Founders - #278 Peter Thiel

Starting point is 00:00:00 Steve Jobs' return to Apple demonstrated the irreplaceable value of a company's founder. In some ways, Steve Jobs and Bill Gates were opposites. Jobs was an artist, preferred closed systems, and spent his time thinking about great products above all else. Gates was a businessman, kept his products open, and wanted to run the world. But both pushed the companies they started to achievements that nobody else would have been able to match. A college dropout who walked around barefoot and refused to shower, Jobs was also the insider of his own personality cult. He could act charismatic or crazy. All this eccentricity backfired on him in 1985.

Starting point is 00:00:40 Apple's board effectively kicked Jobs out of his own company when he clashed with the professional CEO brought in to provide adult supervision. Jobs' return to Apple 12 years later shows how the most important task in business, the creation of new value, cannot be reduced to a formula and applied by professionals. When he was hired as interim CEO of Apple in 1997, the impeccably credentialed executives who preceded him had steered the company nearly to bankruptcy. That year, Michael Dell famously said of Apple, What would I do? I'd shut it down and give the money back to shareholders. Instead, Jobs introduced the iPod, then the iPhone, and then the iPad before he had to resign in 2011 because of

Starting point is 00:01:26 poor health. By the following year, Apple was the single most valuable company in the world. Apple's value crucially depended on the singular vision of a particular person. This hints at the strange ways in which the companies that create new technology often resemble monarchies rather than organizations that are supposedly more modern. 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. The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme. We need unusual individuals to lead companies

Starting point is 00:02:20 beyond mere incrementalism. That is an excerpt found in the last chapter of the book I'm going to talk to you about today. The chapter is The Founder's Paradox, and the book is zero to one. Notes on Startups are How to Build the Future, and it was written by Peter Thiel. So this is the second or third time that I've read this book. All the way back in August of 2018, I did an episode on two books about Peter Thiel. It's episode number 31, and it's based on Ryan Holiday's fantastic book called Conspiracy, and then this book that I'm holding in my hand. So I want to jump from the last chapter all the way to the very beginning in the preface. Peter tells us why this book exists, and the book exists to help you think through how to make new

Starting point is 00:02:59 things. And I think it's going to be interesting for you and I to go through this book again, right after spending so many weeks going through the essays of Paul Graham. Because the way I think about the main theme of Paul Graham's essays, which he's writing over multiple decades, is that he's trying to explain how to find work that you love and that other people find valuable. And if you can do that over a long period of time, you'll be really great at it. And if you're really great at it, you're going to get wealthy. And that ties into a main theme in Peter's book, which is that you do not want to build an undifferentiated commodity business and that the founders that capture the most wealth are actually creating unique and new things. And the best way to do this today is by

Starting point is 00:03:37 creating new technology. I want to actually read a quote that comes from later in the book where he actually, Peter is going to define technology very similar to the way Paul Graham writes about in his essays. And Peter writes, properly understood, any new and better way of doing things is technology. Last week, Paul Graham told us that what is technology? It's technique. It is the way we all do things. Sam Walton got rich not by being a retailer, but by designing a new kind of store. So let's go to the preface of Zero to One. Humans are distinguished from other species by our ability to work miracles. We call these miracles technology. Technology is miraculous because it allows us to do more with less,

Starting point is 00:04:15 ratcheting up our fundamental capabilities to a higher level. And this book has some really powerful writing. This is the first example. By creating new technologies, we rewrite the plan of the world. And then right after that, he goes to another main theme of the book, that most of human behavior is just copying what already exists. That is one to N. Peter is not interested in that at all. That's why the book is called Zero to One. He does not want to go one to N, which is just making more of what already exists. He's like, you have to make completely new things. These are the kind of elementary truths that we teach as second graders, but they're easy

Starting point is 00:04:48 to forget in a world where so much of what we do is repeat what has been done before. And then he explicitly states the purpose of the book. He does not bury the lead at all. Zero to one is about how to build companies that create new things. It draws on everything that I've learned directly as a co-founder of PayPal and Palantirir and then an investor in hundreds of startups. I think this book was first published in 2014, so he's invested in a ton of other companies since then, but at the time of the writing, he's invested in hundreds of startups.

Starting point is 00:05:16 But while I have, oh, I love this part. But while I have noticed many patterns and I relate them here, this book offers no formula for success. The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist because every innovation is new and unique. No authority can prescribe in concrete terms how to be innovative. This is one of my favorite sentences in the entire book coming up right now. The single most powerful pattern I have noticed is that successful people

Starting point is 00:05:43 find value in unexpected places. I'm going to pause in the middle of this sentence. I'm going to relate this back to something we talked about last week. Sam Walton built one of the most valuable personal fortunes in the history of the world because he found value in unexpected places, which was these rural small towns throughout America that other retailers ignored. So let's start this over. The single most powerful pattern I have noticed is that successful people find value in unexpected places and they do this by thinking about business from first principles instead of formulas.

Starting point is 00:06:13 This book stems from a course about startups that I taught at Stanford in 2012. My primary goal in teaching the class was to help my students see beyond the tracks laid down by academic specialties to the broader future that is theirs to create. I don't know why, but when I read that sentence, this quote from Steve Jobs popped into my mind. The minute that you understand that you can poke life and actually something will pop out on the other side, that you can change it, you can mold it,

Starting point is 00:06:40 that's maybe the most important thing. It's to shake off this erroneous notion that life is there and you're just going to live in it versus embrace it, change it, improve it and make your mark upon it. Again, that's Steve speaking. This is Peter again. My primary goal in teaching this class or the class was to help my students see beyond the tracks laid down by academic specialties to the broader futures that is theirs to create. So then he starts the first chapter with this question, this contrarian question that he's famous for. I'm just going to read it to you and explain it to you. In this context, it's somewhat interesting.

