question asked to Steve Jobs when he released the iphone: Reporter: "Why in the world would Apple jump into the handset market with so many competitors and players?"

Steve: "One of the biggest motivations for working so hard for a few years to make a great product, is you want one yourself and we use all the handsets out there and boy is it frustrating, it's really frustrating, its a category that needs to be reinvented, needs to be made not only more powerful but much easier to use and so we thought we could contribute something and we don't mind the fact that there's other good companies making products out there. The fact is 1 billion handsets were sold in 2006 & if we get just 1% market share, thats 10million units."

I don't know why but i always remember the guy from pinterest talk, when he spoke about going over a year and just having around 13000 users. I also remember a blog post by someone who actually spoke to him about his idea and didn't like it. How many of todays VC's, incubators & entrepreneurs would stick around for 2yrs to see if an idea will get traction?

Then for some reason i always think about Kevin Rose's milk which had a couple hundred thousand users in just around 3 months and he shut it down. I noticed he has started with the same concept again. Personally i think you cant point a finger at either side as it is hard to stick with a slow growth business and also hard to accept defeat. I think that you just have to be believe so much that your way is the right way and make the world understand that, just the way Steve Jobs did with the iphone in a competitive market.

clairity 11 years ago | |

patience does seem to be in short supply these days, but it's not just a vague belief that should drive the entrepreneur. it's that you see something the rest of the market has overlooked. it's that you think you have a potentially unfair advantage because of what you know, see, and can do (one that keeps you out of a situation like your username, i might add).

there's a fine line between tenacity and stubbornness (the latter of which is not pretty to watch).

melvinmt 11 years ago |

"I'm personally quite skeptical of all the Lean Startup methodology, I think the really great companies did something of a quantum improvement that really differentiated them from everybody else. They typically did not do massive customer surveys. The people who ran these companies would often, not always, have 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. I do think we're way too focused on iteration as a modality and not enough trying to have a virtual ESP link with the public and figuring it out ourselves."

Glad to finally see this confirmed by someone who knows what he's talking about.

Iftheshoefits 11 years ago | |

Almost nobody in this industry has "mild forms of Asperger's." That canard is used far too often, and far too often as an excuse for something much more simple: these people are socially indifferent, to be polite. Some of them are merely socially inept, but others (many? most?) are, to be quite vulgar about it, simply assholes.

serf 11 years ago | | |

>> Almost nobody in this industry has "mild forms of Asperger's."

but you're wrong.

http://archive.wired.com/wired/archive/9.12/aspergers_pr.htm...

http://blog.codinghorror.com/software-developers-and-asperge...

(not that I put much faith in Gawker..) http://gawker.com/5885196/the-tech-industrys-asperger-proble...

http://www.nature.com/news/2011/111102/full/479025a.html

applecore 11 years ago | | |

That's, like, not even the fourth most point of that quote.

jdimov 11 years ago | | |

What's wrong with being an asshole? The fact that you can't handle it is your problem, not the asshole's. An asshole is simply someone who won't allow themselves to be swayed by anyone else's ignorant opinions.

DanielBMarkham 11 years ago | |

Yeah but it's bloviating. Here's why: at some point you have to check to see if what you're doing is actually taking you somewhere. Sure, maybe you use magic rocks or a psychic telephone hotline to get your vision -- his "we focus too much on incremental" point may be spot-on -- but at some point you gotta have an OODA loop. You gotta stop and take measure of what the heck is going on.

So perhaps he could have gone somewhere interesting with this, it ended up as a rhetorical drive-by shooting.

Having said all of that, the man knows a zillion times more stuff than I do. I'm simply pointing out that this quote is so woefully incomplete as to be sophistry.

staunch 11 years ago |

Companies like Facebook and Google are definitely not the last companies in their markets. Being in a monopoly position does not grant you magic protection from competitors. It probably even hurts more than it helps in the long term. Google and Facebook have not radically innovated since their inceptions. Google is still essentially a better AltaVista/Hotmail and Facebook is still essentially a better MySpace. And yet changes every day in the world make radically new approaches possible.

Zuckerberg did not pay $1 billion for Instagram and then $19 billion for WhatsApp because he wanted to. He did it because he believed they had a shot at replacing Facebook (and so did they).

