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

all right good afternoon uh today's

speaker is Peter teal Peter was the

founder of PayPal and paler and Founders

fund and has invested in uh most of the

tech companies in in silica Valley and

he's going to talk about strategy and

competition thank you for coming Peter

awesome thanks uh Sam thanks for

inviting me thanks for for having me uh

I I sort of have a I have a single eay

FS that I'm completely obsessed with in

um on on the business side which is that

uh if you're starting a company if

you're the founder entrepreneur starting

a company you always want to aim for

Monopoly and um and that uh and you want

to always avoid competition and so uh

hence uh competition is for losers uh

something we'll be talking about

today I'd like to um I'd like to start

by saying something about um the the

basic idea of uh when you start one the

companies um how you go about uh

creating value and there's this question

what makes a business valuable and I

want I want to suggest that there's

basically a very simple uh very simple

formula that um um you you have a

valuable company if two things are true

uh number one that it creates X dollars

of value for the world and number two

that you capture y% of X and and the

critical thing that uh that I think

people always miss in the sort of

analysis is that X and Y are completely

independent variables and so um X can be

very Big Y can be very small X can be of

intermediate size and if Y is reasonably

big you can still get a very big

business so to create a valuable company

you have to basically uh 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 as a as a contrast um

there's if you sort of compare the US

airline industry with a company like

Google on search um if you sort of

measure 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 uh domestic

revenues in 201 uh 2012 Google had uh

just north of 50 billion um and and so

and certainly sort of on some intuitive

level if you said uh if you were given a

choice and said well do you want to get

rid of a 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 and this is of

course just the domestic numbers if you

looked at this globally um airlines are

much much bigger than um than uh than

than than than search or than Google is

but uh but the profit margins are quite

a bit less uh you know they were

marginally profitable in 2012 12 uh I

think the entire 100-year history of the

airline industry the cumulative profits

in the US have been approximately zero

know companies make money they

episodically go bankrupt they get

recapitalized and you sort of cycle and

and repeat and this is reflected in you

know the the combined market

capitalization of the of the airline

Industries maybe uh something um of the

US airline industry something like a

quarter that of Google so so uh you have

you have a search engine much much

smaller than than air travel but much

more valuable and I think this this

reflects these very different uh

valuations on X and

Y so um you know if we look at perfect

competition um you know there are sort

of there's some pros and cons to the

world of perfect competition um on a

high level uh uh it's always um this is

what you study in econ one it's always

it's easy to model which I think is why

econ professors like talking about

perfect competition um it somehow is

efficient especially in a world where

things are static because you have all

the consumer surplus gets captured by

everybody and uh and politically it's uh

What uh what we're what we're told is

good in our society that you you want to

have competition and this is somehow a

good thing um of course there are a lot

of negatives uh it's it's generally not

that good if you're you're um you're

involved in anything that's hyper

competitive um because you often don't

make money I'll come back to this a

little bit later so uh so I think at one

end of the spectrum you have uh

industries that are perfectly

competitive and at the other end of the

spectrum um you have things that um I

would say are monopolies and um and

they're you know they're much stable

longer term businesses you have more

Capital uh and um and if you get a

creative Monopoly for inventing

something new I think it's symptomatic

of having created something something

really valuable um and so I do think

this you know the the the sort of the

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 um

there's shockingly little that is in

between and uh this dichotomy is not

understood very well because uh people

uh are constantly lying about the nature

of the businesses they're in um and this

is why this is in my mind this is the

most important is 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 the two kinds of

businesses and so let me say a little

bit about the lies that people tell and

so you basically um the basic uh if you

sort of imagine that there was a

spectrum of companies from perfect

competition to Monopoly um the um the

apparent differences are quite small

because the people who have monopolies

pretend not to they will basically say

uh 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 um and if you're

in some sort of business where you will

never make any money um you will be

tempted to tell a lie that goes in the

other direction where you will say that

you're doing something unique um that um

is is somehow uh less competitive than

it looks because um because you want to

you will want to differentiate you want

to try to trct Capital or something like

that so if the monopolists pretend not

to have monopolies the non- monopolists

pretend to have monopolies the apparent

difference is very small whereas the

real difference I I would submit is is

actually quite big and 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 uh the

