The Pete Quiñones Show - Pete Reads Peter Thiel's 'Zero to One' - Part 1

Episode Date: March 1, 2024

67 MinutesSafe for WorkPete starts reading and commenting on Peter Thiel's best-seller, Zero to One. In this first episode, Pete covers the first three chapters: 1. The Challenge of the Future; 2. Party Like It’s 1999; and 3. All Happy Companies Are Different. Get Autonomy Support Pete on His WebsitePete's PatreonPete's Substack Pete's SubscribestarPete's VenmoPete's Buy Me a CoffeePete on FacebookPete on TwitterBecome a supporter of this podcast: https://www.spreaker.com/podcast/the-pete-quinones-show--6071361/support.

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financial services are limited trading as cooper financial services is regulated by the central bank of arland all right i want to welcome everyone to the first of these where i'm going to start releasing episodes every week where i'm reading through and commenting on books that i want to read and i hope that you guys enjoy them i'm picking ones that i'm very interested in reading myself many of these, I may just be reading for the first time, and you may be experiencing that with me. This isn't one of them. But yeah, welcome. And I hope this catches on.

I know that people have enjoyed the read-alongs before. I will have guests sometimes, but a lot of times I'm just going to do this because I have the time to do it. And I'm just going to jump in and start reading books. And I'm going to read them front to back and try to release two, maybe even three episodes a week doing this. So the first book I chose is a book by, I think really the best way to describe it is it's based upon the thought of Peter Thiel. And because it was written by Blake Masters. I'm sure some of you heard that name. He ran for Senate out of Arizona in 2022 and lost.

It was no one hid the fact that he was backed by Peter Thiel. And the reason I chose this book to start with is because, Because I'm trying to look at things from different perspectives in the past. And coming out of libertarianism and reading Austrian economics, there are all of these set answers that you have to everything. And one of those things that I think is very evident from anybody who's listened to Austrian economists is that monopolies are bad. Or I don't know that Australian economists would say monopolies are bad.

They would say that they're unnatural. A lot of communists and socialists would say, oh, if it was a free market, there would be monopolies. And that makes it a bad thing. But Austrian economists say, well, no, you know, you could start up a, you could start your own Amazon and compete against Amazon. Well, one of the reasons I picked this book is because the argument is made in this book that, that monopolies are how you innovate. It's not the only argument this man here, but it's one of the most important ones

as to why I picked this book. More importantly, because this is a book that whenever anyone reads it, and I've recommended to some people read it, they're like, oh, that's why the company that I worked for failed. That's why the company I worked for didn't run properly. They just saw things in this book that they hadn't thought before.

And I think one of the reasons why is because there are people who start companies and they are extremely successful, incredibly successful. And I think there's a lot of conspiracy theories about, oh, these are just made people. And they were given this technology by, I don't know, space aliens or something like that. And, you know, they're just a frontman. Well, I think you'll, once you go through this, you'll see that, Unless one of the aforementioned aliens wrote this, this is something different. And I want to see if you'll enjoy it with me and get as much out of it as I did. So I'm going to start with the preface and I'll just go from there.

And of course, I'll be stopping to comment as I go along also. Like I said, sometimes I will have people on to read with. me, but I wanted to do this on my own because I just got back from a bunch of days off where I didn't want to do anything and just relax. And I thought this was a good way to jump right back in. So this is the preface of zero to one notes on startups or how to build the future based on the thought of Peter Thiel, written by Blake Masters. Preface, zero to one. Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page, Sergi 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. Of course, it's easier to copy a model than to make something new. Doing what we already know how to do takes the world from one to N, adding more of something familiar. But every time we create something new, we go from zero to one. The act of creation is singular, and as is the moment of creation and the result of something fresh and strange. So I think immediately you can see that most people when they start a business or they come up with a product, they're really not coming up with a product. They're not coming up

with something new. They're either doing something that's been done before, which is safe. We have franchises. Every place I've traveled around the world, I see KFCs and Subways as well. And those work. But you're not innovative. on anything. And that's basically what we're talking about here. You go from one to end. If you build upon, you know, the cell phone, you haven't really in it, you haven't taken, you haven't created something new. The point of this book is talk about creating something new. So onward. Unless they invest in the difficult task of creating new things, American companies will fail in the future, no matter how big their profits remain today. What happens, what happens when we've gained

everything to be had from fine-tuning the old lines of business that we've inherited. Unlikely as it sounds, the answer threatens to be far worse than the crisis of 2008. Today's best practices lead to dead ends. The best paths are new and untried. In a world of gigantic administrative bureaucracies, both public and private, searching for a new path might seem like hoping for a miracle. Actually, if American business is going to succeed, we are going to need hundreds or even thousands of miracles. This would be depressing, but for one crucial fact, 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, ratcheting up our fundamental capabilities to a higher level. Other animals are instinctively driven to build things like dams or honeycombs, but we are the only ones who can invent new things and better ways of making them. Humans don't decide what to build by making choices from some cosmic catalog of options given in advance. Instead, by creating new technologies, we rewrite the plan of the world. These are the kind of elementary truths we teach to second graders,

but they are easy to forget in a world where so much of what we do is repeat what has been done before. Zero to one is about how to build companies to create new things. It draws on everything I've learned directly as a co-founder of PayPal and Palantir and then an investor in hundreds of startups, including Facebook and SpaceX. 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.