Even Apple had to fight for its position with smart phones, which it practically invented. If Apple hadn't poured resources into keeping iPhone ahead of Android it would be absolutely dead today. Their monopoly began expiring the day it came into existence.

You either acquire and kill the competition or innovate and beat them in the market. Either way your monopoly doesn't protect you.

jonalmeida 11 years ago |

I think Peter is mistaken as to why science goes about inventing things with little financial gain. There are some people that don't want money (who would have thought?), but find more value in the research. It's fair to say that on the other hand, there are those who also want some sort of financial gain, so there should be a way for them to go about this.

> "If people at Twitter make billions of dollars, it must be that Twitter is worth far more than what Einstein did."

Do people actually follow this thinking? Can someone give a better example of how this supposedly works?

levlandau 11 years ago |

I agree with the overall sentiment expressed in Thiel's monopoly theory. However, it seems like the whole problem is defining the market in the first place. We can define search, ecommerce and payments as part of larger markets and/or as fields which had many startups "competing" with each other. The ultimate winner ended up being a startup which was "10X" better on some dimension and thus blew past its "competition". The fact that successful startups start with a small niche seems orthogonal to whether or not "competitors" exist or whether the true market size is large. Even with this realization, it's not always obvious whether something is "10X" better than the existing alternatives. This is especially true when you aren't building something that can be easily measured along some dimension like speed e.g. a social network. Knowing that a network with real identity is 10X better than myspace is something that seems obvious in hindsight but would probably have been hard to justify to critics as enough of a difference to classify it as a startup that wasn't "competing" with Myspace, hi5 etc. dhouston is also on the record for saying VCs kept reminding him that there were thousands of "sharing and sync" startups when he decided to make Dropbox. Making a product that "just worked" was enough to render all "competition" irrelevant for years.

So what are we are left with? I think Thiel's advice boils down to:--> Do something that you have a strong intuition is >= 10X the existing alternatives. There is always competition because you cannot invent a new need and people are fulfilling their needs with something. However you can make the competition completely irrelevant by doing something so good that it is practically new and you'd do better not to go about your day to day with competition as your driving force.

jeffreyrogers 11 years ago |

Since Thiel talks a lot about "monopoly theory" it's probably worth reading some of the people who've been talking about this for longer than Thiel's been in business (i.e. before the late 1980s). The two most prominent are Michael Porter and Warren Buffett. Buffett's annual letters to shareholders make excellent reading, and the book Understanding Michael Porter is a very good summary of Porter's thoughts.

saosebastiao 11 years ago | |

This "theory" has been around for well over a century. It is just a rewording of a very mature understanding of product positioning and competitive advantage. It is nothing more than a nuanced understanding of Marketing 101.

geoffbrown2014 11 years ago |

One minor point of clarification on airline profitability. It wasn't competition that bankrupt them it was government regulation. Airlines were heavily regulated for many years and their ticket prices were set by regulators. Huge incentives were created for executives to not invest in fuel efficient new planes and capital equipment. When labor union contracts exploded with benefits and deregulation came, the legacy airlines could not compete with the new arrivals.

Technically speaking several airlines have remained profitable for many years without going bankrupt. Southwest comes to mind with a 40+ year profitability streak. Even if they went bankrupt now I would consider them a financial success.

I find him an engaging speaker and I'm not even refuting his point, but perhaps a better choice of industries would make his point clearer.

tim333 11 years ago | |

>several airlines have remained profitable

Thiel's point is that the industry as a whole in not especially profitable if at all. This has been true in most countries where there is free competition. In a competitive market you would expect the best companies to to make money and the least good to lose it or go bust.

Here's some Buffett quoteing on the matter:

>Back in ’95 in an interview with UNC TV, Buffett pointed out that the airline business in the U.S. “has made no money.”

>Thanks to Wilbur and Orville Wright and their adventures on the Outer Banks, North Carolina is known as “first in flight.” But Buffett didn’t let that history stop him from making a sarcastic remark about investors’ attitude toward the Wrights.

>“If there had been a capitalist down there, the guy would have shot down Wilbur,” Buffett said. “One small step for mankind, and one huge step for capitalism.”

He was joking or course. Interestingly Buffett has returned to aviation but with a business that is what Thiel would call a monopoly - Netjets. They have the vast majority of the fractional private jet rental business.

geoffbrown2014 11 years ago | | |

For airlines it must have been hard to capture much of the x value they created when someone else was in control of their y. ;)

I think computer hardware (especially memory or hard drives) would be a better historical industry to point to for incredible value created and precious little retained due to a hyper competitive market.

