|The PayPal Mafia – Silicon Valley's richest group of men|
The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
Today’s “best practices” lead to dead ends; the best paths are new and untried.
The Challenge of the Future
That is what a startup has to do: question received ideas and rethink business from scratch.
Party Like It's 1999
The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:
- Make incremental advances.
- Stay lean and flexible.
- Improve on the competition.
- Focus on product, not sales.
And yet the opposite principles are probably more correct:
- It is better to risk boldness than triviality.
- A bad plan is better than no plan.
- Competitive markets destroy profits.
- Sales matters just as much as product.
How much of what you know about business is shaped by mistaken reactions to past mistakes? The most contrarian thing of all is not to oppose the crowd but to think for yourself.
All Happy Companies Are Different
The world we live in is dynamic: it’s possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.
All happy families are alike; each unhappy family is unhappy in its own way. Business is the opposite. All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.
The Ideology of Competition
Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival.
Anyone would fight for things that matter; true heroes take their personal honor so seriously they will fight for things that don’t matter. This twisted logic is part of human nature, but it’s disastrous in business. If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.
Last Mover Advantage
Characteristics of monopoly: Proprietary technology, network effects, economies of scale, and branding.
What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you.
It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision.
You Are Not a Lottery Ticket
If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it.
A business with a good definite plan will always be underrated in a world where people see the future as random.
Follow the Money
You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
For the startup world, this means you should not necessarily start your own company, even if you are extraordinarily talented. People who understand the power law will hesitate more than others when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast.
If you do start your own company, you must remember the power law to operate it well. The most important things are singular: One market will probably be better than all others. One distribution strategy usually dominates all others, too. Time and decision-making themselves follow a power law, and some moments matter far more than others.
The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
A startup messed up at its foundation cannot be fixed.
When you start something, the first and most crucial decision you make is whom to start it with. Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.
A company does better the less it pays the CEO. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
The Mechanics of Mafia
We didn’t assemble a mafia by sorting through résumés and simply hiring the most talented people. Why work with a group of people who don’t even like each other? Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together.
You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done. You should be able to explain why your company is a unique match for him personally.
From the outside, everyone in your company should be different in the same way. On the inside, every individual should be sharply distinguished by her work.
If You Build It, Will They Come?
Nerds vs. Salesmen: What nerds miss is that it takes hard work to make sales look easy.
All salesmen are actors: their priority is persuasion, not sincerity.
If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.
The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC). In general, the higher the price of your product, the more you have to spend to make a sale—and the more it makes sense to spend it.
Man and Machine
The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
Technology is the one way for us to escape competition in a globalizing world.
The seven questions that every business must answer:
- The Engineering Question
Can you create breakthrough technology instead of incremental improvements?
- The Timing Question
Is now the right time to start your particular business?
- The Monopoly Question
Are you starting with a big share of a small market?
- The People Question
Do you have the right team?
- The Distribution Question
Do you have a way to not just create but deliver your product?
- The Durability Question
Will your market position be defensible 10 and 20 years into the future?
- The Secret Question
Have you identified a unique opportunity that others don’t see?
The team insight—never invest in a tech CEO that wears a suit—got us to the truth a lot faster. The best sales is hidden. There’s nothing wrong with a CEO who can sell, but if he actually looks like a salesman, he’s probably bad at sales and worse at tech.
This philanthropic approach to business starts with the idea that corporations and nonprofits have until now been polar opposites: corporations have great power, but they’re shackled to the profit motive; nonprofits pursue the public interest, but they’re weak players in the wider economy. Social entrepreneurs aim to combine the best of both worlds and “do well by doing good.” Usually they end up doing neither.
The Founder's Paradox
A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.
Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from everybody at his company.
Stagnation or Singularity?
Our task today is to find singular ways to create the new things that will make the future not just different, but better—to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.
N.B. Peter Thiel's lecture in Stanford in Fall 2014, as a part of Sam Altman's Startup Class.