Indeed, 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. I hope you're all following what he's saying here. This book stems from a course about startups that I taught at Stanford in 2012. College students can become extremely skilled at a few specialties, but many never learn what to do with those skills in the wider world. 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. One of those students, Blake Masters, took detailed class notes which circulated far beyond the campus, and in zero to one, I have worked with him to revise the notes for a wider audience.

There's no reason why the future should happen only at Stanford or in college or in Silicon Valley. All right. First section here is called the challenge of the future. Whenever I interview someone for a job, I like to ask this question. What important truth do very few people agree with you on? The great thing about my audience, everybody listening to this or watching this right now is, I'm sure all of you have truths that you definitely the people around you do not, well, things that you believe that people around you do not agree with. So this 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. That's one of the reasons why when you look at you have a journalist school, J school, why do they all sound the same? Why is the president of Harvard persecuted for plagiarism when basically everything she believes is what everybody else in that in that world believes? It's all plagiarism. Nobody believes anything new. and it's psychologically difficult because anyone trying to answer must say something she knows to be unpopular.

Brilliant thinking is rare, but courage is even in shorter supply than genius. Most commonly I hear answers like the following. Our educational system is broken and urgently needs to be fixed. America is exceptional. There is no God. These are bad answers. The first and second statements might be true, but many people already agree with them. The third statement simply takes one side in a familiar debate.

A good answer takes the following form. Most people believe in X, but the truth is the opposite of X. I'll give my own answer later in this chapter. What does this contrarian question have to do with the future? In the most minimal sense, the future is simply the set of all moments yet to come. But what makes the future distinctive and important isn't that it hasn't happened yet, but rather that it will be a time when the world looks different from today. Ten years from now the world is going to look different from today.

Who are the people going to be who create that world that looks different? So one of the questions that a book like this seeks to answer but also seeks to, but doesn't really seek to answer it. It seeks to make you to realize that one of those people could be you. And that's the only way we're going to move forward. In this sense, if nothing about our society changes for the next 100 years, then the future is over 100 years away. If things change radically in the next decade, then the future is nearly at hand.

No one can predict the future exactly, but we know two things. It's going to be different, and it must be rooted in today's world. Most answers to the contrarian question are different ways of seeing the present. Good answers are as close as we come to looking into the future. The future of progress. Zero to one, the future of progress. When we think about the future, we hope for a future of progress. That progress can take one of two forms.

Horizontal or extensive progress means copying things that work, going from one to end. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things, going from zero to one. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. If you take one typewriter and build 100, you have made horizontal progress. If you have a typewriter and build a word processor, you have made vertical process. There's a for those watching they can see that there's a graph here a graphic here that just shows an arrow going up says vertical or intensive progress doing new things horizontal or extensive progress copying things that work at the macro level the single word for horizontal progress is globalization

so taking things that work somewhere and making them work everywhere and making them work every everywhere. So copying things that work, you're just basically looking to build upon what's already there, just to multiply. And in order for it to multiply, in order for it to make any kind of profit off of that, it has to go beyond where it's already been. I think that's the reason why the term globalization is used. China is the paradigmatic example of globalization. Its 20-year plan is to become like the United States is today. The Chinese have been straightforwardly copying everything that has worked in the developed world, 19th century railroads, 20th century air conditioning, and even entire cities. They might skip a few steps

along the way, going straight to wireless without installing landlines, for instance, but they're copying all the same. The single word for vertical, zero to one progress, is technology. The rapid progress of information technology in recent decades has made Silicon Valley the capital of technology in general. But there is no reason why technology should be limited to computers. Properly understood any new and better way of doing things is technology. There's another graph here, the graphic here, has an arrow going up, technology is zero to one, arrow going sideways, globalization one to N. Because globalization and technology are different modes of progress, it's possible to have both either or neither at the same time. For example, 1815 to 1914 was a period of both rapid technological development and rapid globalization.

Between the First World War and Kissinger's trip to reopen relations with China in 1971, there was rapid technological development, but not much globalization. You catch them in the corner of your eye. Distinctive, by design, they move you, even before you drive. The new Cooper plug-in hybrid range for Mentor, Leon, and Teramar. Now with flexible PCP finance and trading boosters of up to two. 2000 euro. Search Coopera and discover our latest offers. Coopera. Design that moves.

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it tomorrow. Or you know, fight Brenda. Since 1971, we have seen rapid globalization along with limited technological development, mostly confined to IT. This age of globalization has made it easy to imagine that the decades ahead will bring more convergence and more sameness. Even our everyday language suggests we believe in a kind of technological end of history. The division of the world into the so-called developed and developing nations

implies that the developed world has already achieved the achievable, and that poorer nations just need to catch up. But I don't think that's true. My own answers to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more. Without technological change,

if China doubles its energy production over the next two decades, it will also double its air pollution. If everyone in India's hundreds of millions of households were to live the way Americans already do, using only today's tools, the result would be environmentally catastrophic. Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.