ThomPete 11 years ago | |

I am always reminded of Branson being asked about how to become a millionaire to which he replied "You start as a billionaire and then buy an airline"

I think Theils point was that even those airlines that do survive makes no profit.

tomasien 11 years ago |

"Monopolies are good for the businesses that have them" is so ridiculously axiomatic I wish he would just stop making it the focus of his talk. We know this, and we know VC's get drastically bigger returns on those. The reasons we don't like Monopolies (if you're a person who doesn't like them) isn't because they're bad for those businesses or the market cap of those markets, but because they're bad for consumers and the economy as a whole.

Thiel's IMPORTANT point is that small monopolies lead to bigger ones and you can not start by going after a big monopoly. That is his point that is not only spot on but really, really important and actionable.

aytekin 11 years ago | |

"they're bad for consumers and the economy as a whole."

I read the book. He argues monopolies are good for consumers and economy as well. When companies have so much returns that they don't know what to do with it, the good ones will invest the money in R&D which in return is good for everyone.

tomasien 11 years ago | | |

I was careful to say "if you're a person who believes monopolies are bad" - it's ancillary to my point whether they actually are.

increment_i 11 years ago |

I've noticed a refreshing contrast between Thiel and Graham's lectures concerning startups and what you typically read or see on Amazon's best seller 'Startups' category. It's nice to hear giants in this field basically tell you, "Go do something you think is cool or important, and do it much better than anyone else is even capable of doing." It's obvious of course, but it's a point that gets buried and needs to be resurrected every so often.

jonalmeida 11 years ago |

Notes: http://jonalmeida.com/posts/2014/10/07/htsas-lec05/

betadreamer 11 years ago |

I enjoyed the lecture, but I somewhat disagree with the scientist statement about how Y is close to 0. I think X is the one that is 0 because when the scientist makes an invention the market is so new that there is no market yet. Within this low market the Y value will be high because that is the only thing that exist in it.

Am I the only one who thinks this way? or am i misunderstanding his statement. It could just be a different side of the same coin.

graycat 11 years ago | |

Maybe Thiel was trying to keep the arguments simple. Basically you are correct. Thiel's example of Uncle Albert is not so good: Einstein long had all the money he wanted and, then, what he really wanted, free time to pursue research in physics.

Yes, Einstein seemed not interested in making $1 billion.

But, let's see: What about Steinmetz, electrical engineering, and GE? What about A. Viterbi and Qualcomm? What about the inventors of RSA, that is, Rivest, Shmmir, and Adleman? What about the researcher founders of some small research oriented pharmaceutical companies? Then there is research mathematician James Simons who used something between his ears to make ~$12 billion or so.

And there's R. Bixby, long a prof at Rice, lone a leading researcher in mathematical programming, at one time Editor in Chief of Mathematical Programming, and creator of CPLEX, now owned by IBM. The story goes that Bixby has a relatively nice house in Houston.

And I would differ with Thiel on the Wright brothers. They sold copies of their first successful flyer to all who wanted to get into aviation on the ground floor. And there was Curtiss Wright that was still a viable airplane engine builder in WWII. There was a lot of progress, call it research and/or engineering, in aircraft engines from Kitty Hawk to WWII.

Oh, I almost forgot: Edison who was definitely interested in money.

Sometimes the researchers do not much want to get paid a lot, but sometimes they do and do.

staunch 11 years ago | | |

Or what about the computer scientist Lawrence Page? He managed to extract some value from his contributions. This argument of Thiel's is only correct if you regard any scientist who makes money as a non-scientist.

james1071 11 years ago | | |

Those guys did not invent RSA.

lhh 11 years ago | |

When a scientist makes a new breakthrough that adds a lot of value to society, X by definition is large (X = value created). "Value" doesn't necessarily need to be monetary, it could be lives saved or some other metric, though eventually I think most big breakthroughs do become monetizable in some form, and his point is that the inventing scientist generally captures very little of that X.

