Course lectures "Startup". Peter Thiel. Stanford 2012. Session 4

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 translate the fourth lesson. Astropilot Editor.

Session 1: Future Challenge
Activity 2: Again, like in 1999?
Session 3: Value Systems
Session 4: 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?

Session 4: Last Turn Advantage

I. Failure to compete

It is usually considered that capitalism and perfect competition are synonymous. No monopolies. Firms compete, and competition eats up profits. It is curious, but it is better to consider capitalism and perfect competition as two opposites. Capitalism is, above all, the accumulation of capital, while in a world with perfect competition it is absolutely impossible to make money. Why do people strive to present capitalism and perfect competition as interchangeable things is an interesting question that needs to be fully considered.
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The first thing to recognize is that our positive attitude to competition has deep roots. Competition is something typically American. She tempers the character. She teaches us a lot. Competition is saturated with the whole field of education. Sometimes extremely high competition lays the foundation for future success, already devoid of competition. For example, to enter a medical school you have to endure very high competition, but as a result you become a highly paid specialist.

Of course, there are cases when perfect competition is really good. Not all businesses are created for the sake of money, there are people who can work without making much profit, earning just as much as they need for a living. But as soon as a person takes care of making money, he begins to be skeptical of perfect competition. Such areas as sports and politics are characterized by high competition initially. It is easier to create a successful business than to run 100-meter fastest or be elected as president.

It can upset people that competition is not always good. It is necessary to explain what I mean. In a sense, competition is really useful. It allows you to make learning and education better. Sometimes the letters and recommendations really reflect a high degree of achievement, but the concern is that chasing them often turns into a habit. Too often we forget about the goal of competition, in the end, people just learn to compete always and in everything. This is a disservice because the best thing to do is to stop competing, become a monopoly and enjoy success.

I will illustrate this with one story from the life of law school. To graduate, Stanford Law School (SLS - Standford Law School) and other elite universities earn enough awards and recommendations for the next ten years. It is considered most prestigious to get a position of the secretary of the Supreme Court. After graduating from SLS in 92nd, having worked for a year in the 11th arrondissement, I was among a small handful of secretaries who had reached the interview with two Judges from the Supreme Court. The desired position was at arm's length. I was one step away from winning this last competition. It remained only to hear "yes" and life would be arranged. But the dream did not come true.

A few years later, after I created and sold PayPal, I met one of my old SLS friends. The first thing a friend asked was: "Well, you're glad that you did not get a job in the Supreme Court then?" It's funny, because once it seemed that getting this job is very important, but there are many reasons why winning this last competition is not worth it. Probably, in the future this would threaten even more ridiculous competition. And there would be no paypal. This is amply expressed in the phrase about Rhodes Scholars scholarships: "they all had a great future in the past."

This does not mean that posts, scholarships and awards are often not a sign of high achievement. We must pay tribute to them. Just very often in a competitive race, we confuse what is valuable with what is difficult to achieve. Tough competition puts us heads together, making victory difficult. The intensity of competition substitutes value, but value is a completely different concept. In extreme form, we often compete for the sake of competition itself. Henry Kissinger’s anti-academic statement quite accurately illustrates the relationship between difficulty of achievement and value: the more ferocious in the scientific world of battle, the lower the stakes.

It seems to be true, but it seems a bit strange. If the stakes are so low, why do people continue to fight hard instead of doing something else? A question for thought. Maybe these people could not figure out what is valuable, and they know only one way - the path of struggle. Or they succumbed to the romantic charms of competition. In any case, it is important to understand at what point it makes sense to go the distance and turn life towards monopoly.

Let's take a look at high schools, which for Stanford students and the like were not a model of perfect competition. It was an inadequate battle for the means used: machine guns against bows and arrows. Without a doubt, just fun for the best students. Further higher education and competition is increasing. In graduate school is even tougher. The worst situation is in the professional world: at every step, people compete with each other to move forward. In general, this is a rather insidious question. We absorbed with mother's milk that strong perfect competition changes the world for the better. But in many ways deep-seated problems are hidden in the competition.

One of the problems of tough competition is that it demoralizes. The best graduates of schools, getting into elite universities, quickly become convinced that the bar has risen. But instead of questioning the existence of the bar itself, they tend to take up the challenge and participate in the race. For this you have to pay. In different universities, this problem is solved in different ways. In Princeton, the solution is a huge amount of alcohol, which helps to smooth the corners a little. The Yale offers painkillers in the form of eccentricity and encouraging students to engage in esoteric sciences. Harvard went the furthest, he sent students straight to the center of the cyclone, forcing them to compete even more intensely. In fact, all this leads only to the fact that you will be repeatedly beaten by all these supermen. Is this normal?