This is when you hear people talk about like the Green New Deal, what they're looking at is they're looking at basically stopping all technology. all technology from going. You don't hear them talking about, you know, you hear, oh, the kind of technology that they talk about is, oh, we need artificial food. We need food that doesn't come that isn't associated with cow farts and things like that. What Peter and Blake are talking about here is they're talking about technology that would be able to mitigate that, that we should be looking beyond what we have now.

It's almost like the Green New Deal. that we're not going to have any progress, that we've progressed out. New technology has never been an automatic feature of history. Our ancestors lived in static zero-sum societies where success meant seizing things from others. They created new sources of wealth only rarely, and in the long run, they could never create enough to save the average person from an extremely hard life. Then after 10,000 years of fitful advance, from primitive agriculture to medieval windmills and 16th century astrolabst. The modern world suddenly experienced relentless technological progress from the advent of the steam engine in the 1760s all the way

up to about 1970. As a result, we have inherited a richer society than any previous generation would have been able to imagine. Any generation, accepting our parents and grandparents, that is. In the late 1960s, they expected this progress to continue. They looked forward to a four-day work week, energy too cheap to meter, and vacations on the moon. But it didn't happen. The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old. Only computers and communications have improved dramatically since mid-century. That doesn't mean our parents were wrong to imagine a better future. They were only wrong to expect it as something automatic.

Today, our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th. See, basically, what he's saying is he's saying that when you look back at those like Star Trek and you look back at people talking about flying cars and jetpack. and things like that. They talked about them, but where was the innovation? And some of that may have been caused by, some of that may have been retarded by environmental,

environmental restrictions, regulations on a lot of different things, but then you can get in the argument of, oh, well, things would just be 10 times worse if we could, yeah, let's move on. All those questions will be answered. New section, startup thinking. New technology tends to come from new ventures, startups. From the founding fathers in politics to the Royal Society and Science to Fairchild

semiconductors' traitorous eight in business, small groups of people bound together by a sense of mission have changed the world for the better. Elite theory on display. The easiest explanation for this is negative. It's hard to develop new things in big organizations, and it's even harder to do it by yourself. Think about that. The easiest, this is negative. It's hard to develop new things in big organizations. Elite theory. It really is. When there's too many cooks in the kitchen, you're not going to get things done. But it's even harder to do it by yourself. It's almost

impossible to do it by yourself. It's very rare that you see someone who comes along. It's like, I did this completely by myself. Bureaucratic hierarchies move slowly, an entrenched interest shy away from risk. In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work. If this describes your company, you should quit right now. Read that again. In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work. And he's saying quit, if that describes your company. At the other extreme, a lone genius might create a classic work of art or literature,

but he could never create an entire industry. 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. I'll read that again. 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 can actually can. 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. Because that is what a startup has to do. Question received ideas and rethink business from scratch. We can't go back. We have to think in new ways. What we build may look and have echoes of the past, but it will be new and the ideas will be new.

If you want to apply this to government, which is something we always talk about, the state. The reason why the state is, when I look at the state now, through a lens such as this, what I see is I see an obsolete way of doing things. It must be something new. New section. This is actually chapter two. It's called party like it's 1999. One contrarian question. Let me start over again. Our contrarian. question. What important truth do very few people agree with you on? Is difficult to answer directly. It may be easier to start with a preliminary. What does everybody agree on? Quote, madness is rare in individuals, but in groups, parties, nations, and ages, it is the rule.

Nietzsche wrote before he went mad. If you can identify a delusional popular belief, you can find what lies hidden behind it. The contrarian truth. Consider an elementary proposition. Companies exist to make money, not to lose it. This should be obvious to a thinking person, but it wasn't so obvious to many in the late 1990s when no loss was too big to be described as an investment in an even bigger, brighter future.

The conventional wisdom of the new economy accepted page views as a more authoritative, forward-looking financial metric than something as pedestrian as profit. Conventional beliefs only ever come to appear arbitrary and wrong in retrospect. Whenever one collapses, we call the old belief a bubble. But the distortions caused by bubbles don't disappear when they pop. The internet craze of the 90s was the biggest bubble since the crash of 1929

and the lessons learned afterward to find and distort almost all thinking about technology today. The first step to thinking clearly is to question what we think we know about the past. We have to look back if we want to be able to go forward. That should be obvious. New section. A quick history of the 90s. This is good stuff here. This is, you know, if you've heard about the dot-com boom and bust, this is it right here.

The 1990s have a good image. Think about it. People like, what's his name, James Lindsay and the IDW, the intellectual dork web guys, they all want to go back to the 1990s because it has a great image. We tend to remember them as prosperous. We tend to remember them as a prosperous, optimistic decade that happened to end with the internet boom and bust. But many of those years were not as cheerful as our nostalgia holds. We've long since forgotten the global context for the 18 months of dot-com mania at decades end.

The 90s started with a burst of euphoria when the Berlin Wall came down in November 1989. It was short-lived. By mid-1990, the United States was in recession. Technically, the downturn ended in March 91, but recovery was slow, and unemployment continued to rise until July 1992. Manufacturing never fully rebounded. The shift to a service economy was protracted and painful. 1992 through the end of 1994 was a time of General Malays. Images of dead American soldiers in Mogadishu looped on cable news.