theFish 11 years ago |

As a restaurant consultant I feel somewhat obliged to defend my industry. I am familiar with Russian market, but I think that fundamentally US and EU are not that different. The problem with Peter's arguments is that, while being mathematically accurate, they do not represent the real picture. Restaurants are actually pretty awesome business if you treat them like one. It's just that 95% of restaurateurs don't. But those 5% who do do pretty well. What I do for a living is help people with the transition - I help them establish metrics, collect data, make data-driven decisions e.t.c. As painful as these changes are, they are also very fruitful, and once treated like a proper business almost any restaurant can become succesful, having nice margins and turning profit.

fillskills 11 years ago |

Very eye opening. Personally this was the best of the series so far for me. Helped solve a lot of questions in my mind about why certain companies succeed (Instagram, Snapchat, Facebook, Tesla etc). Serve your niche well - is a often repeated quote, Peter just brought the idea to a higher level by answering the Why.

One thing he might be missing on is the idea of lean startups. Its my opinion that Lean Startups does not mean build and release crappy products, but to validate your market and market-fit your product before you spend years building a product. Just helps you improve your product faster (or ditch it) using market's help.

zan2434 11 years ago | |

Interesting, but what were the niches for those companies you mentioned? Instagram, Snapchat, Tesla - namely

fillskills 11 years ago | | |

Tesla - Started with electric cars only for rich and tech savvy people Instagram - Instead of doing everything related to photos, they focused only on Filtering - which at that point was considered a very niche market Snapchat - Started for teenagers to send disappearing pics to each other. Again not a huge/world changing sector

jlukanta 11 years ago |

Interesting point about market size. If it's true that companies often lie to themselves about their market, what can they do to identify their real market? Is there an objective measure or is it purely subjective?

james1071 11 years ago | |

The market is what you are selling and close substitutes to it.

A close substitute is something that someone would buy instead of your product.

toomim 11 years ago |

Thiel's Einstein example was wrong:

    "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
    billionnaire; you don't even get to be a millionaire."

Actually, Einstein WAS a millionaire. His net worth was around $1 million. http://www.celebritynetworth.com/richest-businessmen/richest...

coryl 11 years ago | |

1) That's a terrible source for data.

2) Being worth $1m is still terrible for having done everything he did.

jmngomes 11 years ago | | |

If we only pursued endeavors that produce money, our civilization's development would be centuries behind and our life would be (more) miserable. Fortunately, not everyone is motivated (just) by money and power.

jeffreyrogers 11 years ago | | |

Worth noting that $1mm in the 40s and 50s is much more in 2014 dollars.

aprdm 11 years ago |

Very good lecture! So.. basically, start small and try to turn into a monopoly

johan_larson 11 years ago | |

Maintaining a monopoly, or even just a dominant share of a market, requires what Warren Buffet likes to call a "moat", some crucial advantage that makes it difficult to compete with you.

http://www.investopedia.com/ask/answers/05/economicmoat.asp

jaoued 11 years ago |

"Competition is for losers": may be when it's competition based on price i.e. being the cheapest but definitely not competition based on being unique and creating value - and I don't mean only financial value as Peter Thiel seems always to refer to. That reminds me the Blue Ocean Strategy book by Kim and Mauborgne. http://en.wikipedia.org/wiki/Blue_Ocean_Strategy : How to Create Uncontested Market Space and Make the Competition Irrelevant

cossatot 11 years ago |

One interesting thing is really considering whether X and Y really are independent. Much of the software world has taken the position that if Y is too big, X will stay small. This is why open-source exists, basically. So there is a dependence, at least in some markets. In other cases, having a large Y gives the creators the resources to make X much bigger.

For those who would like their work to positively impact the world, and not starve to death in the process, it's something that needs to be considered: how high of a Y is workable in the given environment?

rajensanghvi 11 years ago |

His depth and insight into the industry is fascinating. Here are 32 Peter Thiel quotes from the lecture that I took note of - https://medium.com/how-to-start-a-startup/32-quotes-from-pet...

caster_cp 11 years ago |

Peter Thiel's advice about monopoly is hugely similar to the point Porter makes in his first book, Competitive Strategy. On the first chapter of his book, Porter clearly states that a business located in an industry with strong competitive forces will have lower margins. He even uses the airline industry example on his HBR article, in the 80's (actually, I'm not sure if it is in his first article, or the one from 2008 in which he revisits the topic 20 years later. Either way, is an old idea in the business world) It is, in a way, a very old idea in the business world. The value of Thiel's way of stating it (very, very boldly and controversially) is that it makes people in the startup world actually listen to it. And that's a very good thing The only problem I see, on the other hand, is the unnecessary bashing of economists. Economists, normally, analyse a market from the point of view of the "public interest". With this perspective in mind, self-perpetuating monopolies are almost always a bad thing (unless you believe in such things as centralized planning and dictatorships).

graycat 11 years ago | |

> Economists, normally, analyse a market from the point of view of the "public interest". With this perspective in mind, self-perpetuating monopolies are almost always a bad thing (unless you believe in such things as centralized planning and dictatorships).

