We Study Billionaires - The Investor’s Podcast Network - TIP786: Zero to One by Peter Thiel

Starting point is 00:00:00 You're listening to TIP. On today's episode, we'll be exploring the book Zero to One by Peter Thiel. Zero to one of my favorite books on the topic of innovation, monopolies, and what it really takes to build something that's enduring. Teal has one of the most interesting backgrounds of any investor I've come across. At his core, Teal is an entrepreneur. The first team that Teal built became known as the PayPal Mafia because so many of his former colleagues went on to help each other start and invest in successful tech companies.

Starting point is 00:00:34 Teal challenges the idea that progress comes from simply doing more of what already works. Instead, he argues that the biggest breakthroughs happen when someone creates something entirely new, or in his words, when a business goes from zero to one. I wanted to cover this book because it forces investors to look beyond the spreadsheets in the near-term metrics, and instead think deeply about competitive advantages, long-term value creation, and the future of an industry. Much like investing, it's easy to assume that success comes from following the crowd in competing in familiar markets. But as Teal explains, competition often destroys profits, while truly great businesses escape competition altogether.

Starting point is 00:01:21 Zero to one is a reminder that the most valuable companies are not built by copy. copying what already exists. They're built by seeing the world differently and acting on that insight. At the end of the episode, I'll also share my thoughts around a company that had its own zero to one moment, and that company is Uber. There's a lot of debate currently around the strength of Uber's mode, and I find it to be one of the most interesting case studies in today's market. So with that, I hope you enjoy today's episode on Zero to One by Peter Thiel. Since 2014 and through more than 190 million downloads, we break down the principles of value investing and sit down with some of the world's best asset managers. We uncover potential opportunities in the

Starting point is 00:02:07 market and explore the intersection between money, happiness and the art of living a good life. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your host, Clay Fink. Hey, everybody, welcome back to the Investors podcast. I'm your host, Clay Fink. On today's episode, I'll be chatting about the book Zero to One by Peter Thiel. Peter Thiel is one of the most successful and unconventional investors of the modern era. In 2005, Teal launched the Founders Fund, which sought to invest in founders who were building revolutionary technologies. His unconventional investment style led him to make successful

Starting point is 00:03:01 venture capital investment in companies like SpaceX, Facebook, PayPal, Palantir, and Stripe in their infancy. His book, Zero to One, matters because it distills the mental models he used to spot monopolies before the rest of the market understood their true power. Rather than teaching incremental improvement, T.L challenges investors to look for businesses that create something entirely new and can dominate a niche. His framework has deeply influenced how venture capitalists and other long-term investors, evaluate businesses that are built on a zero-to-one technological breakthrough. For value investors, this framework is especially useful because it really forces you to step back from the spreadsheets and ask yourself whether a business truly has the potential to become

Starting point is 00:03:49 dominant. Instead of simply looking at a business's financials and determining whether it's expensive or cheap based solely on the numbers, I felt this firsthand as an investor. There have been times where I spent hours refining a model down to the second decimal place, only to realize later that I never stopped to ask whether the business itself could actually become dominant. Zero to one was a reminder for me that a flawless spreadsheet will not save you if you're modeling a company that never had a chance to matter in the first place. As Teal puts it, every moment in business happens only once. The next Bill Gates will not build an operating system, the next Larry Page or Sergiant

Starting point is 00:04:31 Brin will not make a search engine, and the next Mark Zuckerberg won't create a social network. If you're trying to copy these guys, you are not learning from them, end quote. And right off the bat, I just love this insight from Teal. In order for a great company to remain great, they need to be innovating and trying new things. Otherwise, they're destined for failure. But as you can imagine, creating new things tends to be incredibly difficult. And copying a model that already exists is much easier and tends to be exactly what most people do. When I look at our business here at the Investors Podcast Network, we hit our own zero to one moment

Starting point is 00:05:10 when we launched a podcast that discussed stock investing back in 2014. In the years that followed, especially after 2020, we then saw a tidal wave of podcasts enter the space and we knew that if we did not innovate and create something new, then our business was doomed for failure. It reminds me of Jeff Bezos's line where he essentially said that he predicts that one day, Amazon will go out of business. And this reality is what keeps Amazon experimenting and innovating because it's what's required to continue to extend the life of a business that's on its way to one day failing. Innovating and creating new ways of doing things is the way that society really progresses forward. And for some, it might feel like you're sort of hoping for a