Anxiety about globalization and U.S. competitiveness intensified as jobs flowed to Mexico. This pessimistic undercurrent drove then President Bush 41 out of office and won Ross Perrault, nearly 20% of the popular vote in 92, the best showing for a third-party candidate since Theodore Roosevelt in 1912. And whatever the cultural fascination with Nirvana, grunge, and heroin reflected, it wasn't hope or confidence. The people who look at the 1990s as some kind of glory day didn't live through it.

I remember all this stuff. I had friends who OD'd. I had friends who were in and out of rehab. It wasn't this hopeful time. It was a mess. Thomas 777 calls it like the early 1990s literal anarchy. And it was. It just seemed like people were doing whatever the hell they wanted and they were getting away with it.

Silicon Valley felt sluggish too. Japan seemed to be winning the semiconductor war. The internet had yet to take off, partly because its commercial use was restricted until late 1992, and partly due to the lack of user-friendly web browsers. It's telling that when I arrived at Stanford in 1985, economics, not computer science, was the most popular major. So most people on campus, the tech sector seemed idiosyncratic and even provincial.

The internet changed all this. The Mosaic browser was officially released in November 1993, giving regular people a way to get online. Mosaic became Netscape, which released its Navigator browser in late 1994. Navigator's adoption grew so quickly from about 20% of the browser market in January 1995 to almost 80% less than 12 months later that Netscape was able to IPO in August 95, even though it wasn't yet profitable. Within five months, Netscape stock had shot up from $28 to $174 per share. Other tech companies were booming too. Yahoo went public in April 96 with an $848 million valuation.

$848 million valuation. Amazon followed suit in May 97 at $438 million. By spring of 98, each company's stock had more than $448 million. quadrupled. Skeptics questioned earnings and revenue multiples higher than those for any non-internet company. It was easy to conclude that the market had gone crazy. This conclusion was understandable, but misplaced. In December 96, more than three years before the bubble actually burst, Fed chairman, Alan Greenspan, warned that irrational exuberance might have unduly escalated asset values. Tech investors were exuberant, but it's not clear that they were so irrational.

It is too easy to forget that things weren't going well in the rest of the world at the time. The East Asian financial crisis hit in July 1997. Crony capitalism and massive foreign debt brought the Thai-Indonesian and South Korean economies to their knees. The ruble crisis followed in August 98 when Russia, hamstrung by chronic fiscal deficits, devalued its currency and defaulted on its debt. American investors grew nervous about a nation with 10,000 nukes and no money. The Dow Jones Industrial Average plunged to more than 10% in a matter of days. Those people who love going out shopping for Black Friday deals, they're mad, aren't they?

Like, proper mad. Brenda wants a television, and she's prepared to fight for it. If you ask me, it's the fastest way to a meltdown. Me, I just prepare the fastest way to get stuff, and it doesn't get faster than appliances. Delivered.aE. Top brand appliances, top brand electricals, and if it's online, it's in stock.

With next day delivery in Greater Dublin. Appliances Delivered.E. Part of expert electrical. See it, buy it, get it tomorrow. Or you know, fight Brenda. You catch them in the corner of your eye. Distinctive, by design. They move you,

even before you drive. The new Cooper plugin hybrid range. For Mentor, Leon and Teramar, Now with flexible PCP finance and trade-in boosters of up to 2,000 euro. Search Coopera and discover our latest offers. Coopera. Design that moves. Finance provided by way of higher purchase agreement from Volkswagen Financial Services, Ireland Limited, subject to lending criteria.

Terms and conditions apply. Volkswagen Financial Services Ireland Limited. Trading as Cooper Financial Services is regulated by the Central Bank of Ireland. People were right to worry. The ruble crisis set off a chain reaction that brought down long-term capital management, a highly leveraged U.S. hedge fund. LTCM managed to lose 4.6 billion in the latter half of 1998 and still had over 100 billion in liabilities when the Fed intervened with a massive bailout and slashed interest rates in order to prevent systematic

disaster. This all sounds familiar, huh? Europe wasn't doing that much better. The euro launched in January 1999 to great skepticism and apathy. It rose to $1.19 on its first day of trading but sank to 83 cents within two years. In mid-2000, G7 central bankers had to prop it up with a multi-billion dollar intervention. So the backdrop for the short-lived.com mania was started in September 1998 was a world in which nothing else seemed to be working. The old economy couldn't handle the challenges of globalization. Something needed to work and work in a big way if the future was going to be better at all by indirect proof the new economy the internet was the only way forward new section mania september 1998 march 2000 dot com mania was intense but short 18 months of

insanity from september 1998 to march 2000 it was a silicon valley gold rush there was money everywhere and no shortage of exuberant often sketchy people to chase it Every week, dozens of new startups competed to throw the most lavish launch party. Landing parties were much more rare. Paper millionaires would rack up $1,000 dinner bills and try to pay with shares of their startup stock. Sometimes it even worked. This just sounds so keensy when you think about it. legions of people decamped from their well-paying jobs to found or join startups.

One 40-something grad student that I knew was running six different companies in 1999. Usually it's considered weird to be a 40-year-old grad student. Usually it's considered insane to start half a dozen companies at once. But in the late 90s, people could believe that was a winning combination. Everybody should have known that the mania was unsustainable. The most successful companies seemed to embrace a sort of anti-beauty, business model where they lost money as they grew. But it's hard to blame people for dancing when the music was playing.