way these lies

work and so um you know

the the the basic uh lie you tell as a

non-m monopoly is that we're in a very

small Market the basic lie you tell as a

monopoly is that the market you're in is

much bigger than it looks and so um and

so typically if you want to think of

this in sort of set theoretic terms you

could say that a monopoly tells um a a

lie where you describe your business as

the union of these vastly different

markets and the non- monopolist

describes it as the intersection so that

uh in effect um if you're if you're a

non- monopolist you will rhetorically

describe your Market as super small

you're the only person in that market if

you have monopo you will describe it as

super big and um and there's lots of

competition in it so uh some examples of

how this how this works in practice uh

so I always use restaurants as the

example of a terrible business this

always you know sort of my idea is you

know capitalism and competition are

antonyms um capitalist is someone who

accumulates Capital world of perfect

competition is a world where all the

capital gets competed away so uh 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 paloalto so

it's British paloalto and uh and of

course that's too small a market because

people may be able to drive all the way

to Mountain View or even Meno Park um

and there probably are no people who eat

nothing but British food at least no

people who are still

alive and so so that is um that's that's

a sort of a fictitiously narrow Market

um there's there's sort of a Hollywood

version of this where uh the way movies

always get pitched is you know okay it's

like a college football star you know uh

joins an elite group of hackers to um to

catch the shark that killed his

friend um sorry and so that's now that

is a movie that has not yet been

made but um 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 uh doing movies or

it's really really

hard and so you always have this

question about does the intersection

does 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 the sort of the

bad really bad versions you just take a

whole series of buzzword sharing mobile

social apps you combine them and you

have some kind of uh narrative and

whether or not that's a real business or

not uh is is uh um is it's generally a

bad sign so it's it's almost this

pattern recognition when you have this

rhetoric of the sort of intersections um

it it 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 uh one of a kind but it's not

Stanford um so let's look at the

opposite the opposite law is um if you

are uh let's say uh the uh the search uh

company that's down the street from here

and has about a happy 66% market share

um and uh is you know is completely

complely dominant in the search Market

um Google has not almost never describes

itself as a search engine these days um

and instead it uh it describes itself in

all these different ways so it sometimes

says it's an advertising company so if

it was search you'd say wow this this

like it's it's it has this huge market

share that's really really crazy it's

it's like a incredible Monopoly it's

much bigger than it's much a much more

robust Monopoly than Microsoft ever had

in the 90s maybe that's why it's making

so much money um but if you uh if you

say it's an advertising Market you could

say well there's search advertising is

17 billion and that's part of uh 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 3

and a half% so um a tiny part of uh of

this much larger

market um or uh if you don't want to be

an advertising company you can always

say that you're a technology

company

um and so

um sorry let me see um and so the and

and so um and and the technology Market

is something like a one trillion Doll

Market and the narrative that you tell

as Google in the in the technology

Market is um well we're competing with

all the car companies with our

self-driving cars we're competing with

Apple on TVs and

iPhones uh we're competing with Facebook

we're competing with Microsoft on um 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

uh you you look and uh 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 uh these very powerful incentives

to to uh to distort uh the nature of

these markets one way or or the

other so um you know the the the

evidence of narrow markets in the uh in

the tech industry is um is if you

basically just uh if you look at sort of

the some of the big tech companies Apple

Google Microsoft Amazon um they just um

they've just been building up cash for

um year after year and you have these

incredibly High profit margins and I

would I would say that the the one of

the reasons the tech industry in the US

has been uh has been so successful

financially is because it's it's prone

to creating all these Monopoly like

businesses and that's that's um and it's

reflected uh 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 um and

so so let me say um let me say a few

things about uh about how to how to

build a monopoly and I think uh I think

the one of the sort of very

counterintuitive ideas that comes out of

this Monopoly uh thread is that um you

want to go after small markets if you're

a

startup um you know you want to get to a

monopoly you're starting a new company

you want to get to Monopoly um Monopoly

is 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 uh and then over time

you find ways to expand that market in

in concentric circles and uh the thing

that's always a big mistake is going

after a giant market on on day one

because that's typically evidence that

um that you somehow haven't defined the

categories correctly that 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 uh 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 um a bookstore