Starting point is 00:07:12 I think it's more interesting when he applies it to what is the contrarian question for businesses. In other words, what is the most valuable business no one is building at this moment? Whenever I interview someone for a job, I like to ask the question, what important truth do very few people agree with you on? The question sounds easy because it's straightforward. Actually, it's very hard to answer. It's intellectually difficult because the knowledge that everyone is taught in school is by definition agreed upon. And it is psychologically difficult because anyone trying to answer must say something that she knows to be unpopular.

Starting point is 00:07:42 This is a fantastic line here. Brilliant thinking is rare, but courage is an even shorter supply than genius. So the contrarian question is, what important truth do very few people agree with you on? And then he's going to give an example of a way to answer it. A good answer takes the following form. Most people believe in X, but the truth is the opposite of X. Why would he start this book out with this question? Most answers to the contrarian question are different ways of seeing the present. Good answers are as close as we can come to looking into the future.

Starting point is 00:08:15 The subtitle of the book, How to Build the Future. So that is why he starts the book with the contrarian question. It's to prompt you into thinking of seeing the present in a different way. That's how it relates to how to build the future. The other part of the subtitle is notes on startups. Why did he connect the two? Because he feels startups are the ones that are actually going to are the only ones capable of actually building the future.

Starting point is 00:08:35 This is why new technology tends to come from new ventures. Startups from the founding fathers in politics to Fairchild, semiconductors, traders, eight in business, small groups of people bound together by a sense of mission have changed the world for the better. So what is this? I feel you and I have talked about in the last three weeks over and over and over again, Paul references the power of small groups, specifically the power of small groups of smart people questioning received ideas. Now we see that exact framework, that exact way of thinking pops up in this book too. So let's go to the next part. It is hard to develop new things in big organizations. Bureaucratic hierarchies move slowly and entrenched interests shy away from risk.

Starting point is 00:09:16 Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can. And this next sentence ties both parts of the subtitle, notes on startups and how to build a future together. Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. A new company's most important strength is new thinking. Even more important than nimbleness, small size affords space to think. This book is about the questions you must ask and answer to succeed in the business of doing new things. What follows is not a manual or a record of knowledge, but an exercise in thinking. That's fantastic because that is what a startup has to do.

Starting point is 00:09:59 Question received ideas and rethink business from scratch. So then Peter spends a chapter talking about what it was like building PayPal during this time of mass hysteria. So this fantastic book, I actually became friends with the author. His name is Jimmy Sony. I covered it back on episode 233. It's called The Founders, The Story of PayPal and the Entrepreneurs Who Shaped Silicon Valley. It covers the four-year history of PayPal. In fact, Jimmy spent more years researching that book. He spent five years researching writing that book.

Starting point is 00:10:30 So he spent a year longer than actually PayPal existed before it was sold to eBay. But there's a lot, a ton of useful information in that book. If you haven't listened to the podcast, listen to it, but then buy the book because there's just a lot of useful ideas for startup founders in there. But Peter, in this book, the one I'm holding my hand now is talking about, you know, 1999 was a really crazy part. And he starts off saying, this quote from Nietzsche, he says, madness is rare in individuals, but in groups, parties, nations, and ages, it is the rule. If you can, why is that important to startup founders? If you can identify a delusional popular belief, you can find what lies hidden behind it, the contrarian truth. Why is that important? He

Starting point is 00:11:05 just told us in the last chapter that success is finding value in unexpected places. That value usually goes against the conventional thinking or the conventional beliefs of the time that you're operating in. And the weird thing is it's hard to tell while it's happening. He says conventional beliefs only ever come to appear arbitrary and wrong in retrospect. Whenever one collapses, so whenever a conventional belief collapses, we call the old belief a bubble. And so he was building PayPal during the first dot-com bubble from September 1998 to March 2000. And that's what he's going to talk about. And really, I don't know why. So he's describing like the crazy behavior that was taking place in Silicon Valley during this time.

Starting point is 00:11:53 And I'm just going to read my note to you first because I don't know why it popped my mind other than I guess he's describing things that have nothing to do with serving your customer. So I realized to myself, I was like, oh, an antidote to irrational mania, right? Which is he's just quoting Nietzsche said madness is rare in individuals, but in groups, parties, nations and ages, it's the rule, right? So we're prone to it. I'm prone to it. You're probably prone to it. We're just humans. We're prone to this. It's like, what is the antidote to rational mania? And it's asking yourself, how does this behavior that I'm doing for my company actually help the customer? None of the stuff that's going on in this chapter was helping the customer. And so a way to anchor yourself around, how is this helping my customer?

Starting point is 00:12:20 It's really a way to act sane when everybody else is being crazy. So he says, when I was running PayPal in late 1999, I was scared out of my wits, not because I didn't believe in our company, but because it seemed like everyone else in the Valley was ready to believe anything at all. Everywhere I looked, people were starting and flipping companies with alarming casualness. And I love the fact that he used the word alarming casualness. One of my favorite things that John D. Rockefeller ever said, I read his autobiography, which he wrote as a much older man. I think he was like maybe 80 years old when he's writing it.

Starting point is 00:12:51 It's episode 148. If you haven't listened to that, if you haven't read the book yet, you should read it because you can read it in the weekend. But the podcast, I also think is really good. But I love the way where Rockefeller lets his ego slip when he's writing the book because he's talking about he was working for these two partners. This is before he started his own company. And he just thought they were really sloppy.

Starting point is 00:13:08 And he says their casual way of conducting affairs did not appeal to me. And you get the sense in his writing that he was disgusted by their sloppiness. And then he would he never states this, but I kind of read through the lines like, oh, no wonder these guys wind up going bankrupt. They deserve to be bankrupt. They were scrubs. But all these ideas are just embedded in this line of being disgusted by their casual way of conducting, essentially their casual way that they approach their business. And even, I think it was like 16, maybe 17, I forgot how old he was when he's working at maybe 18. But even that, he's just saying that just this casual way of conducting

Starting point is 00:13:42 affairs just did not appeal to me. And so we see that same terminology here. Everywhere I looked, people were starting and flipping companies with alarming casualness. And Peter continues, acting sanely began to seem eccentric. And so he's describing this environment and then he describes when it pops. And he says on February 16, 2000, the Wall Street Journal ran a story lauding our viral growth and suggesting that PayPal was worth $500 million. And I think for experienced founders and investors, this next sentence that you've seen the behavior like this in the past, for other people, they think, oh, no, the world can't possibly work this way. And it does.