Irrationality was rational given the appending.com to, given that appending.com to your name could double your value overnight. There's a graph here of the dot com boom where, yeah, you're going from the Netscape 95 Netscape IPO when it's right around 1,000. I'm pretty sure this is the NASDAF. And then March 10th, 2000 peaks at 5,000. Pre-Mania is listed from 95 to 98, to 98 to 2000.

PayPal Mania. 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. One acquaintance told me how he had planned an IPO from his living room before he'd even incorporated his company, and he didn't think that was weird.

In this kind of environment, acting sanely began to seem eccentric. Let me just check on one thing real quick. All right. At least PayPal had a suitably granted. mission. The kind that post-bubble skeptics would later describe as grandiose, we wanted to create a new internet currency to replace the U.S. dollar. Our first product let people beam money from one Palm Pilot to another. However, nobody had any use for that product except the journalists who voted at one of the 10 worst business ideas of 1999. Palm pilots were still too exotic then, but email

was already commonplace, so we decided to create a way to send and receive payments over email. By the fall of 1999, our email payment product worked well. Anyone could log into our website and easily transfer money, but we didn't have enough customers. Growth was slow and expenses mounted. For PayPal to work, we needed to attract a critical mass of at least a million users. Advertising was too ineffective to justify the cost.

Prospective deals with big banks kept falling through, so we decided to pay people to sign up. We gave new customers $10 for joining it. We gave them $10 more every time they referred a friend. And the reason why I'm laughing and smiling is because this is when I joined PayPal. I joined it to get the $10. And then I got a couple other people to join. So I think I got $30 out of the deal.

I was into PayPal and I was actually selling stuff on eBay in the year 2000. So that was really early in on this. And good memories, actually. I could really make some money. to them. You catch them in the corner of your eye. Distinctive, by design. They move you, even before you drive.

The new Cooper plugin hybrid range. For Mentor, Leon, and Terramar. Now with flexible PCP finance and trade-in boosters of up to 2000 euro, search Coopera and discover our latest offers. Coopera, design that moves. Finance provided by way of higher, purchase agreement from Volkswagen Financial Services Ireland Limited. Subject to lending criteria.

Terms and conditions apply. Volkswagen Financial Services Ireland Limited. Trading as Cooper Financial Services is regulated by the Central Bank of Ireland. Those people who love going out shopping for Black Friday deals, they're mad, aren't they? Like, proper mad. Brenda wants a television and she's prepared to fight for it. If you ask me, it's the fastest way to a meltdown. Me, I just prepare the fastest way to get stuff,

and it doesn't get faster than Appliances Delivered.e. Top brand appliances. top brand electricals, and if it's online, it's in stock. With next day delivery in Greater Dublin. Appliances Delivered.com, part of expert electrical. See it, buy it, get it tomorrow. Or, you know, fight branda. When eBay was not a, didn't become, it was mostly people selling stuff they had around their house. It hadn't become, you know, businesses going on there and basically running their businesses on PayPal. And after a few years, it was just,

It was terrible to use. So we gave new customers $10 for joining and we gave them $10 more every time they referred to friend. This got us hundreds of thousands of new customers and an exponential growth rate. Of course, this customer acquisition strategy was unsustainable on its own. When you pay people to be your customers, exponential growth means an exponentially growing cost structure. Crazy costs were typical at the time in the valley, but we thought our here.

huge costs were sane, given a large user base, PayPal had a clear path to profitability by taking a small fee on customers' transactions. We knew we'd need more funding to reach the goal. We also knew that the boom was going to end. Since we didn't expect investors' faith in our mission to survive the coming crash, we moved fast to raise funds while we could. On February 16, 2000, the Wall Street Journal ran a story lauding our viral growth and suggesting that PayPal was worth 500 million. When we raised 100 million the next month, our lead investor took the journals back of the envelope valuation as authoritative. 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 tell me where to send it. That March 2000 financing round bought us the time we needed to make PayPal a success. just as we closed the deal, the bubble popped. Alright, let me see where we are. Okay, still in party like it's 1999. All right, new section. Lessons learned.

Because they say 2000-0-0 party over oops at a time. So tonight I'm going to party like it's 1999, Prince. The NASDAQ reached 5,048 at its peak in the middle of March 2000 and then crashed to 3,321 in the middle of, April. By the time it bottomed out at 1114 in October 2002, the country had long since interpreted the markets collapse as a kind of divine judgment against the technological optimism of the 90s. The era of cornucopian hope was relabeled as an era of crazed greed and declared

to be definitely over. Everyone learned to treat the future as fundamentally indefinite and to dismiss as an extremist anyone with plans big enough to be measured in years instead of quarters. I don't know how many companies I've worked for who just measured everything in quarters even long after this. Globalization replaced technology. Remember globalization is going sideways, not creating anything new. Technology is going up and creating something new. Globalization replaced technology as to hope for the future. Since the next, 90s migration from bricks to clicks didn't work as hoped. Investors went back to bricks, housing, and bricks, globalization.

The result was another bubble, this time in real estate. The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash to still guide business thinking today. One, make incremental advances. Grand visions inflated the bubble, so they should not be indulged. anyone who claims to be able to do something great is suspect and anyone who wants to change the world should be more humble. Small incremental steps are the only safe path forward. 2. Stay lean and flexible. All companies must be lean, which is code for unplanned. You should not

know what your business will do. Planning is arrogant and inflexible. Instead, you should try things out, iterate and treat entrepreneurship as agnostic experimentation. Three, improve on the competition. Don't try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors. Four, focus on product, not sales. If your product requires advertising or salespeople to sell it, it's not good enough.

Technology is primarily about product development, not distribution. Bubble era advertising was obviously wasteful, so the only sustainable growth is viral growth. These lessons have become dogma in the startup world. Those who would ignore them are presumed to invite the justified doom visited upon technology in the great crash of 2000. and yet the opposite principles are probably more correct. One, it is better to risk boldness than triviality. Two, a bad plan is better than no plan. Three, competitive markets destroy profits.

Say that again. Competitive markets destroy profits. Four, sales matter just as much as product. It's true that there was a bubble in technology. The late 90s was a time of hubris. People believed in going from zero to one. Two few startups were actually getting there and many never went beyond talking about it. But people understood that we had no choice but to find ways to do more with less. The market high of March 2000 was obviously a peak of insanity. Less obvious, but more important, it was also a peak of clarity.

People looked far into the future, saw how much valuable new technology. technology we would need to get there safely and judge themselves capable of creating it. We still need new technology, and we may even need some 1990-style hubris and exuberance to get it. 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, ask yourself, how much of what you know about business is shaped by mistaken reactions, mistaken reactions to past mistakes.

The most contrarian thing of all is not to oppose the crowd, but to think for yourself. All right. Where are we at? Chapter 3, which is all happy companies are different. Let's see how long we've been doing this. 43 minutes. All right. I'm going to go through.

this. Chapter 3. All happy companies are different. 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 very valuable itself. Creating value is not enough. You also need to capture some of the value you create. This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip.

Compare that to Google, which creates less value, but captures far more. Google brought in 50 billion in 2012 versus 160 billion for the airlines, but it kept 21% of those revenues as profits. More than 100 times the airline industry's profit margin that year. Google makes so much money that it's now worth three times more than every U.S. airline combined. Remember, this was written more than 10 years ago, but do we need this today? Wow. The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference. Perfect competition and monopoly. Perfect competition is considered both the ideal and default state in economics 101. Everyone of you knows it. Everyone who's taking an economics class.

Those of you who came over with me from libertarianism knows. It's about competition. They tell you that's what's going to keep prices down. That's what in an anarchist society, you can just, You can start as many companies as you want to compete, and that'll just keep the prices down. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogenous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market. increase supply, drive prices down, and thereby eliminate the profits that attracted them in the

first place, what I just said. If too many firms enter the market, they'll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run, no company makes an economic profit. Those people who love going out shopping for Black Friday deals, they're mad, aren't they? Like, proper mad. Brenda wants a television and she's prepared to fight for it if you ask me it's the fastest way to a meltdown

me I just prepare the fastest way to get stuff and it doesn't get faster than Appliances Delivered.aE top brand appliances, top brand electricals and if it's online it's in stock with next day delivery in Greater Dublin Appliances Delivered.com. Part of expert electrical see it, buy it tomorrow or you know, fight Brenda

You catch them in the corner of your eye distinctive by design they move you even before you drive the new cupra plug-in hybrid range for mentor lay on and terramar now with flexible PCP finance and trade-in boosters of up to 2000 euro search cupra and discover our latest offers cupra design that moves finance provided by way of higher purchase agreement from Volkswagen Financial Services Ireland limited subject to lending criteria. Terms and conditions apply. Volkswagen Financial Services Ireland Limited. Trading as Cooper Financial Services is regulated by the Central Bank of Ireland. That should be easy to see. Everything that was just explained. The opposite of perfect competition is monopoly. Whereas a competitive

firm must sell at the market price, a monopoly owns its market so it can set its own prices. Since it has no competition, it produces at the same quantity and price combination that maximizes its profits. To an economist, every monopoly looks the same. Whether it deviously eliminates rivals, secures a license from the state, or innovates its way to the top. In this book, we're not interested in illegal bullies or government favorites by monopoly. Let me repeat that. In this book, we're not interested in illegal bullies or government favorites. 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. This is back in the day of Google. Google is a good example of a company that went from zero to one. It hasn't competed in search

since the early 2000s when it definitively distanced itself from Microsoft and Yahoo. Americans mythologized competition and credit it with saving us from socialist breadlines. Say that again. Americans mythologize competition and credit it with saving us from socialist breadlines. You know that's true. You know that you hear that. Oh, oh, the fact that the, look at how many different companies sell bread. Look how many choices you have. Look at that.

No, no. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear. If you want to create and capture a lasting value, don't build an undifferentiated commodity business. Lies people tell, new section.

How much of the world is actually monopolistic? How much is truly competitive? It's hard to say because our common conversation about these matters is so confused. So the outside observer, all businesses can seem reasonably alike. So it's easy to perceive only small differences between them. Got a couple graphics here that are very simple. Perception firms are similar from A, perfect competition, firm B, monopoly. But the reality is much more binary than that.