Okay, but the more famous economists are usually at the more famous universities which tend to have large endowments and tend to want to get high returns and often do this by investing in VCs who look for monopolies that can return money enough to pay for the professors of economics!

Actually, whatever gets taught or suggested in the classrooms, it's both common and easy enough for the high end universities to look for and like students who are wealthy or relatively likely to become wealthy and make significant donations back to the university -- no joke. Or, universities are not against monopolies everywhere on campus!

enraged_camel 11 years ago | |

>>Economists, normally, analyse a market from the point of view of the "public interest". With this perspective in mind, self-perpetuating monopolies are almost always a bad thing (unless you believe in such things as centralized planning and dictatorships).

Yes. The full saying is, "competition is good... for the customer." It almost always results in reduced prices and better service. It's obviously never good for businesses, since they have to work harder to win and retain customers.

howradical 11 years ago |

Timestamped notes: https://timelined.com/how-to-start-a-startup/lecture-5-how-t...

porter 11 years ago |

"85% of the value is from cash flows very far into the future. One of the thing we always overvalue in silicon valley is growth rates, and we undervalue durability.”

Startups != growth.

dsugarman 11 years ago |

SV seems to overvalue growth rates and undervalues durability.

This is because early investors have, presumably, already cashed out by the time durability is in question

graycat 11 years ago |

There was a lot good in Thiel's lecture.

One point he made at the end was good: Look for things that are new. Indeed, venture capital very much needs what is quite exceptional at least in exit value but also in whatever the heck it is, likely new, that leads to that value.

But it seems to me that in the quest for work that is now, powerful, and valuable, Thiel is overlooking something both big and important and, actually, close to where he lives in SV: He is overlooking some of the crucial aspects of how SV became important, i.e., got there.

And what was that? Sure, US national security via decades of high spending on electronics for aerospace, yes, in SV.

I do agree with Thiel that it is better if a founder has a really good idea for a startup and has this without "get out of the building" feedback from customers responding to agile developments.

Okay, here's something big, solidly in the background of SV, that Thiel didn't emphasize: Suppose a founder thinks of a big problem, that is, a big need.

Next, he wants a good solution: So, he wants, say, the first good or a much better solution to the big problem. And with that solution he wants a monopoly. Good.

Now, how to get that solution? Well, SV long showed an important way -- research. And the researchers do not necessarily have to settle for Thiel's Y = 0%.

So, for US national security we have a long list of fantastic solutions, from research, heavily done in SV, for really challenging problems. Point: Such work can be done. That is, when want a really good solution to a big problem, in the case of US national security, research in SV has a terrific track record.

Yes, some of that research was expensive, but not all research is! A lot of the best research is one guy with paper and pencil. E.g., did Thiel mention Einstein?

But, wait, there's more! Now SV likes computing, that is, exploiting Moore's law. And Thiel said he liked software. Okay, it's about information. And for techniques to take in available data, manipulate it, and put out valuable information? Sure, and may I have the envelope, please (drum roll): Right, and the winner is applied mathematics, commonly done with paper and pencil, by one guy. Then convert to software and proceed! For US national security, SV did a lot of that.

Well, then, since such work can be done, do such work on commercial problems. That way, get such good technology and have a monopoly, the first good or a much better solution, much better technology, etc. I didn't hear Thiel explain the promise of this approach and thought that he should have.

ph0rque 11 years ago |

I wonder what Peter Thiel's take is on the role of open source in building a monopoly?

lawsohard 11 years ago |

full transcript! http://tech.genius.com/Peter-thiel-lecture-5-business-strate...

ekm2 11 years ago |

Does anyone have a transcript of this lecture?

andygcook 11 years ago | |

I don't know where you can find a direct transcript, but almost all of the lecture is derived from Zero to One. It's a fascinating book and definitely worth reading.