[Work in Progress!]

Peter Thiel, 2014

Preface

• Doing what we already know takes the world from 1 to n. Every time we create something new, we go from 0 to 1.
• succesful people find value in unexpected places. They do this by thinking about business from first principles instead of formulas

1. The challenge of the future

Interview question: "What important truth do very few people agree with you on?". Bad answers are tautological or relate to familiar debates (our educational system is broken; there is no god).

Horizontal progress (1 to n) versus vertical progress (0 to 1).

At the macro level, the globalization is horizontal progress. E.g., China's 20-year plan is to become the world's biggest economy by copying everything that has worked in the developed world. Vertical progress is enabled through technology (the capital of which has been Silicon Valley through information technology).

• From 1815 to 1914: both rapid technological development and rapid globalization.
• Between the First World War and Kissinger's trip to reopen relations with China in 1971, rapid technological development but not much globalization.
• Since 1971, rapid globalization along with limited technological devlopment, mostly confined to IT.

Peter Thiel's answer to the contrarian question: in a world of scarce resources, technology matters more than globalization. Without technological change, if China increases its energy production, so will its air pollution. If India was to live like the US, the result would be environmentally catastrophic.

Technological progress came from the advent of the steam engine in the 1760s up to about 1970. Since midcentury, only computers and communications have improved dramatically. Boomers have taken progress for granted.

Innovation comes from startups because bureaucratic hierarchies move slowly; entrenched interests shy away from risk; signaling that work is being done is more valued than actually doing work. On the other hand, lone individuals do not have the manpower/competency to create an entire industry.

2. Party like it's 1999

"Madness is rare in individuals - but in groups, parties, nations, and ages it is the rule" - Nietzsche

The contrarian truth lies behind a popular belief.

Quick history of the '90s

• by mid-1990, US was in recession. Manufacturing never fully rebounded
• shift to a service economy (shift to subscription pricing model) was protracted
• Mosaic browser became Netscape which released its Navigator browser in 1994. Navigator grew from 20% of the browser market to 80% in less than a year.
• Yahoo went public in April 1996, Amazon in May 1997
• By spring of 1998, each internet company's stock had more than quadrupled
• July 1997: East Asian financial crises due to crony capialism (i.e. business thrive as a result on money amassed through a nexus between the business class and the political class)
• Ruble crisis follows in August 1998 when Russia devalued its currency and defaulted on its debt. Brought down highly leveraged US hedge fund, Long-Term Capital Management. The Fed intervened with a massive bailout and slashed interest rates in order to prevent systemic disaster.
• Dow Jones Industrial Average plunged 10%+ in days
• Euro launched in January 1999 to great skepticism
• Dot-com mania: september 1998 - march 2000

Lessons learned

Incorrect dogmas:

1. make incremental advances (measure plans in quarters not years)

2. stay "lean" (code for "unplanned") and flexible

3. improve on the competition

4. focus on product, not sales/distribution. The only sustainable growth is viral growth

The opposite principles are probably more correct:

1. better be bold than trivial

2. a bad plan is better than no plan

3. competitive markets destroy profits

4. sales matters just as much as product

Being contrarian is not dogmatically rejecting the crowd (otherwise the crowd still thinks for you), it is thinking for yourself.

3. All happy companies are different

• U.S. airline companies create hundreds of billions of dollars of value but make only 37 cents on a $178 passenger trip.
• Google creates less value ($50 billion in 2012) but keeps 21% of revenues. More than 100 times the airline industry's profit margin.

Perfect competition

• achieves equilibrium when producer supply meets consumer demand
• every firm is undifferentiated, new firms increase supply, drive prices down and eliminate the profits
• under perfect competition, no company makes economic profit in the long run

Monopoly

• monopoly owns its market and sets its own prices
• in this book, we're not interested by government favorites or illegal bullies

Capitalism (premised on the accumulation of capital) and competition (which eliminates profits) are therefore opposites by definition.