There's an enormous difference between perfect competition and monopoly. and most businesses are much closer to one extreme than we commonly realize. It's basically the same, repeating the same graphic except firm A and firm B are further away from each other. Firm A is closer to perfect competition. Firm B is closer to monopoly. The confusion comes from a universal bias for describing market conditions in self-serving ways. Both monopolists and competitors are incentivized to bend the truth. Monopoly lies, new section. Monopolis lie to protect themselves. They know that

bragging about their great monopoly invites being audited, scrutinized, and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly, usually by exaggerating the power of their non-existing competition. Think about how Google talks about its business. It certainly doesn't claim to be a monopoly. but it is one. Well, it depends. A monopoly in what? Let's say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. Its closest competitors, Microsoft and Yahoo, have about 19% and 10% respectively. If that doesn't seem dominant enough, consider the fact that the word Google is now an official entry in the Oxford English dictionary

as a verb. Don't hold your breath waiting for that to happen to bang. But to suppose, Suppose we say that Google is primarily an advertising company. That changes things. The U.S. search engine advertising market is $17 billion annually. Online advertising is $37 billion annually. I really need to look up and see what these numbers are now. The entire U.S. advertising market is $150 billion, and global advertising is a $495 billion market. So even if Google completely monopolized U.S. search engine advertising, it would own just $3.4.4. percent of the global advertising market. From this angle, Google looks like a small player in a competitive world. What if we frame Google as a multifaceted technology company instead? This seems

reasonable enough. In addition to its search engines, Google makes dozens of other software products, not to mention robotic cars, Android phones, and wearable computers. But 95% of Google's revenue comes from search advertising. Its other products generated just 2.35 billion in 2012, and its consumer tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it, a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention. So when it comes to search revenue, when it comes to search revenue, when it comes to what is this here? But, but, but, but, right. It's, it owns 68% of the market, which is an,

which is an absolute monopoly when you look, when you compare it to everyone else. But once you add everything in and you mix everything else they do, it doesn't look like they have monopoly in anything. They look like just another tech company. Competitive lies. Non-monopolis tell the opposite lie. We're in a league of our own. Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrow so that you dominate it by definition. Suppose you want to start a restaurant that serves British food in Palo Alto. No one else is doing it, you might reason. We'll own this the entire market. But that's only true if the relevant market is the market for British food

specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? These are hard questions, but the bigger problem is that you have an incentive not to ask them at all. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different. You'll spend time trying to convince people that you are exceptional instead of seriously considering whether that's true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all. It's very possible they don't exist. In 2001, my coworkers at PayPal and I would often get lunch on Castro Street

in Mountain View. We had our pick of restaurants, starting with obvious categories like Indian sushi and burgers. There were more options once we settled on a type. North Indian or South Indian, cheaper and fancier, and so on. 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 the restaurants on Castro Street did, but our business was much more valuable than all of those restaurants combined.

Change your thinking. This should be obvious to us, but it's not something that's taught to us. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors, maybe you think your non is superior because of your great-grandmother's recipe. Your business is unlikely to survive. Creative industries work this way, too. No screenwriter wants to admit that her new movie screenwriter wants to admit that her new movie

script simply rehashes what has already been done before. Rather, the pitch is this film will combine various exciting elements in entirely new ways. It could even be true. Suppose her idea is to have Jay-Z star in a cross between hackers and jaws. Rappstar joins elite group of hackers to catch a shark to kill his friend. That has definitely never been done before. But like the lack of British restaurants in Palo Alto, maybe that's a good thing. Non-monopoulos exaggerate their distinction by defining their market as the intersection of various smaller markets. British food, restaurant, Palo Alto. Compare that to RAPStar, hackers, sharks.

Monopolis, by contrast, disguised their monopoly by framing their market as the union of several large markets. Search engine, mobile phones, wearable computers, self-driving cars. What does a monopolist union story look like in practice? Consider a statement from Google Chairman Eric Schmidt's testimony at a 2011 congressional hearing. We face an extremely competitive landscape in which consumers have a multitude of options to access information. Those people who love going out shopping for Black Friday deals, they're mad, aren't they? Like, proper mad. Brenda wants a television and she's prepared to fight for it, if you ask me, it's the fastest way

a meltdown. Me, I just prepare the fastest way to get stuff and it doesn't get faster than Appliances Delivered.I.E. Top brand appliances, top brand electricals and if it's online, it's in stock with next day delivery in Greater Dublin. Appliances delivered.combe, part of expert electrical. See it, buy it tomorrow. Or you know, fight Brenda. Ready for huge savings? Well mark your calendars from November 28 to 30th because the Liedel Newbridge Warehouse sale is back. We're talking thousands of your face. favorite LIDL items all reduced to clear. From home essentials to seasonal must-habs,

when the doors open, the deals go fast. Come see for yourself. The Lidl Newbridge Warehouse Sale, 28th to 30th of November. Lidl, more to value. Or translated from PR speak to plain English, Google is a small fish in a big pond. We can be swallowed whole at any time. We are not the monopoly that the government is looking for.

Let me see. Ideology of competition. Look at what I did. I turn this upside down. All right. Onward. Ruthless people. The problem with a competitive business goes beyond lack of profits.