Starting point is 00:05:55 miracle. If American business is going to succeed, it's going to need thousands of miracles to happen. What makes humans really unique relative to other species is our ability to work miracles. And today, we call those miracles technology. Technology is what enables us to continue to do more with less, ratcheting up our fundamental capabilities to an ever higher level. If you want to find the next home run investment opportunity, it's probably in a company that's creating groundbreaking zero-to-one technologies. But there's no formula for creating these types of miracles. A formula cannot exist because every innovation is new and unique. And no authority can give you the blueprint on how to be innovative. When we think about the future, we hope for a future of

Starting point is 00:06:42 progress. As Teal explains, this progress can take one of two forms. We have horizontal or extensive progress, which means copying things that already work. Horizontal progress is easy to imagine because we already know what it looks like. Whereas vertical or intensive progress means doing new things, or 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 of them, you've made horizontal progress. If you have a typewriter and build a word processor, you've made vertical progress. I like to think about this the way we would think about transportation.

Starting point is 00:07:25 Building faster horses is horizontal progress. It might help at the margin, but you're still limited by the horse. Inventing the automobile is vertical progress, because it changes what's possible altogether. Investors tend to overestimate how far incremental improvement can take them and underestimate how disruptive a true paradigm shift can be. At a macro level, the single word for horizontal progress is globalization. For example, the U.S. saw the rise of Amazon and e-commerce, and we've seen several other, quote, Amazon's emerge in their own form in recent years, whether that be Alibaba in China,

Starting point is 00:08:02 ricado Libre in Latin America, or C-limited in Southeast Asia. In Teal's view, China has been copying the developed world for decades now, from 19th century railroads and 20th century air conditioning to how cities are built. On the flip side, 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. Since 1971, we've seen rapid levels of globalization and most of the technological development has been confined to information technology.

Starting point is 00:08:37 In Teal's view, in order for humanity to continue to progress, it is essential that new technologies continue to emerge. Because if all of these emerging market countries see their standards of living continue to rise and adopt these technologies that are being used in developed countries, then energy production will increase substantially in the end result would be an environmental catastrophe. In a world of scarce resources, globalization without new technology is simply unsustainable. The challenge that society faces today is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th century. And it shouldn't come as a surprise that Teal believes that new technologies tend to come from

Starting point is 00:09:22 startups, or a small group of people brought together by a sense of mission to change the world for the better. The easiest explanation for this is that it's hard to develop new things in big organizations. And it's even harder to do it by yourself. Bureaucratic organizations tend to move slowly and not really take too much. risk, whereas startups operate on the principle that you need to work with other people to actually make an impact. But you also need to stay small enough to keep bureaucracy at bay. A new company's most important strength is new thinking. Small size affords you the space to think. In the 1990s, Amazon did not try to beat Barnes & Noble by building better bookstores. They've reimagined the entire

Starting point is 00:10:07 book buying experience around the internet. And based on first principles thinking, They leverage the internet's capabilities to deliver more value to customers for less. Peter Thiel's favorite question to ask in a job interview is, What one important truth do very few people agree with you on? It's a difficult question to answer, especially when you're coming out of college and you were more or less taught the same dogmas as everyone else. Some might say that the educational system is broken and urgently needs fixed, but practically everyone agrees with that statement.

Starting point is 00:10:40 Many people might believe that they're contrarian without actually being contrarian. If we jump back to the 1999 tech bubble, this was a time where both entrepreneurs and investors behaved very irrationally in short term. In Teal's view, the collapse of the tech bubble left Silicon Valley with four primary lessons. First, make incremental advancements. The grand visions of the tech bubble were a clear indication that the vast majority of people got way too carried away with themselves. Anyone who claims to be great at something is suspect, and anyone who wants to change the world should really be more humble. Small incremental steps

Starting point is 00:11:21 are the only safe path forward. The second lesson that people took away from the tech bubble is to stay lean and flexible. All companies must be lean because the future will deliver you curveballs you just don't expect. You shouldn't know what your business will do, so planning is arrogant and inflexible. Third, improve on the competition. Don't try to create a new market prematurely. The safe way to start a real business is to start with an already existing customer and pursue recognizable products that are already offered by successful competition. And lastly, focus on the product, not sales. If your product requires advertising or salespeople to sell it, it's just not good enough. Technology is primarily about product development, not distribution.