we have all the books in the world so

it's it's a it's a it's a better

bookstore 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 um you know eBay you start with Pez

dispensers you move on to beanie babies

and eventually uh it's it's all these

different um auctions for all these

sorts of different Goods um and uh 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 um they don't think

that they're uh valuable at all when

when you get

started um the the PayPal version of

this was uh was you know we started with

uh with power sellers on eBay which was

about 20,000 people when when we first

saw this happening in December of 99

January 2000 right after we launched uh

there was a sense that uh that these

were all um 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 um but you you

know you there was a way to get a

product that was much better for

everybody in that market you could um

and we got to something like 25 30% you

know Market penetration in 2 or 3 months

and you got some Walkin you got brand

recognition and you're able to to build

the business from there so um so I

always think these um these these very

small markets are are quite underrated

uh the Facebook version of this I always

give is that uh you know the initial

Market at Facebook was 10,000 people at

Harvard it went from 0 to 60% market

share in 10 days that was a very

auspicious start um the way this gets

analyzed in Business Schools is always

um that's ridiculous it's 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 uh almost no value uh and

they they would have had little value

had they stayed small but it turned out

there were ways to then grow them

concentrically and that's what made them

uh that's what made them so valuable um

now I think the opposite version of this

is always where you have super big

markets and um and I there's so much so

many different things that went wrong

with all the clean tech companies in the

last decade but uh 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 was sort of the clean

tech bubble in 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 um

and then you know once you're sort of a

a minnow in a vast ocean um that's not a

good place to be that means that 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

10th thin film solar panel company you

don't want to be the 100th restaurant in

paloalto um you know restaurant industry

is a trillion dollar industry so if you

do a market size analysis youd include

restaurants are a fantastic business to

go into and it's often large markets

large existing markets typically mean

that you have uh tons of competition

very very hard to uh to differentiate so

the first very

counterintuitive int uh 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 get a foothold and then

um and then if those markets are able to

expand you can scale into a big monopo

business um you know um a second uh sort

of there's sort of several different uh

characteristics of these Monopoly

businesses um that I like to um focus on

and U there's probably no no sort of

single formula to it and I I always

think that uh 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 uh uh the next

Larry Page won't be building a search

engine the next uh Bill Gates won't be

building an operating system and if

you're copying these people you're not

learning from them but it's it's and so

um there is always um these very unique

businesses that are doing something

that's not been done before end up um

end up having the potential to be a

monopoly if you're you know the the the

opening the opening line in um Anna Ken

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 um my

sort of crazy 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 I it's maybe not

that Hightech 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 um was

using uh uh checks to uh send money on

eBay took 7 to 10 days to clear PayPal

could do it than 10 times as fast so you

want to have some sort of very uh very

powerful Improvement in some um on in

some order maybe an order of magnitude

Improvement on some key Dimension um of

course you know if you if you actually

come with something totally new um it's

it's 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 maybe not infinite but it's