Most businesses are much closer to one extreme (perfect competition or monopoly) that we commonly realize. The confusion comes from a universal bias for describing market conditions in self-serving ways.

Monopolists lie to protect themselves (from audit, scrutiny and attacks) usually by exaggerating the power of their (nonexistent) competition.

E.g.: Google presents itself as an advertising company (much bigger market, even so globally) as opposed to a search company (globally dominated by Google).

Non-monopolists tell the opposite lie: "we're in a league of our own". Biggest mistake a startup can make: describe your market extremely narrowly so that you dominate it by definition. if you lose sight of competitive reality and focus on trivial differentiating factors, your business is unlikely to survive.

Non-monopolists exaggerate their markets as the intersection of smaller markets. Monopolists disguise their market as the union of several large markets.

Anecdote: Michelin's star system enforces a culture of intense competition for high-end restaurants. French chef and winner of three Michelin stars Bernard Loiseau was quoted as saying "If I lose a star, I will commit suicide". Michelin maintained his rating, but Loiseau killed himself anyway in 2003 when a competing French dining guide downgraded his restaurant.

Competitive markets offer low margins therefore employees are paid minimum wage. Monopolies can care about its workers, its products, and its impact on the wider world. Monopolists afford to think about ethics; non-monopolists can't.

Do outsized profits come at the expense of the rest of society? Yes, profits come out of customers' wallets, and monopolies deserve their bad reputation - but only in a world where nothing changes. Creative monopolists are powerful engines for adding new categories of abundance.

History of progress is of better monopoly businesses replacing incumbents:

• IBM hardware monopoly in the 60's
• overtaken by Microsoft's software monopoly in the 70's
• operating system dominance reduced by Apple's iOS with mobile computing

In business, market equilibrium means stasis and stasis means death. If your industry is in equilibrium, your business's death does not matter; some undifferentiated competitor will take your place.

Tolstoy opening Anna Karenina: "All happy families are alike; each unhappy family is unhappy in its own way." Business is the opposite.

4. The Ideology of Competition

We teach every young person the same subjects in the same ways, irrespective of individual talents and preferences.

Higher education: people get stuck in fierce rivalries with equally smart peers over conventional careers like management consulting and investment banking. Tuition continues to outpace inflation.

Thiel's path: Stanford Law School. For law students, goal is getting a Supreme Court Clerkship. He didn't the clerkship and founded PayPal instead. Opportunity cost would have been enormous.

[Marx and Shakespeare provide two models for understanding almost every kind of conflict:

• Marx: proletariat fights the bourgeoisie because their economic upbringing provided them with different values
• Shakespeare: all combatants look alike and it is not clear why they fight.]

In business, companies lose sight of what matters and focus on their rivals instead.\

E.g.: Microsoft vs Google (Windows/Chrome OS, Bing/Google Search, Explorer/Chrome, Office/Docs, Surface/Nexus). Apple came along and overtook them all (market cap of $500B vs$467B for Microsoft and Google combined). Just three years before, Microsoft and Google were each more valuable than Apple.

Competition makes people overemphasize opportunities.\

E.g.: 90s battle for online pet store market.

If you can't beat a rival, it may be better to merge.\

E.g.: Thiel and Max Levchin started Confinity in 1998. Elon Musk's X.com was four blocks away on University Avenue in Palo Alto and mirrored their product. In early 2000, Elon and Thiel were more scared about the rapidly inflating tech bubble (i.e. possible financial crash) than about each other and negotiated a 50-50 merger.

5. Last mover advantage

Most of a tech's company value will come at least 10 to 15 years in the future.

Many entrepreneurs focus only on short-term growth and obsess about weekly active user statistics, monthly revenue targets and quarterly earnings reports. You can hit those numbers and still overlook deeper, hard-to-measure problems that threaten the durability of your business.

Examples of rapid short-term growth: