Course lectures "Startup". Peter Thiel. Stanford 2012. Activity 2

This spring, Peter Thiel, one of the founders of PayPal and the first Facebook investor, held a course in Stanford - “Startup”. Before starting, Thiel stated: "If I do my job correctly, this will be the last subject you will have to study."



One of the students of the lecture recorded and laid out a transcript . In this habratopic I am translating the second lesson.



Session 1: Future Challenge

Activity 2: Like in 1999 again?

Session 3: Value Systems

Lesson 4: The Last Turn Advantage

Session 5: Mafia Mechanics

Activity 6: Thiel's Law

Lesson 7: Follow the Money

Session 8: Idea Presentation (Pitch)

Lesson 9: Everything is ready, but will they come?

Lesson 10: After Web 2.0

Session 11: Secrets

Session 12: War and Peace

Lesson 13: You are not a lottery ticket

Session 14: Ecology as a Worldview

Session 15: Back to the Future

Session 16: Understanding

Session 17: Deep Thoughts

Session 18: Founder — Sacrifice or God

Session 19: Stagnation or Singularity?

Activity 2: Like in 1999 again?

I. Party has already passed

The story is created by people, generation after generation. We are all born at a certain time in a certain cultural environment. This cultural environment can be compared to a conversation at dinner; a lot of people say, someone is calm, someone is angry, someone is loud, someone is whisper. We listen to the best of our abilities, trying to understand what this conversation is about. What makes people happy or upset? Sometimes it is hard enough to understand.

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Take someone born in the late 1960s. In terms of culture - the time was stormy. But the child, by the end of the 60s, despite having lived all of this, essentially missed all disputes about civil rights, Vietnam, and could not have an accurate idea of ​​the United States of that time. A child more or less excluded from the table would later be difficult to understand what those conversations were about.



There is a direct analogy between the cultural revival of the 60s and the rapid development of the technology of the 90s. Today's students and graduates, like the child of 1969, may have been too young to experience what happened in 1999 internally. In order not to be an outcast in a dinner conversation, to be able to think and talk about businesses and start-ups today in 2012 - we have to plunge back into the history of the 90s. I doubt that you can understand startups without knowing, say, Webvan or the talismans of Pets.com.



History is a strange thing, it often differs from what people think about it, really its survivors. Even the businessmen of the 90s might have difficulty bringing together the events of that decade. Looking back now, it is difficult to understand why everything happened this way and not otherwise. What is indisputable is that the events of the 90s form the current landscape, therefore it is necessary to extract the maximum from them.

Ii. Brief history of the 90s

Most of the 1990s were not related to the dot-com crisis. In fact, what could be called insanity began in September 1998, and lasted only 18 months. The rest of the decade was a somewhat more chaotic picture.



The nineties began in November 89, when the Berlin Wall collapsed. This was followed by 2 months of fairly big euphoria. But the euphoria did not last long. By early 1990, the US economy was in decline. The first recession after the Second World War. Although it was not a particularly deep recession, and technically it ended in March 91 - recovery was relatively slow. Production was never fully restored, and the transition to a service economy was a long one.



Thus, from 1992 until the end of 1994, it was still a feeling that the United States was mired in a recession. Culturally, Nirvana, grunge and heroin reflected a sense of hopelessness and a lack of faith in the future. Concern about NAFTA and America’s competitiveness against China and Mexico has become almost ubiquitous. Strong pessimistic concealed feelings led to the relative success of Ross Perot, the third party candidate for president. Over the past thirty years, George Bush Sr. has become the only one-term president. It seemed that everything was falling apart.



Of course, technical progress continued in Silicon Valley, but this was not very noticeable. Unlike today, the Stanford campus in the late 1980s was quite divorced from technology developing in the valley. Japan seemed to be winning the semiconductor war. The Internet had yet to shoot. Technology has been the object of special attention. The industry felt small.



The Internet was supposed to change all that. Netscape, with a client-server model, is probably more than anyone else responsible for starting the Internet. It was not the first company that thought about a 2-sided interaction between all computers on the network - this honor belongs to Xanadu, which developed its model as early as 1963. The problem with Xanadu was that it required the simultaneous transition of the entire network to a new scheme, but they could not achieve this. Later it became some kind of obsession; in spite of the fact that it did not bring any money, venture financing continued to attract about 29 years, and finally died in 1992, when investors simply did not have enough patience.



So, in 93, Netscape enters the scene, and away we go. In August 1995, Netscape came out with an IPO, just in the middle of the decade - this event attracted all the attention to the Internet. It was an unusual IPO, as Netscape did not bring profit then. The initial estimate was $ 14 / share, then it was doubled. On the first day of trading, stock prices doubled again. Within 5 months, Netscape shares soared to $ 160 / share - absolutely unprecedented growth for a non-profit company.



Netscape’s story is reminiscent of a Greek tragedy: a visionary founder, a great vision, pride and an epic fall. Regarding pride, for example, there was such a case: they came to the Redmond campus and triumphantly put posters of Netscape everywhere. They played with fire - Bill Gates immediately ordered Microsoft to drop everything they were doing and start working on the Internet. Soon IE and Netscape began to rapidly lose market share. Netscape’s final, graceful step was to appeal to the antitrust committee — probably the only reason a company that never made a profit was sold to AOL for more than a billion dollars.



The first 3 years after Netscape’s IPO were relatively calm; by the end of 1998, the NASDAQ index was approximately 1,400 - only 400 points higher than in August 95. Yahoo entered the public market at 96, and was valued at $ 350 million, after it went public Amazon at 97 with an estimate of $ 460 million Skepticism was in the air. People continued to pay attention to profitability and to believe that these companies can not be very valuable, and will never be successful.



Pessimism was probably sober, but not directed there. Things were not going well in the rest of the world. Alan Greenspan gave his famous “irrational abundance” speech in 1996 - 3 years before the dot-com bubble, when the real insanity began. But even if it were not for this speech in 96, the United States could hardly have changed anything then. In 1997, a series of East Asian financial crises swept, in which a combination of huge debts and crony capitalism brought the economies of Thailand, Indonesia, South Korea and Taiwan to their knees (the list is not complete - here are just a few). China managed to avoid the main blow with the help of strict state control over capital. But in 1998, the ruble collapsed in Russia. The case was unique in that, usually, either the banking system collapses, or the currency depreciates. Here we saw both. Money does not cost anything, but there is no money in banks. Zero multiplied by zero will be zero.



On the heels of the Russian crisis came the crisis of the hedge fund Long-Term Capital Management; LTCM, which is trading with huge borrowed funds, ultimately exploded, and if it were not for multibillion-dollar loans from the Federal Bank of New York, it would have been ready, it would seem, to drag off the entire US economy. In Europe, things were not much better. The euro was launched in January 1999, but the optimism surrounding it was more the exception. The norm was strong skepticism. Immediately after the launch, the Euro began to lose in price.



One explanation for the technical boom from March 1998 to September 2000 comes from the realization that everything else was insanely wrong at the time. The technology bubble was indirect evidence of this; the economy did not work because we could no longer compete with Mexico or China. The financial markets of developing countries have failed, wallowing in cronyism and mismanagement. Europe did not give much hope. And no one wanted to make risky investments after the LTCM crisis. Thus, by the end of the 90s there was only one area where money could be invested - technology.



Of course, proof by contradiction is a dangerous way to draw conclusions, but the world is not always logical. If A, B, C, and D are not true, the truth of E does not necessarily follow from this. The set may be somewhat wider. But, probably, it is worth noting that indirect evidence has a certain psychological force. Indeed, the technology worked, in contrast to everything else.

Iii. Insanity: September 1998 - March 2000

A. In general

The frenzy began in September 98. Probably the best way to convey how this madness happened was to tell a few stories. Any high-tech entrepreneur of that time must have a lot of tales about all this. Most of them have a common feature - the time was rave and just soaked with communication. People were extremely generous. It felt like the money was everywhere ... probably because it was so. And there was no shortage of very suspicious people hanging around the valley.



Admittedly, all these stories quite superficially reflect what is happening. But we should not be skeptical because of this — often the outward manifestations of things — the essence of things. In short, all these stories, reflecting the transient spirit of the “bubble”, except that they are just funny and unusual, are worth considering.



Themselves stories abound. For example, there were 40-year-old Stanford graduates who tried to establish dozens of stupid companies at the same time. Now, usually, if you are released in more than 40 years, it means that you are some kind of crazy, well, and the desire to open several companies at once is considered unreasonable. But at the end of 1998 a lot of people considered this a winning move.



There were breakfasts at Bucks and Il Fornario dinners. There were billionaires from Idaho arriving and giving money to anyone who had any idea with a beautiful flow. There were entrepreneurs, penniless, arranging dinners of several thousand dollars and trying to pay off shares of their company, and sometimes it even succeeded. Looking back, you can see a lot of absurdities. But all this was worthless nonsense: a lot was done in a social context. The parties became so important that someone even created a mailing list, with their schedule and ranking.



People began to discuss and do crazy things. There are business models in which, the more you made or sold, the more money you lost. It was like a SNL parody: the customer contributes $ 100 with one-cent coins and the bank loses money because processing and maintenance cost more than the deposit itself. But before the bank understands all this and stops, the dot-commers come and say without irony: “Everything is OK, everything will soon increase in value”. Irrationality became rationality, and simply adding ".com" to your company name doubled its cost in a day.



Yahoo grew to replace Netscape with Olympus, as the most arrogant high-tech company. In 97, it was the largest Internet company in Silicon Valley. Yahoo contributed to the fact that in 2000, PayPal thought hard about who to sell the company to, because when selling “shares for shares”, you need to be sure that the buyer is a reliable and stable company. Yahoo made itself an attractive buyer because it bought for its shares, which, in their words, "always only grow in value."



Huge fortunes were made in those 18 months. Many were lost. In 1997, Larry Augustin (Larry Augustin) was thinking about whether to close the project VA Linux. Decided not to close. In 1999, VA Linux came out with an IPO for $ 30 / share. The price quickly soared to $ 300 / share, marking in history as the steepest rise in the stock price on the first day of trading. Augustine owned 10% of the shares, which by the end of the day were worth about a billion dollars. People began to say that sometimes lightning beats twice in the same place, because Augustine had earlier rejected the offer to become the third employee of Yahoo, which would certainly make him a billionaire. But in the story of VA Linux, there was a sharp turn: 6 months later, after a period of recession, stocks lost 90% of their value. And those who did not sell their shares by this point in another 6 months lost another 90%. Augustine ended up with 5 or 6 million dollars, which is also a lot of money, but still it is not a billion.



All of these stories of parties, money, and successful IPOs have spawned many dubious companies. These companies were founded by dubious selling entrepreneurs and financed by dubious venture investors. Due to the fact that everyone around was expressing rather crazy ideas, it became increasingly difficult to distinguish normal companies from rogues. In order not to be deceived by dexterous traffickers, Max Levchin (Max Levchin) developed what he called the "aura test" - you listen to someone for 15 seconds and decide if he has a good aura. If yes, you continue to listen, if not, you just leave. It is not difficult to assume that companies that used something like the “aura test” were more likely to have experienced the dotcom crisis than all the others.

B. PayPal Mania

So, as PayPal appeared only in December 1998, when the high-tech boom was already in full swing, one of the problems that had to be faced was the high probability of hiring scammers who were multiplying at an incredible speed. The founders decided that they could not afford to hire such people, and simply hired their friends to work.



The initial idea of ​​PayPal was to transfer money between Palm Pilots. According to the polls, it was one of the 10 worst business ideas of 1999, and this says a lot. The initial business model was hardly better: it was assumed that PayPal had to earn money, then it would make more money, and then we would decide what to do with all this money. Strangely enough, with such a model it was quite possible to attract investment: one typical investor while serving Chinese food at Town & Country at Palo Alto was completely indifferent to what PayPal was doing, he was only interested in one question: who else is investing? At the end of the conversation, when they gave a “surprise cookie” , often together with the account), he read on it, and the cookie prompted him to invest.



One of the first turning points was the attraction of 4.5 mil. dollars from the company Nokia. The problem, however, was that the mobile Internet was not working at the time. Until good interfaces still live and live, and the accession of the headset, it seemed, took forever. Much to Nokia’s surprise, PayPal presented a prototype at the very first post-investment board meeting. The new idea was simple: an account-based system where you could send money to anyone with an email address. It was a good idea, but it all seemed too easy. In addition, there was a lot of competition. So in 1999, the tension increased and increased, everyone understood, or we move forward quickly or fail.



PayPal’s big challenge was attracting new customers. Tried to advertise - too expensive. We tried to conclude BD transactions (Business Development) with large banks. Only the triumph of the bureaucracy followed. The turning point was the moment when Luke Nosek (Luke Nosek) achieved a meeting with the chairman and top managers of HSBC Bank in London. Several old school bankers crammed into a large, wood-paneled conference room. They had no idea what to do with these California start-up guys who were talking about the Internet. They were so embarrassed and stunned that they could easily have passed for extras who absolutely did not know anything about payments and technologies. Luke, despite being on a diet, found himself Häagen-Dazs. And for ice cream, the PayPal team has come to an important decision: BD does not work. I needed organic viral growth. It was necessary to give people money.



So, that's what they did. Each new client received $ 10 upon registration, and the user received $ 10 for a recommendation. The exponential growth began, which cost PayPal $ 20 for each new customer. Everything looked as if it works and does not work at the same time: a 7-10% increase daily and 100 million users is good. Lack of profit and an exponential increase in costs - of course not. I felt the instability of the situation. PayPal was supposed to glow at every corner in order to attract additional capital and continue the job. (In the end, it worked, but that does not mean that it was the best way to create a company. I think it’s not.)



February 16, 2000 was a good day for PayPal. The Wall Street Journal published a laudatory article that highlighted the company's exponential growth and valued the company at $ 500 million. The following month, at a regular round of financing, the main investor accepted the WSJ estimate, finding it quite authoritative.



March was just crazy. One South Korean company that wanted to invest in PayPal called PayPal lawyers and asked where to transfer money. After that, they immediately transferred $ 5 million without any arrangements and signatures. Koreans completely refused to tell PayPal how to get the money back. They had a very simple position: “No, no, you must take them.” March 31, PayPal closed another round of financing of $ 100 million. It happened at a very good time, it was a turning point - then the dotcom crisis struck. So, PayPal had everything needed to create a real, working business.



The transition from 1999 to 2000 was very similar to what Prince had predicted in his song “1999” (“Cause they say 2,000 zero zero party over, oops! Out of time! So tonight I'm gonna like this 1999!” - "They say: 2000 is zero, zero is the end of the party, what a bummer! Time is up! And I'm going to break away, like the last time, as if it's still 1999!"). He was right, although he was wrong in the reasons. Probably no need to pay too much attention to this, but the song turned out to be prophetic. The incidental crash wave struck: in the first half of 2000, e-commerce companies fell, in the second B2B company. They were followed in 2001 by the telecommunications industry. If you had to choose the economic sector, which in March 2000 was the lowest, it would probably be the military industry. NASDAQ soared. No one believed that there would ever be another war. But everything fell on its head. The military industry grew almost all the next decade.

Iv. Pride and gloating

After 2001 and 2002, a huge amount of pride in some turned into the gloating of others. People said: "We knew it!" There was a cultural and social depression.



PayPal would survive this period, but it was clear that this was a completely new world. In 2001, the company broke even, was able to deal with several frauds and customer service problems. When PayPal registered for an IPO at the end of September 2001, it was the first after September 11th. This time, 20 months after the first eulogy of the WSJ, the second one came out. It began like this:



What would you do with a 3-year-old company that never made a profit, is about to lose a quarter of a billion dollars, and according to the results of its last check, the Securities and Exchange Commission (SEC) warns that its services can be used for money laundering ?



If you were PayPal's managers or venture capitalists, you would try to sell it to the public. That is what they are going to do for $ 80 million, trying to test the limits of investor tolerance and the credulity of financial markets.



Further, it is not much better: “The USA”, according to the publication, “needs it [in PayPal] just as in the epidemic of anthrax”.

V. Lessons Learned

A. Mir

A key lesson for most people was that the technical boom of the late 90s was a bubble. Returning back to the real economy was a must. If the 90s slogan was “bricks to clicks” (from bricks to clicks), then the 2000s demanded a return from clicks to bricks. People have gone into real estate and emerging markets. Serious investors like Warren Buffet have avoided high-tech companies in favor of the old economy markets. Business began to be assessed only by profit. Technology has faded into the background, to the first globalization. In general, Dotcom taught us that the future is very uncertain, and all the prophets are false prophets. We should not take the word of people.