sort of definitely an order of magnitude

or more of an improvement so I think uh

the the technology is designed to give

you a massive Delta over over the next

the next best thing I think um I think

there often are network effects that can

kick in that really help the thing

that's very um and these these lead to

monopolies over time the thing that's

very tricky about Network effects is uh

they're often uh they're often very hard

to get started and so um so even though

everyone understands how valuable they

are uh there's always this incredible

tricky question why is it valuable to

the first person who's doing something

um economies of scale uh if you have

something that with very high fixed

costs very low marginal costs uh that's

typically a monopoly like business and

then um then there's this thing uh of of

branding uh which is sort of like just

uh this idea that gets lodged in

people's brains I I never quite

understand how branding Works uh so I

never invest in companies where it's

just about branding but it is I think a

real phenomenon

that uh that creates uh that creates

real value I think one of the things I'm

going to come back to this a little bit

towards the end but one of the things

that's very striking is that software

businesses are often um are for some

reason uh very good at some of these

things they're especially good at the

economies of scale part because the

marginal cost of software is zero and so

if you get something that works in

software um 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 market start

small um you can grow your business

quickly enough to uh stay um stay at the

same size as the growing market and uh

and maintain the sort of Monopoly uh

Power now the critical thing about these

monopolies is um is it's it's not enough

to have a monopoly for just a moment the

critical thing is to have one that lasts

over time um and so you know in Silicon

value is the sort of idea that you want

to be the first mover and I I always

think it's it's in some ways um 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 uh Google is the last

search engine Facebook will be valuable

if it turns out to be the last social

networking site and um and one way to

one way to think of this uh last mover

uh value is this idea that most to the

value in these companies exists far in

the future um 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 rate's 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 had been in

business for about 27 months and um and

we sort of had you know the growth rate

was 100% a year we were discounting

future cash flows by about 30% and it

turned out that about 3/4 of the value

of the business as of 2001 came from

cash flows in years 2011 and Beyond and

um and whenever you do the math on any

of these tech companies you get to an

answer that's something like that so if

you are trying to analyze any of the

tech companies in Silicon Valley Airbnb

Twitter uh Facebook um any emerging

internet companies all the ones in y

combinator um the math tells you that

three qus 80 85% of the value is coming

from cash flows in years 2024 and Beyond

it's very very far in the future and uh

and so one of the things that uh we

always overvalue in Silicon Valley is

growth rates and we undervalue

durability because uh growth is

something you can measure in the here

and now and you can always track that

very precisely um 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 uh

qualitative sort of a thing and so if if

we um if we went back to this idea of

these characteristics of Monopoly uh

proprietary technology Network effects

economies of scale um um you can think

of these these characteristics as ones

that exist at a moment in time where you

capture a 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 uh um can become a um a

bigger and stronger Monopoly over time a

proprietary technology is always a

little bit of a tricky one so you want

something that's an order of magnitude

better than uh 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 um 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

uh you know dis Drive Manufacturing in

the 1980s um you could you could do a

better dis build a better dis Drive 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 disc drives so it had

great benefit to Consumers but um it

didn't actually help the people who

started these compan compies and so

there's always this question about

having a huge breakthrough in technology

but then also being able to say explain

why uh yours will be the last

breakthrough uh 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 um 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 um that's great for society

it's um it's actually not that good for

your business typically um and then um

economies of scale uh where I talked

about so so I think anyway so I think

this last mover thing is is very

critical I'm always tempted you know 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

one-third of a pawn Advantage so there's

a small advantage to uh going first you

want to be the last mover um who who

wins the game and so so was the Kappa

Blanca uh world champion uh uh chess

champion Kappa Blanca line you must

begin by studying the end game and and I

do think that's um well I wouldn't say

that'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 uh is a really

critical one to to try to think

through let me um let me sort of uh I

want to sort of go in two slightly other

directions with this Monopoly versus

competition idea and I think um so I

think this is the the central idea uh in

my mind for for business for starting

business for thinking about them and U

and there are some some very um

interesting perspectives I think it

gives on the whole you know on the whole

history of innovation and technology and

science because um you know we we've

lived through um we've lived through um

you know 250 300 years of incredible

technological progress in you know many

many different domains uh you know steam

engine to Railways

to telephones Refrigeration household

appliances um 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 uh we've lived through

centuries of of enormous amounts of

innovation in in in science as well and

um and the the thing that I think um

people always miss when they think about

these things is um is that um because X

and Y are independent variables um some

of these things can be extremely

valuable Innovations but uh the people

who invent them who come up with them do

not get rewarded for this and uh and

certainly if you go back to um you need

to create X dollars in value you capture

y% of X I would suggest that the history

of science has generally been one where

y 0% across the board the scientists

never make any money um they're always

duded 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 uh that scientists tend to