Starting point is 00:12:06 Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth. It was widely believed that if you did not follow these principles, then you were bound to fall for the same mistakes that others made during the 1999 tech bubble. Teal, being the contrarian that he is, believes that the opposite principles are probably more correct. So to list all four here, it's better to risk boldness than triviality, a bad plan is better than no plan, competitive markets destroy profits, and marketing and sales matter just as much as the product. The late 90s was a time of hubris, and when many people believed in going from

Starting point is 00:12:45 zero to one. But too few startups were actually getting there, and many were never beyond just talking about it. Teal then explains that the business version of the contrarian question is, what valuable company is nobody building? This question is harder than it sounds, 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 large businesses can be bad businesses. U.S. Airlines are a perfect example. They serve millions of passengers and create hundreds of billions of dollars in value each year. But the majority of that value goes to society and not to the companies themselves. In 2012, the average airfare

Starting point is 00:13:32 each way was $178. But airlines only made 37 cents per passenger trip. Teal then compares the airlines to Google, which creates less value but captures far more of it. In 2012, Google brought in revenues of $50 billion, while the airlines brought in revenues of $160 billion. Despite generating less than one-third of the revenue, it kept 21% of that revenue as profit. That's more than 100 times the airline industry's profit margin that year. As of the time of the book, Google was worth three times more than all of the U.S. airline companies combined. Today, that figure is more like 25 times more valuable than the airline industry. So running a great business is more about having the ability to capture the value that you are creating, and less about just generating more

Starting point is 00:14:24 revenue. One critical difference between these two case studies is that Google had practically no competition in the search business, and all of the airlines competed with each other head-to-head, more or less offering the exact same product. If we were sitting in an economics class, we might say that Google was a monopoly, and the airlines were in perfect competition. A perfectly competitive market is considered both ideal and the default state in the economics 101, and it's when markets achieve equilibrium between producer supply and consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products, and since no firm has really any market power, they must sell at whatever price the market

Starting point is 00:15:09 determines. For example, if I do a search on flights for my trip to New York this September, I might see Southwest Airlines, they have a flight for $350. $50. United Airlines, they have a flight for $375, and pretty much every situation I would select the Southwest flight because I view the product offered about essentially the same. In the long run, under perfect competition, no company makes an economic profit. A monopoly is the opposite of perfect competition. In contrast to a market with several competitors, a monopoly owns the market and is able to set its own prices. Since it has no competition, it sets prices and volume levels,

Starting point is 00:15:48 in order to maximize its profits. To an economist, every monopoly looks the same, whether they deviously eliminate rivals, secure a license from the state, or innovate its way to the top. But in the book, Zero to One, Teal is most interested in the companies that are so good at what they do that no other firm can offer a close substitute. So he's not interested in companies that are government favorites or do shady or illegal things in order to get a leg up on the competition. Google is a really good example of a company that went from zero to one.

Starting point is 00:16:20 Since the early 2000s, Google has effectively had no real competition. And of course, the jury is still out on how LLMs will impact Google long term, but so far they seem to still be in a league of their own. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo few, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:21:00 In many markets, Uber dominates the ride-haling market, but some might argue that Uber faces significant competition, they compete with Lyft, which essentially offers the exact same service, and we're seeing the rise of autonomous vehicles which threaten Uber's business model. But it's really difficult for me to make the case that Uber really does face significant competition today. In the trailing 12 months, the company generated nearly $50 billion in revenue, and free cash flow generated is over $8 billion, which to me suggests that Uber has a pretty significant moat, at least for the time being. Teal believes that most businesses lie closer to the extremes than we might realize. One reason that identifying monopolies can be a bit tricky is because

Starting point is 00:21:42 monopolists have an incentive to lie in order to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked. Monopolis want to conceal their position and exaggerate the power of their non-existing competition. In 2011, during a congressional hearing, Google Chairman Eric Schmidt stated, during his testimony, we face an extremely competitive landscape in which consumers have a multitude of options to access information, end quote. When we look at the search market today, Google has 90% market share, Bing has 4% market share, and there are several others with a de minimis amount of the market. Any unbiased observer would say that Google clearly has a monopoly in the search market,

Starting point is 00:22:27 and there's practically no risk that Bing is going to overtake that point. But Google would rather tell you that they aren't a search business. They're an advertising business. When you look at the advertising market globally, estimates suggest that Google generates around 25 to 30 percent of the advertising market globally, so it's much more difficult to make the case that they have a monopoly in the global advertising market. Or perhaps they would tell you that they're a multifaceted tech company. In addition to their search engine, they have dozens of other software products, they make autonomous vehicles, Android phones, and wearables. As a tech company, this puts Google head-to-head with heavyweights like Amazon, meta, Microsoft, Apple,