Imagine you're running one, excuse me, imagine you're running one of these restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every, efficiency. That's why small restaurants put grandma to work at the register and make the kids

wash dishes in the back. Restaurants aren't much better even at the very highest rungs, where reviews and ratings like Michelin Star Systems enforce a culture of intense competition that can drive chefs crazy. French chef and winner of three Michelin stars, Bernard Lusso, was quoted as saying, if I lose a star, I will commit suicide. Michelin maintains his rating, but Lusso killed himself anyway in 2003 when a competing French dining guy downgraded his restaurant. The competitive ecosystem pushes people toward ruthlessness or death. A monopoly like Google is different. Since it doesn't have to worry about competition with anyone,

it has wider latitude to care about its workers, its products, and its impact on the wider world. Google's motto, don't be evil, is in part of branding ploy, but it's also characteristic of a kind of business that's successful enough to take ethics seriously without jeopardizing its own existence. It's so obvious that this was written so many years ago. In business, money is either an important thing or it is everything. Monopolis can afford to think about things other than making money.

Non-monopolis can't. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival. Monopoly profits. Next section. Monopoly capitalism. So a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsize profits come at the expense of the rest of society?

Actually, yes, profits come out of customers' wallet and monopolies deserve their bad reputation, but only in a world where nothing changes. In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price. Others will have no choice but to buy from you. Think of the famous board game. Deeds are shuffled around from player to player, but the board never changes. There's no way to win by inventing a better kind of real estate development.

The relative values of the properties are fixed for all time, so all you can do is try to buy them up. But the world we live in is dynamic. It's possible to invent new and better things. 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. Even the government knows this. That's why one of its departments works hard to create monopolies by granting patents to new inventions, even though another part hunts them down by prosecuting antitrust cases. It's possible to question whether anyone should really be awarded a

legally enforceable monopoly simply for having been the first to think of something like a mobile software design. But it's clear that something like Apple's monopoly profits from designing, producing, and marketing the iPhone were the reward for creating greater abundance, not artificial scarcity. Customers were happy to finally have the choice of paying high prices to get a smartphone that actually works. The dynamism of new monopoly. itself, explains why old monopolies don't strangle innovation. With Apple's iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft's decades-long operating system dominance. Before that, IBM hardware monopoly of the 60s and 70s was overtaken by Microsoft's

Software Monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cell phone plan from any number of, providers. If the tendency of monopoly businesses were to hold back progress, they would be dangerous and we'd be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents. Monoplies drive progress because the promise of years or even decades of monopoly profits provide a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make long-term plans and to finance the ambitious research projects that firms locked in competition can't dream of.

And I hope you're all getting this because this is, this is definitely not what we're taught. We are taught that monopoly is evil and that competition is the best for us. I hope this is, people are starting to understand that competition just stunts innovation. You may have small increases and improvements go from 64, 64 gigabytes, being able to store 64 gigabytes on your phones, 128, but not something brand new, but not something that just that makes that obsolete. So why are economists obsessed with competition as an ideal state? It's so funny that I haven't, I forgot to read ahead of this and that I just jump into it and start talking about what comes next. So why are economists obsessed with competition as an ideal state?

It's a relic of history. Economists copied their many mathematics from the work of the 19th century physicists. They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because they, that's what's easy to model, not because it represents the best of business. But it's worth recalling that the long-run equilibrium predicted by the 19th century physics was a state in which all energy is evenly distributed and everything comes to rest, also known as the heat death of the universe.

Whatever your views on thermodynamics, it's a powerful metaphor. In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the, death of your business won't matter to the world. Some other undifferentiated competitor will always be ready to take your place. If you are in a competition business, you are not special. For those listening, that's my comment. You are not special. If you are in a competition business right now, you should be looking to create a monopoly business while you still have this one and while it's still profitable because it won't always be. Perfect equilibrium may describe the void that is that is most of

the universe. It may even characterize many businesses, but every new creation takes place far from equilibrium. In the real world, outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. monopoly is the condition of every successful business. Tolstoy opens Anna Karenina by observing 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. That's the end of chapter three. Chapter 4 is the ideology of competition. And when I do the next reading, we will start there. And yeah, I hope that this is, I hope you're getting something out of this. I really enjoy this, uh, reading this book for this is the third time.

I'm actually reading it, reading it with y'all. And, uh, I get something, I see something new every time or something strikes me differently every time. I hope that in this hour and five minutes that I've been. talking that numerous things have jumped out at you and are impacting you in the same way that it's impacting me. So I will be back with, well, let me do plugs real quick for myself. I'm on speaker now. Download the speaker app and just listen directly on the app. If you notice that There are ads. I have ads that are helping me to pay the bills.

If you don't want to deal with the ads anymore and you want an ad-free, you can go to freeman Beyond the wall.com forward slash support. There's, you can, if you do through Patreon, if you do through my website, if you do through Subscribe Star, you can get, I send out the episodes without ads and, you won't have to deal with that anymore. But I just want to thank you. And I'll be back for Chapter 4. part two of this.

Probably within the next couple of days, I'm going to try to put these out every other day, if I can. All right? Thank you. Have a good night. You catch them in the corner of your eye. Distinctive. By design.

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