suffer from in our in our society um and

and even in technology there are sort of

many different areas of Technology where

um where there were great innovations

that created tremendous value for

society but uh but people did not uh did

not actually capture uh that much of the

of the value and so I think there is

this sort of whole uh history of um

science and technology that can be told

from the perspective of how much value

was actually captured and um and

certainly there are 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 um it just it just somehow

doesn't work that way um the railroads

incredibly valuable most of them just

went bankrupt because it was too much

competition um right Brothers um you fly

the first plane you don't make any money

and so I think there is sort of the

structure to these industries that's uh

that's very important um and I think the

uh the thing that's actually rare are

the success cases most the so it's

actually you really think about the

history in this in this 250 years sweep

um it's unus Y is almost always 0% it's

always zero in science it's almost

always in in technology and so it's very

rare where people made money you know

the early uh the late uh 18th early 19th

century the first Industrial Revolution

was the textile mills you had the steam

engine you 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% every

year year after year decade after decade

you had 60 70 years of tremendous

improvement from 1780 to

1850 um but even in 1850 most of the

wealth in Britain was still held by the

landed aristocracy uh 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 uh um the structure of the

competition prevented people uh from

from making any money um and so I 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 uh come

up with new things and made money doing

so um one is uh these sort of vertically

integrated complex monopolies which

people uh did build in the Second

Industrial Revolution at the end of the

19th and start of the 20th century and

so this was like Ford it was the

vertically integrated oil companies like

Standard Oil um and what these

vertically integrated monopolies uh

typically required was this very complex

coordination you got a lot of pieces to

fit together in just the right way uh

when you assembled it you had a

tremendous Advantage this is actually uh

done surprisingly little today and so I

think this is sort of a business form

that um when people can pull it off is

very valuable it's typically fairly

Capital intensive uh we live sort of in

a 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 uh but I you know when I

sort of think about my colleague Elon

Musk from PayPal success with Tesla and

SpaceX uh 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 if you ask you know was there

sort of a single breakthrough I mean

they certainly innovated on a LW of

Dimensions I don't think there was a

single 10x breakthrough in battery

storage or you know

maybe working on some things on 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 um and doing

it in a way that was more vertically

integrated than most of their

competitors so Tesla you also integrated

The Car Distributors so they wouldn't uh

steal all the money as has happened with

the rest of the car industry in the US

or SpaceX um you basically uh pulled in

all the

subcontractors um uh where most of the

large uh 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 um and

so uh vertical integration I think is

sort of a a very underexplored modality

of of technological progress that people

uh would uh would do well to look at

more and then I think there is there is

something about software itself that's

very very powerful um software has these

incredible economies of scale these low

margin costs and there is something

about the world of bits as opposed to

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 midsized Market and have a fast

adoption rate you can uh take over this

market and so and so I think this is one

of the reasons Silicon Valley has done

so well and why 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 sort of

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 um creating X Dollar in

value and capturing y% of X so the

science rationalization we're always

told is that the scientists aren't

interested in making money they're doing

it for charitable reasons and that 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 I think we