Of all the elite universities, Stanford is farthest from perfect competition. Maybe this is an accident, and maybe it was conceived. Probably, the geographical position contributed to this, the east coast never paid much attention to us, and we did not remain in debt. A variety of specializations of the university also influenced: a strong technical school, a strong humanitarian and even the strongest sports school in the country. There is competition here, but rather as a joke than seriously. Consider, for example, the Stanford-Berkeley rivalry. It is, to a greater extent, also asymmetrical. In football, Stanford usually wins. But let's take for example something really important, for example, the creation of high-tech companies. If you ask the question: “Graduates from which of the two universities founded the most valuable company?” Obviously, over the past 40 years, Stanford will win with a score of 40: 0. This is monopoly capitalism, terribly far from the world of perfect competition.

An excellent illustration of competition is war. Everyone just kills everyone. For war, there is always a rational explanation. Previously, she was often romanticized, now less often. This has its own logic: if you accept that life is really a war, then most of your life you need to either fight or prepare for it. This is the way of thinking that is planted at Harvard.

But what if life is not a war, but something more? Maybe sometime you just need to step aside? Maybe it's better to sheathe your sword, look around and choose some other target? Maybe “life is war” is an unreasonable lie that we are told, and the competition is not so good?

II What do people lie about

One of the negative conclusions from all this is that life is indeed a war. It is difficult to determine which part of life is perfect competition, and which monopoly. We need to start by evaluating the various statements that life is war. To do this, we must strictly dismiss falsehood and distortion of meaning. Let's look at the reasons why people can distort the truth about monopoly and competition in the world of technology.

A. Avoid the Ministry of Justice

One problem is that if you have a monopoly, you probably don’t want to talk about it. Antitrust laws have their own nuances and can easily be misleading. And, generally speaking, a manager boasting that he controls a monopoly is an invitation to audit, increased attention and excessive criticism. There is no point in doing this. Due to serious potential political problems, there is a strong positive incentive to distort the truth. You just do not need to say that you are a monopoly; you, on the contrary, need to shout from all the bell towers that this is not true, even if this is indeed the case.

The world of perfect competition is also not entirely free from distortion and lies. As elsewhere, one of the truths in this world is that companies need to invest. But another truth is that investors should not invest in such companies, since none of them can and will not be profitable. When two truths collide, there is a reason for the distortion of one of them.

So, monopolies pretend that they are not monopolies and vice versa. On the scale between perfect competition and monopoly, the range that most companies fall into is very narrow due to what these companies say about themselves. We see only slight differences between them. Since people have very strong reasons for lying about the convergence of opposites, the reality regarding monopoly and competition in the commodity business is probably more polar than we think.

B. Lying about the markets

People also tend to tell lies about the markets. Indeed, large markets are prone to high competition. No one wants to be a small fish in a large pond. Everyone wants to be the best in class. So, if your business is in a competitive situation, you may well be deceiving yourself, thinking that your market is much smaller than it actually is.

Suppose you are going to open a restaurant in Palo Alto, which will offer visitors only English cuisine. There will be only one such restaurant in Palo Alto. “No one else does this,” you say, “We are one of a kind.” But is it? What market do you work in? In the market of British cuisine? Or is it a restaurant market in general? You need to consider only the Palo Alto market, or you need to consider also people traveling to / from Menlo Park and Mountain View to eat. These are hard questions, but an even greater problem is the tendency not to ask them at all. Most likely, you, in your reasoning, underestimate the market. If a rude investor reminded you that 90% of restaurants burn out in the first 2 years, you would have come up with a story about what your difference is. You would take the time to convince people that you are the only player here, instead of seriously considering whether this is true. You have to wonder if there are people in Palo Alto who prefer only English cuisine. In this example, these are the only people you can motivate to pay as much as you want. And, quite possibly, such people simply do not exist.

