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 of these these 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 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 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 air 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 the 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 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 it's 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 these 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 try to attct 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 the 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 Monopoly 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 is always you know sort of my ideaas 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 lie 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 dominant in the search Market um Google has not just 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 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 app 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 uh to distort 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 a thread is that um you want to go after small markets if you're a startup um you know you want to get to 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 uh 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 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 two or 3


months and you got some lockin 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 Zer 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 uh 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 thinfilm solar panel company you don't want to be the H hundredth


restaurant in paloalto um you know restaurant industry is a trillion dollar industry so if you do a market size analysis you'd 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 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 Monopoly 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 is 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 kenina 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 more 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 incredibly 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 uh 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 s value is always 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 IDE that most of 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 is 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 disc counting 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 34 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 companies and so there's


always this uh 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 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 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 overdue 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 so there always the Kappa Blanca world champion 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 the 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 uh monop versus competition idea and I think um so I think this is the the central idea 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 why is 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 but people uh 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 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 lot 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 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 marginal 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 this phenomenal industry and what I what I would suggest uh 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 you're 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 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 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 this 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's happening 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 aplike sheeplike leming like cd-like um and it's this very very problematic uh thing that uh we need to always think through and 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 moved 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 where 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 make 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 imagin than real there's always sort of a personal


version of this that I I tell where um you 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 into 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 I left after 7 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 Alcatraz 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 they somehow lost sight of what was important what was valuable 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 valuable and so I would I would say that uh 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 time for you want to take a few questions or


S oh yeah uh 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 of the narratives people tell the Nares 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 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 real people have incentives to powerfully distort these things yeah so which of the aspects of monopolies that you mentioned would you say software comp like Google Excel 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 but with the iPhone uh headph 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 differenti themselves one as 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 palente 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 and 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 can you repeat the question yeah so the question is um what do I think about lean startups uh um itera of 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 Wild forms of bers so they were 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 risk if 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 low-risk track from one perspective persective 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 for 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 on chest piece on the chest board um yeah so there's always this terminology thing so I would I would say that uh there are uh there are categories in which people sort of are bundle together I would say the Monopoly businesses were in in effect 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 network uh in the name of their company s 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' sort of lump all these things together I have one more question okay one more question let's take one here uh if you're theoretically someone who uh worked at Golden Sachs out of college and left out six months and is now studying computer science at Stanford uh how would you recommend rethinking uh of 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 studies they've done on


people who go to um business school there's one they've done at Harvard Business School where um it's sort of the anti- asger um personality we 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 dotcom 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 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

Key Themes, Chapters & Summary

Key Themes

  • Contrarian Perspective on Competition

  • Monopoly Versus Perfect Competition

  • Market Dynamics and Deceptive Practices

  • Strategy for Building Monopolies

  • Characteristics of Successful Monopolies

  • The Significance of Durability in Business

  • Software Industry as a Monopoly Model

  • Societal Attitudes Towards Competition


  • Rethinking Competition in Business

  • The Dichotomy of Monopoly and Perfect Competition

  • Misrepresentations in Market Positioning

  • Tactical Approaches to Establishing Monopolies

  • Defining Features of Monopolistic Companies

  • Prioritizing Longevity in Business Strategy

  • The Role of Software in Monopolistic Growth

  • Cultural Fascination with Competitive Environments


The transcript from the YCombinator YouTube video, "Competition is for Losers with Peter Thiel," offers an engaging and insightful perspective on business strategy and competition. Peter Thiel, co-founder of PayPal and a renowned investor, shares his contrarian views on the nature of competition and the path to successful entrepreneurship.

Redefining the Approach to Competition:

Thiel opens with a provocative statement: aiming for monopoly should be the goal of any startup, and competition is essentially for losers. He challenges the conventional wisdom that competition is inherently good, arguing that true business success lies in creating monopolies - businesses so good at what they do that no other entity can offer a comparable product or service.

Monopoly vs. Perfect Competition:

The discussion delves into the stark contrast between perfect competition and monopolies. Thiel explains that while perfect competition is an idealized form that economics students learn about, it's not where businesses can thrive. Instead, a monopoly - which he defines as a company that’s so good at what it does that no other firm can offer a close substitute - is the key to success.

The Deception in Market Dynamics:

Thiel discusses how companies in monopolistic positions often downplay their status to avoid potential regulatory scrutiny. Conversely, companies in highly competitive markets try to portray themselves as unique to attract investment and customers. This dichotomy, according to Thiel, is often misunderstood due to these deceptive practices.

Building Monopolies:

The key to building a monopoly, Thiel suggests, lies in starting with small markets and gradually expanding. He gives examples of companies like Amazon, which started as an online bookstore before growing into a massive e-commerce platform. Thiel emphasizes that monopolies are built over time by starting in niches that can be dominated and then scaling up.

Attributes of a Monopoly:

Thiel outlines four characteristics that successful monopolies often have:

  • Proprietary technology that's an order of magnitude better than competitors.

  • Network effects that become stronger as more people use the service.

  • Economies of scale that make the business more robust as it grows.

  • Strong branding that creates a unique place in the consumer's mind.

Importance of Durability:

For Thiel, the durability of a business is more important than its immediate growth rate. He posits that the most valuable companies are those that will still be around in 10 or 20 years, making longevity an essential factor for a successful monopoly.

Software as an Ideal Monopoly Platform:

Thiel touches on software’s potential for monopoly due to its low marginal costs and the possibility of rapid scale. He points out that the tech industry’s most significant successes owe to its propensity to create monopolistic businesses.

Cultural Perspectives on Competition:

Towards the end of the transcript, Thiel reflects on society's psychological attraction to competition. He argues that this attraction often leads to a herd mentality, where individuals pursue paths more because they are competitive and less because they are intrinsically valuable.

In summary, "Competition is for Losers with Peter Thiel" presents a compelling argument against the traditional glorification of competition in business. Thiel’s insights encourage aspiring entrepreneurs to think differently, focus on creating monopolies in small markets, and value the longevity and uniqueness of their businesses. This approach, according to Thiel, is what separates successful businesses from the rest.