should we should be a little bit more

critical of this as a rationalization we

should ask is this a rationalization um

uh to obscure the fact that y equals 0%

and the scientists are operating in this

uh in this sort of world where all the

uh all the Innovation is effectively

competed away and they can't capture any

of it directly and then the uh the

software Distortion that often happens

is because people are making such vast

Fortunes in software we infer that this

is the most valuable thing um in the

world being done full stop and so if

people at Twitter make uh billions of

dollars it must be that Twitter is worth

far more than anything Einstein did um

and um and uh 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 uh and

so I do think um I do think the history

of innovation has been this uh this

history where uh the the the the

microeconomics the structure of these

industries has mattered a tremendous

amount and when um and um and and and

there is sort of this the story where

some people have made vast fortunes

because they were in Industries with the

right structure and other people uh made

uh nothing at all because um because

they were in these sort of very

competitive things and we shouldn't just

rationalize that way I think it's worth

understanding this better and then

finally let me come back to this this uh

this sort of overarching theme for this

talk this competition is for losers idea

which um 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 um slow

on the sports on the track team in high

school or who do a little bit less well

on the standardized tests um and don't

get into the right schools and so we

always think of losers as people who

can't compete um and I want us to really

rethink and and revalue this and

consider whether it's possible that

competition itself um is off that we we

we're sort of it's not just the case

that we don't understand this Monopoly

competition dichotomy intellectually so

sort of been talking about why why you

wouldn't understand it intellectually

because um people lie about it it's

distorted we have all these uh the

history of innovation rationalizes what

happen 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 you know very very

attracted to competition in in one form

or another um we find it reassuring if

other people do things the word ape

already in the time of Shakespeare meant

both primate and imitate uh and there is

something about human nature that's

deeply mimetic imitative apik sheeplike

leming like cd-like um and it's this

very very problem

uh thing that we need to always think

through and try to overcome and and

there is always this question about um

competition um as as a form of

validation where we we go for things

that lots of other people are going for

and um it's not that there is wisdom in

crowds it's not when lots of people are

trying to do something that that's proof

of uh it being valuable I think it's

when lots of people are trying to do

something that is often um that is often

proof of insanity there 20,000 people a

year who move to Los Angeles to become

movie stars about 20 of them make it um

I think the Olympics are a little bit

better because you have a you know um

you can sort of figure out pretty

quickly whether you're good or not so

it's there's a little bit less of a dead

weight loss to society um you know um um

you know your your the sort of

educational experience at a place uh the

the the pre- Stanford educational

experience um 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 um it

wasn't exactly a parallel competition

when you were in junior high school and

high school um there's always a question

does the tournament make sense as you

keep going and this is uh and so um

there is always this question if people

go on to grad school or post

post-doctoral educations does the

intensity of the competition really

makes sense there's the uh the you know

classic uh Henry Kissinger line that uh

um describing his fellow faculty at

Harvard that the uh um the battles were

so ferocious because the stakes were so

small describing sort of Academia and um

and and you sort of think on one level

this is a description of 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 imp

really hard to differentiate yourself

from other people when the differences

are when the objective differences

really are small then uh you have to uh

compete ferociously to maintain uh a

difference of one sort uh or another um

that's often more imaginary than real

there's always sort of a personal uh

version of this that I I tell where um

you know I was sort of hyper hypert

tracked I you know my e8th grade Junior

High School yearbook one of my friends

wrote in you know I know you'll get into

Stanford in four years as a sophomore I

sort of went into went to Stanford four

years later uh at the end of High School

uh went to Stanford Law School uh you

know ended up um at a big law firm in uh

New York uh where from the outside

everybody wanted to get in on the inside

everybody wanted to leave um and and you

had um and it was this very strange

Dynamic where after I uh sort of

realized this was maybe not the best

idea um and left after seven months and

3 days you know one of the people down

the hall from me uh told me um it's

really reassuring to see you leave Peter

I had no idea that it was possible to

escape from alcatra which of course all

you had to do was go out the front door

and not come back but um but so much of

people's identities got wrapped up in um

in winning uh these competitions that uh

they somehow lost sight of what was

important what was valuable uh you know

competition does make you better at

whatever it is that you're competing on

because when you're competing you're um

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 um but it

often comes at this tremendous price

that uh you stop asking some bigger

questions about what's truly important

and truly Valu

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 I guess we time for you want to

