Tag: Startups

A few weeks ago, for work related reasons, I had to bone up on Venture Capital. One of the books I read was Thiel’s “Zero to One.”

Recently, Thiel has become even more famous for bankrolling the lawsuit that put Gawker out of business and for his support of Trump. He’s a libertarian gay man.

Before this, Thiel was most famous for being one of the founders of Paypal, of Palantir (the “information” company), and for being one of the early investors in Facebook, which made him about a billion dollars.

He’s also a very smart man, and his book, which is about startups, is worth reading, even if you don’t agree with all of his politics or ideas.

Zero to One is based on the idea that there is doing more of the same (normal business), and there is creating something new. When you create a new way of doing things, that’s going from zero to one. Doing more of the same is additive, new stuff is what really grows the economy.

(This is, interestingly, exactly the same beat that Jane Jacobs tackled in “The Economy of Cities”, which I’ll be reviewing soon. Her answer was more fundamental than Thiel’s, and more important, but Thiel says things worth reading.)

Thiel thinks the key to creating something new is knowing something is true that most people think is not true.

Having a secret. You can use that secret, whether it is a scientific fact or a social one, to do something other people aren’t doing. Elon Musk’s secret at Tesla was to start with luxury cars, and use the demand of wealthy people to drive down market.

But Thiel’s big secret is one that is known to a lot of successful business people, but denied piously by most.

If you want to get stinking rich, if you want to create an important company, it helps to be a monopolist (or oligopolist). In a lot of markets, there’s one or a few big winners, and they take all the money. Google in search (and thus online ads), Microsoft in OS’s back in the 90s, Paypal in sending money online, Steam in online game distribution.

Opolies (a new word I just made up) make money hand over fist.

Thiel goes on a bit of a run here, trying to justify monopolies and oligopolies as good for society, noting that only rich companies can treat their employees and customers well; everyone else cuts wages and costs into the ground.

According to Thiel, opolies are good if they can be superseded, and if they exist because their product is genuinely better.

He then uses the example of Microsoft, which undermines his entire argument. Microsoft’s first operating system that really did well, MS DOS, was not better than other operating systems at the time. It rode to success of the back of a previous monopoly, that of IBM. There used to be a saying in the IT business: “No matter how big and standardized a computer market is, IBM can change it.”

IBM could have written an OS as good and almost certainly better than MS DOS, and when they did a little later on it was better. But they were under a lot of consent orders due to anti-trust laws, so they bought the rights to use MS-DOS (which Gates bought from someone else).

This was a big mistake. Gates outplayed IBM. But MS-DOS didn’t win because it was better, and Windows and Windows 95 were inferior to Apple OS’s at the time as well.

Gates won because he understood positive externalities and did everything he could to get the OS on as many systems as possible and reaped the positive externalities of doing so (and because of Microsoft Office, which is another discussion).

Monopolists and oligopolists, in fact, treat suppliers and customers and employees no better than they feel they must. Amazon is a notably nasty place to work. Silicon Valley colluded for years to not compete for engineers on pay, and so on. Monopolies and oligopolies look good when you have a regulatory environment where everyone is allowed to treat workers and customers terrible (a.k.a. neo-liberalism) and some of them can look good in comparison to the blood washing in the Agean Stables outside.

But enough of sweeping the bad side of monopolies under the rug. Thiel is right: If you want to get filthy rich, you want to create a company which seizes a huge chunk of a market, and you don’t want to compete on commodities. This has been known for a long time, it is the ugly step-child of market theory. Fair and competitive markets drive profits into the ground; companies that want to be profitable, especially for long, need an unfair competitive advantage.

This leads to another of Thiel’s secrets: The power law. A very few companies make almost all of the actual profits. A venture capitalist makes money not because of how most of his investments perform, but because a few perform very well. So, Y-Combinator, which helps startups and takes a small share, has made almost all of its money off two out of hundreds: Dropbox and AirBnB. Everything else, in terms of returns, is a wash, even if it made ten times returns.

Startups are lottery tickets to investors. Most of them won’t pay back enough to matter, but a few will, and it is almost impossible to tell which ones in advance (if you think it’s easy, get moving, and when you make your first billion, I expect you to give me nothing).

Still, Thiel thinks they have the best chance when they are based on some principles:

• A strong view of the future
• A small group of founders (no more than three) who really get along
• An understanding that you are aiming to be an oligopoly or monopoly and plan to get one
• Knowledge of something (a secret) that most other people don’t have
• Knowledge of how you’re going to distribute and sell (basic, but his advice is sound)

Thiel is especially strong on having a plan, a view. He divides world-views into four types: Definite and indefinite optimists and definite and indefinite pessimists.

Definite means “having strong views of the future and a plan.” Thiel puts China into definite pessimists: They have a plan, they’re working on it, and they expect the future to suck.

Why? Because they are copying the West, mostly, and they know that every Chinese can’t live the American dream: There aren’t enough resources in the world, or enough sink for greenhouse gasses. But they aren’t sitting around, they’re doing what they can.

Americans in the post-war liberal period were definite optimists. The future was going to be great, and they had a plan to build it!

Thiel puts modern Americans into the indefinite optimist category (I think Millenials aren’t, however). They think the future will be swell, and have no idea how to get there. (The results are that are mostly bad, in Thiel’s view. I agree.)

And the Europeans are indefinite pessimists. The best is behind, their plan kinda sucks, and they expect the future to be worse. I’m not sure I agree–Eurocrats have a pretty definite plan, but it may well be true of Europeans more generally, and the business community in particular.

Thiel is strong in encouraging people to have a plan, to not treat themselves as lottery tickets, even if that’s how VC’s view founders.  Know what you’re doing and why.

Thiel ends with a macro look at the future. The ancients saw the world as up and down. Civilization rises and falls. We tend to look at the future and see a plateau. He thinks these two are now unlikely, that we’re either going to get to real sustained exponential growth (the abundance society), breaking the bonds of limited resources through technology, or we’re going to pretty much wipe ourselves out.

I can recommend Thiel’s book. It’s pretty good on startups and venture capital, his philosophy is basic but generally not stupid, and it’s an easy read. Perhaps more importantly, Thiel’s thinking appears to be pretty widespread in Silicon Valley and amongst tech elites in general. That doesn’t mean they all agree with the politics which have recently bought him infamy on the Left, but that his general philosophy resonates with them, and how he does business makes sense to them.

Given that these people do drive some of the most important parts of the world economy, understanding how they think is important.