Starting point is 00:23:08 and countless other competitors. Framing themselves as just another tech company allows Google to escape all sorts of unwanted attention. For non-monoplies, they tell the opposite lie. They tell their shareholders that they are in a league of their own. Entrepreneurs are always biased to understate the competition they face, but that is the biggest mistake. a startup can make. Teal spent a lot of time in Palo Alto, and he poses the thought experiment. Suppose you wanted to start a restaurant that serves British food in Palo Alto. You might reason that nobody else is doing this, and you'll own the entire market. But that's only relevant if there is a substantial market for British food. What if the real market you should be focusing on

Starting point is 00:23:52 is the restaurant market in Palo Alto, and what if restaurants in the nearby towns are relevant as well. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about why yours is different. Instead of trying to convince others how great you are, maybe it's better to consider whether people in Palo Alto would even be interested in British food. As the listeners might know, Teal was a part of the PayPal Mafia alongside Elon Musk, Max Levchen, Reid Hoffman, among others. In 2001, PayPal was the only email-based payments company in the world, and at the time, the company employed fewer people than the restaurants Teal would eat at for dinner in the evenings, and yet, the value of PayPal was much higher than all of these restaurants combined.

Starting point is 00:24:38 This highlights another important lesson for entrepreneurs or investors for that matter. The industry you choose to launch a business in is just as, if not more important than the actual execution. Of course, both are important, but Elon Musk would not be worth hundreds of billions of dollars if he chose to invest his time and energy into the restaurant business. Furthermore, operating in a competitive market goes beyond just a lack of profits. It's also a constant fight just to simply survive. Since restaurants have low margins, you're always looking for ways to limit your cost base.

Starting point is 00:25:14 That might mean paying several employees minimum wage and squeezing out every piece of efficiency you can just to tread water. And restaurants aren't much better even at the highest. levels, where reviews and ratings like the Michelin Star System enforce the culture of intense competition that drives chefs crazy. French chef and winner of three Michelin stars, Bernard Lasseau, was quoted as saying, if I lose a star, I will commit suicide. Michelin did maintain his rating, but he ended up killing himself anyway in 2003 when a competing French dining guide downgraded his restaurant. And then you turn the tables and look at Google.

Starting point is 00:25:55 This situation is clearly much different. It doesn't have to worry about competing with anyone. It has a wider latitude to care about its workers, its products, and its impact on the wider world. In the early days, Google's motto was don't be evil. In 2015, this was changed to do the right thing. Google is in the privileged position of being successful enough to take ethics seriously without jeopardizing its own existence.

Starting point is 00:26:22 In business, money is either an important thing or it's every thing. thing. Monoplies can afford to think about things other than just making money. So it's clear that being a monopoly is good for everyone inside the company, but what about everyone on the outside? Teal argues that monopoly profits do come at the expense of customer wallets, and monopolies do deserve the bad reputation they get, but only in a world where nothing changes. In a static world, a monopolist is just a rent collector. They corner a market, jack up the prices, and others will have no choice, but to buy from them. In the game of Monopoly, you can imagine the player that owns all of the most valuable real estate is just collecting rent from you every time you go around.

Starting point is 00:27:04 The dice continues to be rolled, but the board never changes. So there's no way of winning by, say, inventing a property that's even better than what the other players have. But the world we live in is dynamic, so it is possible to create new and better things. Creative monopolies, like many of the big tech players, we all know of today, they give customers more choices by adding these entirely new categories that unlock this new abundance for all of us to benefit from. I've been interested in digital advertising over the years, especially Google and Facebook or meta. And what's interesting to me is that they didn't necessarily compete with radios and billboards by putting up billboards themselves and launching their own radio stations. They created

Starting point is 00:27:48 an entirely new category and therefore they expanded the overall market. This makes their existence good for society as a whole as they expanded the proverbial pie for everybody. In 2005, the total amount spent on advertising in the U.S. was around $140 billion. In 2025, just 20 years later, around $450 billion was spent on digital advertising alone. So their overall market for advertising grew massively because of these better ways for businesses to advertise their products and services. While Google, Meta, and Amazon have raked in billions of advertising dollars, they've also empowered hundreds of thousands of small businesses in helping them grow their own companies. Furthermore, they helped consumers discover products that fit their own unique