take a few questions

or

sorry oh yeah people want to take I'll

take a few questions we have a few

minutes time yeah go ahead um since yeah

as you mentioned earlier often

monopolies and competition often look

similar because the narratives people

tell the narratives we tell

ourselves do you have any ways to easily

determine the difference when you're

looking at an idea or evaluating your

own idea 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 can

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 incentive to distort

things yeah so which of the aspects of

monop that you mentioned would you say s

like

Google um well they have uh they have

Network effects with the the ad Network

they had proprietary technology that

gave them the initial lead because they

had the the page rank algorithm which

was uh sort of an order of magnitude

better than any other search search

engine you have economies of scale uh

because of the need to store you know

all these different uh sites and at this

point you have brand so Google has all

four maybe maybe the proprietary

technology is somewhat weaker at this

point but definitely it had all four and

maybe three and a half out of four now

yeah how does this apply to paler and

second what's you like second is what

what with the iPhone uh head oh this is

that's that's a that's a there sort of a

set of companies that are doing

different copycat payment systems on on

mobile phones there's square there's

PayPal sort of they have just they just

have sort of different shapes that's how

they differentiate themselves one is a

triangle one is a square um and so you

know um maybe at some point the Apes

will run out of shapes or something like

that but um but I think um no palent

here we we started with a focus on on um

the um intelligence Community which is

small submarket um you had a proprietary

technology that used a very very

different approach um uh where it was

focused on the human um computer uh

synthesis rather than the uh uh sub

substitution which 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 the proprietary

technology uh yes um we have design

thinking methodology and uh lean uh

startup thinking um which is used to

mitigate Risk by not creating things

that people don't want but how do young

innovators uh have inspiration to create

complex systems that last through time

can you repeat the question yeah so the

question is um what do I think about

lean startups uh um iterative thinking

where you get uh feedback from people uh

versus uh complexity that may not work

so I I am personally quite skeptical of

all the uh Lean Startup methodology I

think the the the really great companies

um did something was sort of somewhat

more of a Quantum Improvement that

really differentiated them from

everybody else um they they typically

did not do massive you know customer

surveys the people who ran these

companies uh sometimes not always

suffered from mild forms of Asbergers so

they we not actually that influenced not

that easily deterred by what other

people thought or told them to do um so

I I do think we're we're way too focused

on um iteration as a modality and not

enough on trying to um have um you know

um a virtual ESP link with the public

and figuring it out ourselves um I I

would say that uh let me see um I would

say that uh the um I I'm not quite the

risk question I think is always a very

tricky one because there are um

you know there there 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 risks if you if you're going to

take enough time to figure out what

people want um you often will have

missed the boat by then um and um and

then of course there's always the risk

of of doing something that's uh that's

not that uh significant or meaningful so

you know you you could say a track in um

in law school is a lowrisk track from

one perspective it may still be a very

highrisk track in the sense that maybe

you not um 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 sort of this very uh complicated

concept yes you talking about the last

move Advantage but then doesn't that

imply that there's already competition

to begin with chest piece on the chest

board um yeah so there's always this uh

terminology thing so I I would say that

uh there are uh there are categories in

which people sort of are bundled

together I would say the Monopoly

businesses were in in effect they 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 page rank with with

sort of a automated approach um Facebook

was not the first uh social networking

site my friend Reed Hoffman started one

in 1997 they called it social net so

they already had the name social

networking uh in the name of their

company seven years before Facebook uh

their idea was that it was going to be

this virtual cyers space where I'd be a

dog and you'd be a cat and 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 Facebook 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'd sort of lump all these

things together I have one more question

okay one more question let's take one

here uh if theoretically someone who uh

worked at Goldman Sachs out of college

and left out 6 months and is now

studying computer science at Stanford uh

how would you recommend

rethinking

that um you know I don't I don't have a

I don't have a great um 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 uh how to solve this that

there are these um you know there are

these very odd stud they've done on

people who go to um business school

there one they've done at Harvard

Business School where um it's sort of

the anti- asberg um personality where

you have people who are super

extroverted uh generally have low

convictions uh few ideas and you have

sort of a hot house environment you put

all these people in for two years and at

the end of it uh they systematically end

up the largest cohort systematically

ends up doing the wrong thing they try

to catch the last wave you know uh 1989

everyone at Harvard tried to work for

Mike milin 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 bubble peing

perfectly um they did uh and then you

know 05 to7 was housing uh private

Equity stuff like this so so I do think

um I do think this uh tendency for us to

see competition as validation is um is

very deep um I don't think there's some

any sort of easy psychological formula

to uh to avoid it so I don't I I don't

quite know how to uh what sort of

therapy to to recommend but um 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 who are all these stupid

people who fall for All Those ads on TV

they obviously work to some extent and

they work uh to a disturbing extent on

all of us and it's something we we all

should work to

overcome thank you very much