In 2001, some PayPal employees dined at the Mountain View on Castro Street. There, as now, there were many eateries for every taste. If you wanted Indian, Thai, Vietnamese, American or any other cuisine, you could easily find several restaurants to choose from. Even if you decided on the type, you could choose further. Indian restaurants, for example, were divided into South and North Indian, inexpensive and elite. Street Castro was saturated with competition. PayPal, by contrast, was at that time the only e-mail-based payment processing company in the world. PayPal had fewer employees than the Mountain View restaurants; nevertheless, in terms of capital, PayPal was much more valuable than all these restaurants combined. Creating a new South Indian restaurant on Castro Street was (and is now) a rather difficult way to make money. This is a large competitive market, but when you focus on one or two differentiating factors, it's easy to convince yourself that this is not the case.

Movie advertising uses the same principle. Most commercials state that the film will be truly unique. This new film, say investors, will combine certain elements in a completely new way. And it may even be true. Suppose we plan to use the star Andrew Luck in the film, something between a "Hackers" and "Jaws". Something like this will turn out: an American football star joins an elite group of hackers to catch the shark that killed his friend. Nobody has definitely done this before. We had sports stars, "Hackers", "Jaws", but never had what is indicated by their intersection on the Venn diagram. The whole question is whether this intersection will bring any benefit or not?



The conclusion is that it is very important to understand how it all works. Non-monopolies always underestimate the market in which they operate, while monopolies insist that their market is huge. Using logical operators, non-monopolies use the intersection of markets: English cuisine ∩ restaurants ∩ Palo Alto, football star ∩ hackers ∩ sharks. Monopolies, on the contrary, use association to draw us a story about a tiny fish in a large pond. They kind of say: "No, no, we are not the monopoly that the government is looking for."

C. Lies about market shares

There are various ways to separate markets. Some better, some worse. It is crucial to ask about the true nature of your market, and get as close as possible to the answer. If you are creating an application for mobile devices, you need to decide whether your market is the entire market for iPhone applications (in which there are several hundred thousand other applications), or there is a way to create your own dedicated small market. This process should be approached as impartially as possible, without succumbing to extraneous influence.

Let's look at the search engine market. The answer to the question of whether Google is a monopoly or not depends on the market in which this company operates. If you say that Google is a search engine, then it owns 66.4% of this market. Microsoft and Yahoo own 15.3% and 13.8% respectively. Using the Herfindahl-Hirschman index, we conclude that Google is a monopoly, since the index of 66% is much more than 0.25.

But suppose Google is an advertising agency, not a search engine. It changes everything. The US search advertising market is estimated at $ 16 billion. The online advertising market in the US is $ 31 billion. The total US advertising market is $ 144 billion. The global advertising market is $ 412 billion. Even if Google dominates $ 16 billion in the US search advertising market, in the context of the global advertising market, this is less than 4%. Now Google is much less like a monopoly, and more like a small player in a very competitive environment.

You can also say that Google is a technology company. Yes, Google is engaged in search and advertising, but Google also produces cars, computer-controlled, is engaged in television. Google Plus is trying to compete with Facebook. Google also challenges the entire phone industry with its Android phones. The consumer high-tech market is estimated at $ 946 billion, so if we consider Google to be a technology company, we should consider it in a completely different context.

Not surprisingly, this is exactly how Google positions itself. Monopolists and large companies that are concerned with public opinion, tell everyone the "unifying" story. Defining its market as a union of all its main and peripheral markets, and presenting itself as a small fish in a large pond. Their stories are very reminiscent of Eric Schmidt’s quotation:

"The Internet is an incredibly highly competitive environment, every day new forms of access to information arise and start to be used here."

The subtext is this: we must run as hard as possible to at least stay in one place. We are not that big. We can be defeated and destroyed at any time. In this sense, we are no different from the pizzeria in the center of Palo Alto.

D. Cash and Competition

A very important indicator is the amount of money in the company accounts. Apple has $ 98 billion (and grows by about $ 30 billion every year), Microsoft has $ 52 billion, Google has $ 45 billion, Amazon has $ 10 billion. In a world of perfect competition, you have to reinvest all your money in order to save positions. If you are able to grow by $ 30 billion per year - there is a doubt in the competitiveness of the environment. Consider the gross margin - the difference between the revenue from product sales and variable costs. Apple has a gross margin of 40%, Google has 65%, Microsoft has about 75%, Amazon has 14%. But a profit of even 14 cents per dollar is gigantic, because for retail, the rate is about 2%.

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From the translator:
. I also remind you that this text is a translation, its content is copyright, and the author’s opinion may not coincide with mine.

Astropilot Editor. .