Starting point is 00:28:37 needs that they otherwise might not have discovered before. It's a win-win for everyone all around. Just a few weeks ago, I saw an ad for a personalized Christmas ornament I ended up buying for my girlfriend. Immediately when I saw the ad, I knew that I just had to have it. She loves personalized gifts, so it was just perfect. I was able to add both of our names to it, and as a value investor, I was also happy it was only $16 to purchase, and I would have never found that ornament if it weren't for meta. What also makes these monopolies good for society is that just because a company has a monopoly today does not mean that that's going to continue indefinitely. These companies have a strong incentive to innovate and invest in creating new technologies to make their existing

Starting point is 00:29:22 products better or create entirely new products. I just saw today that Waymo, which is owned by Alphabet, is launching a new autonomous vehicle with five-person seating. This business was funded thanks to the monopoly profits of Google Search. These monopolies can keep innovating because profits enabled them to make these long-term plans and finance ambitious research projects that firms in competitive industries just can't even dream of. In the book, I thought it was interesting that Teal got into society's obsession with competition and how society grooms people to conformity. The typical playbook for smart, ambitious individuals in the U.S.

Starting point is 00:30:00 might look something like, go to a prestigious university, earn top scores, go off to law school, or get your MBA, get into investment banking, or become a lawyer, and move up the ranks. In every step, you are in competition. with the person to your left and to your right. Inside these firms, people become obsessed with their competitors for career advancement, and then the firms themselves become obsessed with their competitors in the marketplace. He writes, amid all the drama, people lose sight of what matters and focus on their rivals instead, end quote. It reminds me of how when I look at most automakers today, the vast majority of them seem to produce practically the same vehicles. Of course, there are different

Starting point is 00:30:44 at different price levels, but a lot of cars more or less just look exactly the same. In Teal's view, competition can make people hallucinate opportunities where none exist. He points to the example of the online pet store market in the late 90s. You had Pets.com versus several others, each obsessed with defeating their rivals, precisely because there were no substantive differences to focus on. Who could price Chewy Dog toys most aggressively? Who could create the best Super Bowl ad? These companies totally lost sight of the wider question of whether the online pet supply market

Starting point is 00:31:20 was the right space to be in. Winning is better than losing, but everybody loses when the war isn't one worth fighting. Teal argues that if you're not able to beat a rival, it may be better to merge. He started Confinity in 1998 with Max Lefchin and released the PayPal product in late 99. Elon Musk's company, X.com, was right on their heels. their product mirroring confinities feature for feature. The two companies were headquartered in Palo Alto, just four blocks apart. They were in an all-out war trying to reach the biggest scale, and many people at these companies

Starting point is 00:31:56 were logging 100-hour workweeks. By February 2000, both Musk and Teal were deeply concerned about how inflated the tech bubble was, and they knew that a bursting of the bubble would ruin them both before they could even finish the fight. So they decided to join forces through a 50-50 merger, which enabled them to successfully write out the dot-com crash and build a successful company. Teal then digs in deeper and shares more about how a company can become a monopoly. Escaping competition will give you a monopoly, but even a monopoly is only a great business

Starting point is 00:32:31 if it can endure in the future. If we jump back to 2012, let's compare the value of New York Times to Twitter. The New York Times employed a few thousand people, delivered a service to millions of people, and generated more than $100 million in profit. But when Twitter went public in 2013, it was valued at $24 billion, which was 12 times of the New York Times. You might assume that Twitter was perhaps even more profitable than the Times, given the huge valuation disparity, but the reality was that Twitter was actually losing money, which might make many investors think that the market has lost its mind. But valuing businesses isn't just about profits that a company is generating today.

Starting point is 00:33:14 It's all about the future of cash flows discounted to the present. The market was essentially pricing in that Twitter was going to one day capture substantial monopoly profits. It's also why in 2014, LinkedIn was valued at $24 billion, and yet they only generated $21 million in profit. valuing the company at a PE of over 1,000. Because of this reality of how companies are valued, many people who run early-stage tech companies will chase growth at all costs. But it's important to remember that the value of a business isn't just in the profits it will generate in the future,

Starting point is 00:33:50 but also the durability of those profits. If you just focus on near-term growth above all else, you miss the most important question you should be asking. Will this business be around a decade from now? This is a difficult question to answer because it requires you to really think critically about the qualitative characteristics of the business. Teal explains that every monopoly is unique, but they usually share some combination of the following characteristics. Proprietary technology, network effects, economies of scale, and branding. Proprietary technology is the most substantive advantage a company can have because it makes