Starting point is 00:14:15 And this is going to remind me of my favorite quote, one of my favorite quotes. I shouldn't say my favorite quote from Naval Ravikant. And he says, my number one repeated learning in life, there are no adults. Everyone is making it up as they go along. Figure it out for yourself and do it. Why is this tied to what Peter's talking about in the book? Because he's like, well, this Wall Street Journal comes out on February, this article on my company, PayPal, comes out February 16th, 2000, says, look how fast these guys are growing. It suggests that PayPal was worth $500 million, right? The journalist writing that just took a number out of thin air.

Starting point is 00:14:46 Why does that matter, right? Because this very next sentence will blow your mind. When we raised $100 million the next month, our lead investor took the journal's back of the envelope valuation as authoritative. What the hell? Other investors, I mean, we're kind of coming through a period a little bit, it's very similar to this. At least that's the opinion of this legendary investor named Bill Gurley. He was in this industry, working in the industry. I saw him reply back to somebody. Somebody asked, for people who were there, does this feel, meaning the time that we're

Starting point is 00:15:20 in right now, does this feel like the dot-com bust level unwinding yet? And his simple answer was yes. And so Peter's going to describe more of what was taking place at this time. Other investors were in even more of a hurry. A South Korean firm wired us $5 million without first negotiating a deal or signing any documents. When I tried to return the money, they wouldn't even tell me where to send it. And so Peter says this time was crazy, but the problem is the people that live through this actually learn the incorrect lessons. So there's going to be, he's essentially has four opposite principles for entrepreneurs. First, he's going to describe what is the normal reaction to the dot-com bust and then his reaction, which is almost completely opposite. He says the entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that are still

Starting point is 00:16:03 guiding business thinking today. So I'm going to tell you just one or two sentences from the description because this goes on for a few pages. I'm not going to read the whole thing. It's actually two pages, but number one, make incremental advances. Small incremental steps are the only safe path forward. So he's describing what he feels is a conventional lesson taken from the dot-com bust, and then he's going to describe the opposite, the lessons he took that are almost completely opposite. So that's number one, make incremental advances. Number two, stay lean and flexible. All companies must be lean, which is code for unplanned. Planning is arrogant and inflexible. Number three, improve on the competition. Do not try to create a new market prematurely.

Starting point is 00:16:40 Number four, focus on product, not sales. Technology is primarily about product development, not distribution. So one of my favorite things of the book is the fact that he repeats that over and over again, that sales and distribution are just as important as product. And so he says, these are the four things that most entrepreneurs learn from the dot com crash. This is he saying, well, actually, the opposite principles are probably more correct. And so this is Peter's four opposite principles for entrepreneurs. Number one, it is better to risk boldness than triviality.

Starting point is 00:17:09 Number two, a bad plan is better than no plan. Number three, competitive markets destroy profits. Main theme of the book, do not build an undifferentiated commodity business. He does a great job of describing in this book how power laws rule everything around us. I'll get there in a second, but that's what he's talking about there. Competitive markets destroy profits. Number four, sales matters just as much as product. And then again, he explicitly tells us why he's writing this.

Starting point is 00:17:35 To build the next generation of companies, we must abandon the dogmas created after the crash. That doesn't mean the opposite ideas are automatically true. You can't escape the madness of crowds by dogmatically rejecting them. Instead, this is my favorite part of the contrarian question. Instead, ask yourself, 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. That is a main thing that you and I have talked about over and over again. None of this works for entrepreneurs and investors if you cannot trust your own judgment.

Starting point is 00:18:10 If you cannot trust your own judgment, you have to go work for somebody else. The business version, now we get to the part that I was referencing earlier that I said is my favorite part about the contrarian question. The business version of our contrarian question is, what valuable company is nobody building? This question is harder than it looks because your company could create a lot of value without becoming valuable itself. Creating value is not enough. You also need to capture some of the value you create. And so now we get to one of his main themes is that you should aim for monopoly. But he says, by monopoly, we mean the kind of company that's so good at what it does that no other firm can offer a close substitute. So he started the chapter on the previous page comparing the market cap and profit performance of all the airlines compared with Google.

Starting point is 00:19:00 So if there's only one Google, therefore it can capture a lot more of the value that it creates, where all the airlines, the planes may look different, but they kind of do the same thing. They are not the kind of, they all do the same thing. They're just transporting you from point A to point B. And so his point is that you want to avoid competition the way you avoid competition by aiming for monopoly. And this is one of the punchlines. The airlines compete with each other, but Google stands alone. So again, by monopoly, we mean the kind of company that's so good at what it does that no other firm can offer a close substitute. The lesson for entrepreneurs is clear. If you want to create and capture lasting value, do not build an undifferentiated commodity business. And so he references this exactly what they did at PayPal.

Starting point is 00:19:41 He said in 2001, my coworkers in PayPal and I would often get lunch on Castro Street in Mountain View. We had our pick of restaurants, starting with the obvious categories. He's going to list a bunch of categories, but even if there's a dozen options to choose from. So he says, in contrast to the competitive local restaurant market, PayPal was at the time the only email-based payments company in the world. We employed fewer people than all the restaurants did, but our business was much more valuable than all of those restaurants combined. And then this is just an absolutely fantastic line that ties back to the very beginning of the book on the very first page of the book. The note is the book, this book exists to help you think through how to make new things. Why is that important? Every business is successful

Starting point is 00:20:18 exactly to the extent that it does something others cannot. 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. And he does a great job of summarizing why aiming for monopoly and avoiding competition is a path to create wealth. A creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profit for anybody, referencing what he just wrote about over several paragraphs with the American airline industry. So competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. Then I want to skip ahead to his thoughts on the importance of durability.

Starting point is 00:21:03 This is Charlie Munger's obviously personal hero of mine. I think it was his son in Poor Charlie's Almanac. And the book Poor Charlie's Almanac says that durability has always been a first rate virtue in his dad's eyes. So in Charlie Munger's eyes, he thought durability was always a first rate virtue. For Peter Thiel, Peter's like, well, listen, technology companies usually follow the opposite trajectory. So he was talking about the fact that like a popular nightclub or a popular restaurant in your city, successful ones are going to collect very healthy profits today. But usually their cash flows dwindle over the next few years or a decade from now because customers tend to move on to like the newer, trendier alternative. And so Peter's point is, well, technology companies follow the opposite trajectory, that all the value, most of the value is happening a decade, two decades from now. And so that is why he prioritizes durability. He says technology

Starting point is 00:21:51 companies follow the opposite trajectory. They often lose money for the first two years, or first few years, rather. Most of a tech company's value will come at least 10 to 15 years in the future. And so then he continues, the overwhelming importance of future profits is counterintuitive, even in Silicon Valley. For a company to be valuable, it must grow and endure. So he actually italicized those words, and endure. It must grow. I think a lot of people have been focused on the grow part and not on the enduring part, right? Everybody that you and I study in this podcast knows exactly what Peter's talking about. All of their businesses lasted for decade after decade after

Starting point is 00:22:25 decade after decade. So the company, to capture all the company value, it has to grow and endure. But many entrepreneurs focus only on short-term growth. They have an excuse. Growth is easy to measure, but durability isn't. Those who succumb to measurement mania obsess over weekly active users, monthly revenue targets, and quarterly earnings. However, you can hit those numbers and still overlook deeper, harder-to-measure problems that threaten the durability of your business. If you focus on near-term growth above all else, you miss the most important question

Starting point is 00:22:55 that you should be asking. Will this business still be around a decade from now? And that is a much harder question to answer because it says numbers alone will not tell you the answer. Instead, you must think critically about the qualitative characteristics of your business. And so then Peter takes us through like, what are some characteristics? Do you have a durable business, a business you're going to be able to collect profits 10, 15, 20 years from now? What is a company with large cash flows far into the future look like? Every monopoly is unique, but they usually share some combination of the following characteristics.

Starting point is 00:23:28 Number one, proprietary technology. Number two, network effects. Number three, economies of scale. And number four, branding. This is not a list of boxes to check as you build your business. There's no shortcut to monopoly. However, analyzing your business according to these characteristics can help you think about how to make it durable. So I'm just going to pull out a couple of the highlights. He goes into this. If you have the book, or obviously, I think everybody should have this book. Every founder should have this book. You could read it in two or three days easily. This is in the last mover advantage chapter. So number one, proprietary technology. Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.

Starting point is 00:24:07 His example is Google search algorithms. Number two, network effects. So he's going to talk about Facebook there, but this is the way to define network effects makes a product more useful as more people use it. Number three, economies of scale. A monopoly business gets stronger as it gets bigger. The fixed cost of creating a product can be spread out over ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero. This is going to sound real familiar because that idea is in Paul Graham's

Starting point is 00:24:40 essays over and over again. I'm sure I've talked about it in most of the last few episodes. He says a core group of talented people can provide something of value to millions of separate clients. And then number four, branding, which is also I've heard Peter talk about. He did a bunch of like podcast interviews when he was promoting this book a long time ago. And he says this is something that the one area that he understands the least. and that's branding. Creating a strong brand is a powerful way to claim a monopoly. Today's strongest tech brand is Apple. This is very fascinating, right? He's writing these words, what, in 2012 was the class, 2014 the book is published, you know, almost a decade later. Today's strongest tech brand is still Apple. Then he goes into the

Starting point is 00:25:23 very beginning of building a monopoly. This is going to be, again, echoing the ideas that were in Paul Graham's essay. He kept in his essays, he kept, Paul Graham kept quoting this guy named Paul Bouchette, I think is his name. It's the engineer who created Gmail. And he said that it is better to make a few people really happy than to make a lot of people semi-happy. So Peter says every startup should start with a very small market.

Starting point is 00:25:47 Small does not mean non-existent. It is much easier to reach a few thousand people who really need your product than to try to compete for the attention of millions of scattered individuals. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. That's a fantastic thought. I want to sit here and think about it a little bit more. Let me read it to you again. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. The exact opposite of trying to

Starting point is 00:26:22 build a product and compete for the attention of millions of scattered individuals. Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. Amazon shows how this can be done. Jeff Bezos' founding vision was to dominate all of online retail. We know this because, you know, I've done what, I don't know, five, six podcasts on Jeff in the archive. And when he was at D.E. Shaw, the code name for Amazon inside that hedge fund was the Everything Store. He just started with books. So it says, Amazon shows how this can be done. Jeff Bezos' founding vision was to dominate all of online retail, but he very deliberately started with books. So now we know how that paragraph ends. Let me read it from the top. Once you create and dominate a niche market, then you should

Starting point is 00:27:06 gradually expand into related and slightly broader markets. Amazon shows how this can be done. Jeff Bezos' founding vision was to dominate all of online retail, but he very deliberately started with books. And then he points out, okay, that sounds like you can read that paragraph over and over again. It sounds like, okay, I could do that. His whole point is like sequencing markets correctly is underrated and it takes discipline to expand gradually. The most successful companies make the core progression to first dominate a specific niche and then scale to adjacent markets, a part of their founding narrative. So then we move on to, I would say, Peter's overall worldview that you can have control a lot more than you think

Starting point is 00:27:45 and essentially shape the world around you. And he feels that this belief is completely counter to what is the prevailing cultural belief. And so he has an entire chapter called You Are Not a Lottery Ticket. And part of this is that you're going to be going up against, I don't even know if you go up against, like there's a lot of people that just don't believe you have any control over the future. And so Peter makes the case that this is a relatively new belief. He says every company starts in unique circumstances and every company starts only once. Statistics don't work when the sample size is one from the Renaissance and the Enlightenment to the mid 20th century. Luck was something to be mastered, dominated and controlled.

Starting point is 00:28:20 So he's clearly telling you how he views things. Right. So it says Ralph Waldo Emerson captured this ethos when he wrote, shallow men believe in luck, believe in circumstances, strong men believe in cause and effect. And I love what Peter does here. He's challenging us like, well, do you believe this or not? And if you do believe that everything is just random and luck, then put down the book because you're just wasting your time. So he says in 1912, after he became the first explorer to reach the South Pole, Amundsen, I forgot how to pronounce his name, wrote, victory awaits him who has everything in order.

Starting point is 00:28:52 Luck, people call it. So again, the quote there is, victory awaits him who has everything in order. Luck, people call it. No one pretended that misfortune didn't exist, but prior generations believed in making their own luck by working hard. If you believe your life is mainly a matter of chance, why read this book? Learning about startups is worthless if you're just reading stories about people who won the lottery.

Starting point is 00:29:17 I'm going to pause right there. It's at this point. I had two quotes pop into my mind. One I found in this book called Explore, Create My Life in Pursuit of New Frontiers, Hidden Worlds, and Creative Spark. It's written by Richard Garriott. I covered it back on episode 257. And I love what he says here. He goes, my heroes are people who took epic journeys into the unknown, often at substantial personal risk. I am simply following the path that they carved into history. And then the second one is a quote that I've told you over and over again. It's one of the best things I've ever heard. It comes from Marc Andreessen's blog archive, episode 50, if you haven't listened to it. The world is a very

Starting point is 00:29:55 malleable place. If you know what you want and you go for it with maximum energy and drive and passion, the world will often reconfigure itself around you much more quickly and easily than you would think. So let's go back to Amundsen's quote, victory awaits him who has everything in order. And this is why it's so important to check, like to take a minute, it's like, what do I actually believe? If you treat the future as something definitive, 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 trying to master it. And then something Peter does great is he'll set up the idea.

Starting point is 00:30:35 First, he'll compare like how this is how most people think. Then he'll set up the he gives you a hint that this is the way I think. Then he tells why is that important? Why is it important to have a definitive outlook on the future? And he says definitively, and he's going to tell us. And this is important to entrepreneurs and something you and I have seen over and over again in the history of entrepreneurship that is very different from what most people's advice is. They tell you, like, they kind of worship at the altar of diversification. And you'll find many of history's greatest entrepreneurs,

Starting point is 00:31:07 Warren Buffett, Charlie Munger, Edwin Land, Steve Jobs, over and over again, they reject diversification and they go all in. And the way to think about it is they're striving to be great at something substantive. And this is how Peter thinks about it. A definitive view favors firm convictions. Instead of pursuing many-sided mediocrity and calling it well-roundedness, he is not playing. Instead of pursuing many-sided mediocrity and calling it well-roundedness, he is not

Starting point is 00:31:25 playing. Instead of pursuing many-sided mediocrity and calling it well-roundedness, a definitive person determines the one best thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive, to be a monopoly of one. A definitive person determines the best, the one best thing to do and then does it. They do not pursue many sided mediocrity. And then I just referenced Steve Jobs.

Starting point is 00:31:56 That was no accident because Peter starts to end this chapter on how Steve rejected this idea that you're a lottery ticket and that you can actually pursue a big goal over multiple decades. So he says, the most important lesson to learn from Steve Jobs has nothing to do with aesthetics. The greatest thing Jobs designed was his business. Apple imagined and executed definitive multi-year plans to create new products and distribute them effectively. Forget minimum viable products. Ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus groups or by copying other people's successes.

Starting point is 00:32:34 This is such a great line here. Long-term planning is often undervalued by our indefinite short-term world. And then he tells a great story to round out this chapter. He was sitting, he's the first outside money into Facebook, and he was on their board when they got that billion dollar offer in 2006. And he tells the story of why Mark Zuckerberg completely dismissed even the thought of taking the money at that point. The power of planning explains the difficulty of valuing private companies. When a big company makes an offer to acquire a successful startup,

Starting point is 00:33:09 it almost always offers too much or too little. And he says you should only sell if you don't have a concrete vision for the company. Founders only sell when they have no more concrete visions for the company. Definitive founders with robust plans don't sell, which means the offer wasn't high enough. Well, that's interesting that he says that, which means the offer wasn't high enough. Well, that's interesting that he says that, which means the offer wasn't high enough. But is there always a price? Like for Steve Jobs, there's no price, right? There's no, I think if you read a bunch about him and study him, it's like you could offer him $10 trillion for Apple. He's just not interested. He doesn't care. I mean, he's not saying he doesn't care about the money, but he's not doing it for the money. I don't think

Starting point is 00:33:42 there's any price that he would have, you know, if you say what's the price that you don't get to work on this anymore, I don't think there's actually any price there. So, uh, but he says, uh, when Yahoo offered to buy Facebook for a billion dollars in July, 2006, I thought we should at least consider it. But Mark Zuckerberg walked into the board meeting and announced, okay, guys, this is just a formality. It shouldn't take more than 10 minutes. We're obviously not going to sell here. Mark saw where he could take the company and Yahoo didn't. A business with a good definitive plan will always be underrated in a world where people see the future as random. See what he did there? This is nearly 20 pages later from the beginning of the chapter. And he just ties all these ideas together. And the great thing about this book, too, is you don't have to necessarily read it

Starting point is 00:34:28 in sequential order. You can just pick up and read a chapter at a time, which I actually think is a better use. After you read it once all the way through, just keep it out and kind of use it as a reference. Because I think just picking up, basically, I'm talking to myself here, it's like, hey, I should really, like, to get this idea in my brain, reread this chapter from time to time that you are not a lottery ticket chapter. And then I just got to read one more thing from the chapter. It's the last paragraph. It's absolutely fantastic. A startup is the largest endeavor over which you can have definitive mastery, definitive mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by

Starting point is 00:35:03 rejecting the unjust tyranny of chance. You are not a lottery ticket. Then he has an entire chapter on the fact that we don't live in a normal world. We live under a power law, or why do just a handful of businesses generate all the profits? And a way to think about this is that small minorities often achieve disproportionate results. So he says this extraordinary stark pattern doesn't just apply to business in which a small few radically outstrip all rivals surrounds us everywhere in a natural and social world. The most destructive earthquakes are many more times

Starting point is 00:35:34 are many times more powerful than all other smaller earthquakes combined. The biggest cities dwarf all mere towns put together and monopoly businesses capture more value than millions of undifferentiated competitors. The power law, so named because exponential equations describe severely unequal distributions, is the law of the universe. It defines our surroundings so completely that we don't even see it. This chapter shows how the power law becomes visible when you follow the money. We do not live in a normal world. We live under a power law. And so then he talks about his business, which is being a venture capitalist.

Starting point is 00:36:13 The whole point is power laws dominate venture capital, and even most venture capitalists don't understand that. And then he goes into the power laws dominate not only the entire industry, but individual funds as well. The big question is when this takeoff will happen. For most funds, the answer is never. Most startups fail and most venture funds fail with them. Every VC knows that his task is to find the companies that will succeed.

Starting point is 00:36:37 However, even seasoned investors understand this phenomenon only superficially. They know companies are different, but they underestimate the degree of difference. And he goes back into the steam about this anti-diversification. Venture returns do not follow a normal distribution. They follow a parallel. A small handful of companies radically outperform all others. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you'll miss those rare companies in the first place. And then he just got a great sentence about this. Power law distributions are so big that they hide in plain sight. And then he goes into why is the

Starting point is 00:37:15 understanding of power law important for founders? This is going to be very similar to, again, reference, I want to tie this all together to Paul Graham's essays as well, where he talks about, says, listen, Larry Page and Sergey Brin, the founders of Google, are wealthy because they were the first investors in Google. They didn't invest with their money. They invested with their time and their energy and their skill set. The power law is not just important to investors. It's important to everybody because everybody is an investor. An entrepreneur makes a major investment just by spending her time working on a startup. Therefore, every entrepreneur must think about whether her company is going to succeed and become valuable. Every individual is unavoidably an investor too. When you choose a

Starting point is 00:37:56 career, you act on your belief that the kind of work that you do will be valuable decades from now. See what he did there. He tied this idea from a previous chapter. Again, these all tie together, right? A couple chapters ago, one of my favorite sentences in the book about the importance of durability, making sure that you're building a durable company, right? If you focus on near-term growth above all else, now I'm quoting from a previous chapter, you miss the most important question you should be asking. Will this business still be around a decade from now? Back to this chapter. When you choose a career, you act on your belief that the kind of work you will do, that the kind of work you do will be valuable decades from now. That is so important. Every decision I try to make is like, I just want to make sure I don't mess up a good thing because I know most people making podcasts

Starting point is 00:38:44 are not going to be around a decade from now. I don't have to be the best. I don't have to be the smartest. I don't have to be the most talented. I just have to outlast you. And there's no fucking way I'm quitting. And so I just love that idea. Let's see who's going to be around a decade from now. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now. An entrepreneur cannot diversify herself. You should focus relentlessly on something you're good at doing. I love that he says that. But before that, you must think hard about whether it will be valuable in the future. And then he ties us back into the fact that we live under a power law, so you must understand it if you're going to succeed. If you do start your own company, you must remember the power law to operate it well.

Starting point is 00:39:29 The most important things are singular. One market will probably be better than all others. One distribution strategy usually dominates all others too. You cannot trust a world, which he's describing. Again, this is what he believes. Now he's going to compare and contrast it with what most humans on the planet believe, right? It's completely different. You cannot trust a world that denies the power law to accurately frame your decisions for you. So what's most important is rarely obvious. It might even be a secret. And so then he goes right

Starting point is 00:40:02 into the next chapter, which is titled Secrets. Secrets give you an edge. That is his main, that is his main theme in this chapter. It's something, it's really important. The idea of edge, anytime I see the word edge now, I automatically think Ed Thorpe, who I'm trying to like, this is my personal blueprint, covered him on episode 222, if you don't know what I'm talking about, but he's writing a book. I think he's probably 80. He's definitely in his 80s when he's writing his, maybe 80, when he's writing his autobiography. And he talks about it. He's like, listen, I've had 50-year experience as a money manager.

Starting point is 00:40:35 He's like, listen, I believe that the surest way to get rich is to only play games or make investments where I have an edge. Secrets give you an edge. Let's go to Peter. Every one of today's most famous and familiar ideas was once unknown and unsuspected. A conventional truth can be important. It is essential to learn elementary mathematics, after all, but it does not give you an edge. It is not a secret. And so using contrarian thinking is how you uncover secrets. Contrarian thinking does not make any sense, though, unless the world still has secrets left to give up.

Starting point is 00:41:07 Recall the business version of our contrarian question. What valuable company is nobody building? Every correct answer is necessarily a secret. Something important and unknown. Something hard to do, but doable. If there are many secrets left in the world, there are probably many world-changing companies yet to be started. So if you think about what he's saying there in the paragraph, in that paragraph, how do you spot opportunity? You ask yourself, what valuable company is nobody building?

Starting point is 00:41:33 And there's just a few sentences later on in the chapter that made me think of when Paul Graham writes in the essay, Schlepp Blindness, talks about problems that are so difficult that people, like, they're hiding in plain sight. He uses Stripe as an example. It's like how many, you know, tons of developers knew it was a pain in the ass to accept a credit card online, and yet they'd build, like, recipe aggregator websites or whatever, because it's just so tough. It's like hiding. I just can't even think that it's even possible. And so Peter says, if you think something hard is impossible, you'll never even start trying to achieve it. Same idea. One is in the zero to one book. The other idea, same idea is written in a different context in Paul Graham's essay. I love how this shit fits together. That always gets me excited.

Starting point is 00:42:15 If you think something hard is impossible, you never even start to try to achieve it. Belief in secrets is an effective truth. The actual truth is that there are many more secrets left to find, but they only yield to relentless searchers. The same is true of business. Great companies can be built on open, but unsuspected secrets about how the world works. And then this gets into the fact that Peter believes in the ability to conspire, to have a conspiracy, to have a secret, to recruit co-conspirators, to not tell the outside world what you're doing and to effectively plan and change the world around you. That not only for business, which is this business, which is what this book is about, but if you haven't read Ryan Holiday's fantastic book, Conspiracy, goes into essentially Peter

Starting point is 00:43:00 seeking revenge on somebody. The actual storytelling, whether you think it was a good idea or not, that's not really what I'm debating here. I think the storytelling and the writing of that book is absolutely fantastic. In fact, I have the hardcover, the Kindle, and the Audible version of that book. I liked it so much. So this is essentially I'm like leaning into or leading into the end of this chapter, which I thought was interesting, is the fact that when you do find a secret, Peter is going to tell you, shut up about it. Bad boys move in silence. If you find a secret, you face a choice. Do you tell anyone or do you keep it to yourself?

Starting point is 00:43:36 It depends on the secret. Some are more dangerous than others. Unless you have perfectly conventional beliefs, it's rarely a good idea to tell everybody everything that you know. So who do you tell? Whoever you need to and know more. In practice, there's always a golden mean between telling nobody and telling everybody, and that is a company. The best entrepreneurs know this. Every great business is built around a secret that is 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.

Starting point is 00:44:13 Okay, so then he gets into the importance of laying the foundation for your company, that if you mess with the foundation, you cannot fix it. This is going to, again, tie into what, the fact that Paul Graham writes in his essays that on the Y Combinator application, they ask more about the relationship between co-founders than anything else. And this is why. Every great company is unique, but there are a few things that every business must get right at the beginning. I stress this so often that friends have nicknamed this Thiel's Law, which is a startup messed up at its foundation cannot be fixed. Bad decisions made early on, if you choose the wrong partners or hire the wrong people, for example, are very hard to correct after they are made. It may take a crisis on the order of bankruptcy before anybody will even try

Starting point is 00:44:56 to correct them. As a founder, your first job is to get the first things right because you cannot build a great company on a flawed foundation. And the very first decision that's most important is who you're picking as a co-founder. When you start something, your first and most crucial decision is to whom is to make that you make, excuse me, is whom to start it with. Choosing a co-founder is like getting married and founder conflict is just as ugly as divorce. If the founders develop irreconcilable differences, the company becomes the victim. When I consider investing in a startup, this is going to sound a lot like Paul Graham and Y Combinator, I study the founding teams.

Starting point is 00:45:32 Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they start a company together. Then a few pages later, he goes back into why this is so important to make sure that you're picking the right people that are around you. Since time is your most valuable asset, it is odd to spend it working with people who you don't envision any long-term future together. If you cannot count durable relationships among the fruits of your time at work, you haven't invested your time well.

Starting point is 00:46:07 And so the next sentence he says is exactly what Steve Jobs told us back in 1987. He was interviewed for that book in the company of giants. And they're like, hey, they're like Stanford MBA students, if I remember correctly. And they're like, yeah, but startup founders don't have a lot of time to recruit people. And Steve's like, no, no, no, I disagree completely. Recruiting is the founder's most important job. And he's like, you know, you're the success depends on the first 10 people that you recruit into your company. And Peter Thiel says recruiting is a core competency. It should never be outsourced. And he says this is extremely difficult

Starting point is 00:46:40 because talented people do not need to work for you. They have plenty of options. So he gives us a couple ideas here. General and undifferentiated pitches do not say anything about why a recruit should join your company instead of many others. The only good answers are specific to your company, so you will not find them in this book. But he does give advice where it's like you need to pick somebody that's obsessed with working for your specific company because they believe in the mission. Do not fight the perk war, meaning the kind of people that are swayed by what he says like free laundry pickup or pet daycare would be a bad addition to your team if you're a startup. Just cover the basics like health insurance and then promise when no other company can. The opportunity to do irreplaceable work on a unique problem alongside great people.

Starting point is 00:47:27 Ideally, you're shooting for a tribe of like-minded people fiercely devoted to the company's mission. And then Peter talks about one of the best ideas I've actually ever heard from him. This is the idea he used when he was CEO of PayPal. And he's like, he would only assign one thing. So it's under the subtitle, do one thing. There's actually a video, I'll leave it linked below, where Keith Ravoy, who's a founder and investor, but at the time was working at PayPal under Peter, gives some more context to why this is valuable.

Starting point is 00:47:58 I'll read from that transcript in one second. Let me lay out the idea in Peter's own words. The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee's one thing was unique, and everyone knew I would evaluate him only on that one thing. In fact, if you try to go up to Peter and talk to him about something other than the

Starting point is 00:48:19 one thing that he assigned to you, he would not have the conversation with you. So it says, and everyone knew I would evaluate him only on that one thing. I had started doing this just to simplify the task of managing people, but then I noticed a deeper result. Defining roles, reduce conflict. Most fights inside a company happen when colleagues compete for the same responsibilities. And so there's a video I'll leave below. It's called insist on focus. It's like three minutes long. And I'm just going to read from the transcript real quick, which is Keith Reboy describing why Peter Tields do one thing and only talking to them about one thing was actually such a successful strategy. substitute from A plus problems that are very difficult to solve B plus problems, which you know a solution to, or you at least are on a path to solve. He says, let's say you have a checklist every morning. Imagine waking up, a lot of people write checklists of things they need to

Starting point is 00:49:15 accomplish. Most people have an A plus problem, but they don't know the solution. So they procrastinate on that solution. And then they go down the checklist to a second or third initiative. And then they'll go and try to solve those problems to cross them off the list. The problem is if your entire organization is always solving the second, third, or fourth most important thing, you never solve the first. And so Peter's technique of forcing people to only work on one thing meant everybody had to work on A-plus problems. And if every part of the organization once in a while can solve a problem that the rest of the world thinks is impossible, you wind up with an iconic company that the world's never seen before. And then let's go back to this chapter. We'll end it here.

Starting point is 00:49:57 I love what he says. You and I have talked about the importance of cults over and over again. I think the episode where I talk the most explicitly about this is number 244 on In-N-Out Burger. The best startups at Trader Joe's is also a version of this idea that Peter's talking about. The best startups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful startup are fanatically right about something those outside have missed. And then he has an entire chapter dedicated on the importance of sales and distribution. The beginning of the chapter, we'll get to in a second, but one of the most important

Starting point is 00:50:37 sentences in the entire book is when he writes, superior sales and distribution by itself can create a monopoly even with no product differentiation. The converse is not true. And then this is another example of something he brings up a few times where there's just a lot of things that are hidden in plain sight. Even though sales is everywhere, most people underrate its importance. Distribution may not matter in fictional worlds, but it matters in ours.

Starting point is 00:51:03 We underestimate the importance of distribution, and he's going to define that as a catch-all term for everything that it takes to sell a product. And so he says, customers will not come just because you build it. You have to make that happen, and it's harder than it looks. In Silicon Valley, nerds are skeptical of advertising, of advertising, marketing, and sales, because they seem superficial and irrational. But advertising matters because it works. It works on nerds and it works on you. You may think that you're an exception, that your preferences are authentic

Starting point is 00:51:33 and advertising only works on other people. It's easy to resist the most obvious sales pitches so we entertain a false confidence in our own independence of mind. But advertising doesn't exist to make you buy a product right away. It exists to embed subtle impressions that will drive sales later.

Starting point is 00:51:51 Anyone who cannot acknowledge its likely effect on himself is doubly deceived. And he goes into this idea that the best sales is hidden, that the grandmasters of sales, and he references a few in the book, but we're going to use an

Starting point is 00:52:05 example from 1876 in the writing of Mark Twain, it's just a really interesting thought about the best sales is actually hidden. There are sales grandmasters. If you don't know any grandmasters, it's not because you haven't encountered them, but rather because their art is hidden in plain sight. Tom Sawyer managed to persuade his neighborhood friends to whitewash the fence for him. This was a masterful move, but convincing them to actually pay him for the privilege of doing his chores was the move of a grandmaster, and his friends were none the wiser. Not much has changed since Twain wrote in 1876. The most fundamental reason that even business people underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world that is

Starting point is 00:52:53 secretly driven by it. The engineer's grail is a product great enough to quote, sell itself. But anyone who would actually say this about a real product must be lying. Either he's delusional, which means he's lying to himself, or he's selling something and thereby contradicting himself. It's better to think, this is so fantastic, it is better to think of distribution as something essential to the design of your product. If you invented something new, but you hadn't invented an effective way to sell it, you have a bad business, no matter how good the product. This is something I bring up over and over again. There's this famous speech where Steve Jobs, it's on Steve Jobs' plan to return to Apple or plan to turn around Apple. He gives it right. It's like 1987,

Starting point is 00:53:38 maybe 1998. It's a few weeks after he had returned to Apple. But what's so fascinating about that talk, which it's a really great talk to watch, is when you hear people describe it, they tend to focus on Steve's comments about going back and building great products. The fact that Apple's products suck at the time. He says, you know, they have no sex in them is one line that's from the talk that's rather famous. But what they miss is the fact that he said, we're going to get back to great products, great marketing, and great distribution. It wouldn't have worked if it was just we're going to get back to great products. That's not what he said. And it's exactly what Peter's saying here. It's you need to think of distribution as something essential to the design of your product. If you've

Starting point is 00:54:19 invented something new, but haven't invented an effective way to sell it, you have a bad business, no matter how good the product. So then he goes into what I feel is the most important sentence in this chapter that I've already read to you. Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product, even if it easily fits into already established habits and anyone who tries it likes it immediately, you must still support it with a strong distribution plan. And then Peter says that distribution, like many things in life, will also follow under the power law. This is his entire, I'm going to read the entire paragraph. It's titled the power law of distribution. One of these, one of these methods is likely to be

Starting point is 00:54:59 far more powerful than every other for any given business. Distribution follows a power law of its own. This is counterintuitive for most entrepreneurs who assume that more is more. But the kitchen sink approach, employ a few salespeople, place some magazine ads, and try to add some kind of viral functionality to the product as an afterthought, does not work. Most businesses get zero distribution channels to work. Poor sales rather than bad product is the most common cause of failure. If you can get just one distribution channel to work, you have a great business. And then he ends with a main theme in the history of entrepreneurship. Everybody sells. Everything requires to be sold. Everybody sells. Everybody has a product to sell,

Starting point is 00:55:43 no matter whether you're an employee, a founder, or an investor. And then I'll end on this parting advice. Our task today is to find singular ways to create new things that will make the future not just different, but better. The essential first step is to think for yourself. And that is where I'll leave it for the full story. I highly recommend buying the book. If you buy the book using the link that's in the show notes of your podcast player, you'll be supporting the podcast at the same time. If you want to use the same app that I use to store all the highlights and notes for the books that I read, I use this app called ReadWise and they will give you 60 days free to try it to see if you like it as much as I do.

Starting point is 00:56:20 All you have to do is go to readwise.io forward slash founders. And that link will also be in the show notes. That is 278 books down 1000 ago. And I'll talk to you again soon.

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Founders - #278 Peter Thiel

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