The only problem with all these lessons is that they are probably all wrong. They are based on complex reactionary emotions. They come from pride, envy, and resentment about the 90s in general. When emotions come onto the scene, the analysis becomes unreliable.



The reality is that people were right about the score a lot in the 90s. The indirect evidence that technology has announced to the queen has not lost its strength due to all these future events. There were problems with the Euro, with the war, clan capitalism and excessive regulation of the economy. Technologies have never been perfect, and since they have not been vaccinated against the "bubble" - can be justified.

But be that as it may, March 2000 was not only the apogee of madness, in some important aspects it was a moment of truth.

B. Silicon Valley

In Silicon Valley, it became clear that now we need to do everything differently in order to survive in the world of gloating. First, you must believe and practice incrementalism. Seers are no longer honored.



Secondly, your startup should be "scanty." In fact, this means that you do not need to know exactly what you will end up with. You have to constantly experiment, getting closer to understanding over and over again.



Thirdly, you should not advertise at all. If growth is not viral, it is a fake.



Fourth, we must bear in mind that the new society is anti-social. People would like to go into some kind of anti-social modality. Google is a typical example; it is a product for people who are more likely to interact with computers than with people.



Fifth, the product must be promoted, bypassing the “Business Development”. In 1999, nimble "non-engineers" resorted to BD, in 2001 they created a "product". In the 90s, iconic CEOs were salespeople. For example, Larry Ellison. In the 2000s, iconic CEOs were product visionaries. For example, Steve Jobs (Steve Jobs).



In the sixth, there is a certain distrust of fast monetization. Better longer growth phase and later IPO. If your company grows relatively quickly - you need to reinvest profits to achieve even greater growth.



Finally, you should not discuss the future. You are not what you look like a little crazy on the general background, just do not do it.



Overall, the post-crisis effect was one big strategic retreat. What is right and what is not is a difficult question. But this is a question that must be answered. Of course, there were a lot of reasons for a rollback, but in many aspects, the return was still excessive. In some positions it definitely makes sense: for example, an early IPO, but others are clearly in doubt.

Is it really, to completely refuse advertising, not to use BD, sales? Do not you need to discuss the future? You must be open and understand that for most issues retreats were excessive.

Vi. Bubbles

In inheritance from the 90s we got a big question: are we in a high-tech bubble now?



Many say yes. Richter Scales video “Another bubble is coming!”, Filmed in October 2007, but it perfectly illustrates the way people think today.











Now back to the conversation at dinner. There are many good questions to discuss, but the bubble / non bubble issue is not one of them. You can of course put together a variety of random data, but the result will be superficial. Now there are a lot more than in 99 years, people are engaged in computer science, and erroneous judgments tend to accumulate over time.



Fragmentary data is unlikely to prove that the bubble theory is correct. Moreover, there is plenty of data indicating the opposite. Bubbles arise when (1) a belief is widespread, (2) it is not true. In our society, no one else believes in anything, and without a widespread erroneous belief it is impossible to create a bubble. The incredible story about the high-tech bubble comes from people who need a bubble. This is more a residual reaction to the pain of the 90s than the result of the analysis.



The theory of the absence of a bubble is probably more correct. In other words, it is probably better to assume that everything works and buy houses and stocks of high-tech companies, instead of arguing that now there is another high-tech bubble. But we must confront her too. Bubble and anti-bubble theories are wrong because they are rooted in opinions and have social roots. If the majority does not want to think, then even if you are against the majority, there is no sense in it.



To understand the businesses and startups of 2012, you need to do the exact opposite - you need to think for yourself. The question of the value of something is much more important than the question of a bubble. The question of value becomes more specific when we ask: what is the value of company X? Why?How can we understand this? These are the questions we must ask, and in the next lesson we will see how to approach them.



From the translator:

I ask translation errors and spelling in lichku. I also remind you that this text is a translation, its content is copyright, and the author’s opinion may not coincide with mine.