
Lecture 5, How to Start a Startup: Peter Thiel - stasy
http://startupclass.samaltman.com/courses/lec05/
======
nashequilibrium
This is a question asked to Steve Jobs when he released the iphone: Reporter:
"Why in the world would Apple jump into the handset market with so many
competitors and players?"

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

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

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

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

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

------
melvinmt
"I'm personally quite skeptical of all the Lean Startup methodology, I think
the really great companies did something of a quantum improvement that really
differentiated them from everybody else. They typically did not do massive
customer surveys. The people who ran these companies would often, not always,
have mild forms of Asperger's, so they were not actually that influenced, not
that easily deterred by what other people thought or told them to do. I do
think we're way too focused on iteration as a modality and not enough trying
to have a virtual ESP link with the public and figuring it out ourselves."

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

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

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

~~~
Diamons
Exactly. That's also one of my biggest gripes with yc - Dont be an asshole. If
I want to be an asshole, that's my god given right. I say things how I see
them and am under no obligation to sugar coat my words. Sorry the chemicals in
your brain are signaling discomfort, but that's your job to suit up not mine.

~~~
acomms
My brain is signalling that you may be missing the point.

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

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

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

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

~~~
csallen
_> > "It probably even hurts more than it helps in the long term."_

Compared to what? Big companies and monopolies die eventually, yes, but they
pretty much outlast smaller companies and startups by definition.

Being big gives you the power of scale. You can simply afford to spend more
resources building moats around your business than your smaller competitors
can. If someone built a better Google.com today, I'd still be checking my
Gmail and using an Android phone daily, plus Google would be in a much better
position to play catchup than AltaVista et al were.

~~~
staunch
Compared to not having a monopoly. Google has built up a massive empire using
their monopoly profits to subsidize every new business they've built. They
lose money to give away products and services that users wouldn't pay for.
It's a house of cards resting on a single point of failure. It wouldn't
survive laying off most of its staff, which it would have to if it lost its
search revenue.

Companies that have always had to sing for their supper are much stronger.
Apple is the best example. They constantly make new products that result in
new sources of money.

~~~
csallen
Having one primary source of revenue vs having more than one is not the same
thing as having a monopoly vs not having one. A monopoly is about the number
of serious competitors you have, not the number of revenue steams you support
or innovations you create.

To wit: there are companies with only one product without monopolies (e.g.
pretty much every startup ever), and companies that constantly invent new
products and _do_ have monopolies (e.g. pharmaceutical companies).

~~~
staunch
Of course it doesn't mean having one source of income. But in practice it
looks that way. Certainly that's been the problem at Google, Microsoft, IBM,
Oracle, etc. These companies came to rely on market domination instead of
technology innovation, because their monopoly positions allowed them to.

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

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

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

~~~
analog31
I live in the shadow of a university that is a major biology research magnet,
and quite a number of the professors have their own off-campus start-ups going
on.

There's a widespread misconception about scientists too, due to the assumption
that we're all academics. In fact there are quite a lot of scientists in
industry, either in companies or as entrepreneurs. I've known quite a few
millionaire scientists. Within the company that I work for, and in my side-
business, I have a sincere interest in seeing my inventions commercialized.

I saw a video'd lecture by Alan Kay (probably linked to from HN) where he
distinguished invention and innovation: Invention is creating new things, and
innovation is bringing things to market. Those are separate skills.

~~~
nrao123
This the video of the talk where Alan Kay talks about Innovation Vs Invention:
[https://www.youtube.com/watch?v=gTAghAJcO1o](https://www.youtube.com/watch?v=gTAghAJcO1o)

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

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

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

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

------
geoffbrown2014
One minor point of clarification on airline profitability. It wasn't
competition that bankrupt them it was government regulation. Airlines were
heavily regulated for many years and their ticket prices were set by
regulators. Huge incentives were created for executives to not invest in fuel
efficient new planes and capital equipment. When labor union contracts
exploded with benefits and deregulation came, the legacy airlines could not
compete with the new arrivals.

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

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

~~~
tim333
>several airlines have remained profitable

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

Here's some Buffett quoteing on the matter:

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

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

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

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

~~~
geoffbrown2014
For airlines it must have been hard to capture much of the x value they
created when someone else was in control of their y. ;)

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

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

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

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

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

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

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

------
jonalmeida
Notes: [http://jonalmeida.com/posts/2014/10/07/htsas-
lec05/](http://jonalmeida.com/posts/2014/10/07/htsas-lec05/)

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

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

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

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

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

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

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

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

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

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

~~~
graycat
Thiel did seem to mention that scientists sometimes regard other scientists
who are also interested in making money as not so good or proper scientists or
some such!

But your example is correct.

I get the impression that somehow Thiel is a bit down on the money making
potential of research.

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

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

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

~~~
zan2434
Interesting, but what were the niches for those companies you mentioned?
Instagram, Snapchat, Tesla - namely

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

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

~~~
james1071
The market is what you are selling and close substitutes to it.

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

------
toomim
Thiel's Einstein example was wrong:

    
    
        "You're the smartest physicist of the 20th century
        -- you come up with special relativity, you come up
        with general relativity -- you don't get to be a
        billionnaire; you don't even get to be a millionaire."
    

Actually, Einstein WAS a millionaire. His net worth was around $1 million.
[http://www.celebritynetworth.com/richest-
businessmen/richest...](http://www.celebritynetworth.com/richest-
businessmen/richest-designers/albert-einstein-net-worth/)

~~~
coryl
1) That's a terrible source for data.

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

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

~~~
coryl
True, I looked up the adjusted amount and it's $16m.

But it semantics, as Thiel's point was to contrast the value he created with
the value he captured.

~~~
omegant
There is a contrast only if you consider that the only way to capture value is
through money.

Also you may think that "Capture value" is not a priority for everybody (Not
only money, but also public attention, or power).

In fact capturing value as a priority may absorb too much of your time to be
useful.

EDIT: corrected a word

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

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

[http://www.investopedia.com/ask/answers/05/economicmoat.asp](http://www.investopedia.com/ask/answers/05/economicmoat.asp)

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

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

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

------
rajensanghvi
His depth and insight into the industry is fascinating. Here are 32 Peter
Thiel quotes from the lecture that I took note of - [https://medium.com/how-
to-start-a-startup/32-quotes-from-pet...](https://medium.com/how-to-start-a-
startup/32-quotes-from-peter-thiel-on-business-strategy-and-monopoly-
theory-6025a479f1a7)

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

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

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

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

------
howradical
Timestamped notes: [https://timelined.com/how-to-start-a-
startup/lecture-5-how-t...](https://timelined.com/how-to-start-a-
startup/lecture-5-how-to-start-a-startup)

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

Startups != growth.

------
dsugarman
_SV seems to overvalue growth rates and undervalues durability._

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

------
graycat
There was a lot good in Thiel's lecture.

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

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

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

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

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

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

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

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

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

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

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

------
ph0rque
I wonder what Peter Thiel's take is on the role of open source in building a
monopoly?

------
lawsohard
full transcript! [http://tech.genius.com/Peter-thiel-lecture-5-business-
strate...](http://tech.genius.com/Peter-thiel-lecture-5-business-strategy-and-
monopoly-theory-annotated)

------
ekm2
Does anyone have a transcript of this lecture?

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