Starting point is 00:34:27 your product difficult or impossible to replicate. For example, Google's search algorithms return better results than all other search engines have extremely short page load times and highly accurate query auto completion. It would be very difficult for anyone to do to Google what Google did to all other search engine companies in the early 2000s. The rule of Thun that Teal shares is that a proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal

Starting point is 00:35:07 improvement and will be hard to sell, especially in an overcrowded market. And the clearest way to make a 10x improvement is to invent something completely new, or you can radically improve an existing solution. Once you're 10 times better, you escape competition. PayPal, for instance, made buying and selling on eBay at least 10 times better. Instead of mailing a check that would take 7 to 10 days to arrive, PayPal let buyers pay as soon as an auction ended. Sellers received the proceeds right away, and unlike with a check, they knew the funds were good. Amazon is another excellent example. In the early days, they were a bookseller, and one of their most visible improvements was their vast selection. They offered more than 10 times as many books as any other

Starting point is 00:35:51 bookseller. When it launched in 1995, they could claim to be the Earth's largest bookstore, And they could do this because they didn't need to physically store any inventory. It simply requested the title from its supplier whenever a customer made an order. Teal then writes, this quantum improvement was so effective that a very unhappy Barnes & Noble filed a lawsuit three days before Amazon's IPO, claiming that Amazon was unfairly calling itself a bookstore when really it was a book broker, end quote. Much of Apple's 10x improvement was through a superior integrated design.

Starting point is 00:36:27 Before the launch of the iPad in 2005, tablets were painful to use or even unusable in many people's eyes. With the iPad, a tablet was all of a sudden very intuitive and useful. The second characteristic of Monoplies is network effects. Our audience is going to be very familiar with this one. Network effects make a product more useful as more people use it. Teal illustrates the classic example of Facebook and social networks. Third, we have economies of scale.

Starting point is 00:36:56 business gets stronger as it gets bigger, as the fixed costs can be spread out over an ever-greater customer base. This is part of the beauty of the magnificent seven players, as they're all technology companies that see a lot of their incremental revenue dropping straight to the bottom line. Google's marginal cost for a search query is very close to zero, and their marginal revenue is much higher. Or take Microsoft selling a subscription of Office 365. The cost of delivering that product is practically zero, but the incremental revenue can flow straight through as profit. Many other types of businesses gain only limited advantages as they grow to a large scale. Service businesses, for example, are especially difficult to make monopolies.

Starting point is 00:37:40 If you own a yoga studio, you'll only be able to serve a certain number of customers. Of course, you can hire more instructors and expand in new locations, but your margins will still remain largely the same. To put it another way, a very successful yoga studio might serve. a few hundred customers throughout the week, but a very successful team of software developers have the opportunity to serve millions of people across any number of countries. Tia looks to invest in startups that have the potential to scale exponentially, especially from its initial design. Lastly, we have branding. By definition, a company has a monopoly on its own

Starting point is 00:38:16 brand. So creating a strong brand is a powerful way to claim a monopoly. One of today's strongest brand names is Apple. Apple attracted billions of users. users to their attractive products and carefully chosen materials and design. And despite competitors essentially copying much of what they've already done, people will still pay up to use Apple. However, no technology company can be built on branding alone. It also requires some of the advantages outlined above. So brand, scale, network effects, and technology in some combination define a monopoly, but to get them to work, the market needs to be selected carefully. Teals learned that monopolies need to start with a relatively small market, and the reason is simple.

Starting point is 00:38:59 Smaller markets are easier to dominate than larger markets. When PayPal partnered with eBay to offer payments for buyers and sellers, eBay had a few thousand power sellers that did most of the volume. So PayPal targeted the select target group, and within just a few months, they were already serving one-fourth of them. Had they focused more on mobile payments, while mobile phones were in the hands of millions of people, it would have been not. much more difficult to scale up and dominate that market given how small their team was.

Starting point is 00:39:28 The perfect target market for a startup is a small subset of people concentrated together and served by few or no competitors. Any big market is a bad choice and a big market already served by competitors is even worse. And this is why it's always a red flag to teal if an entrepreneur talks about getting a 1% market share in a $100 billion market. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business.

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Starting point is 00:42:33 asset class in the last few years. Visit fundrise.com slash WSB to invest in the fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Once a niche market is dominated, then one should gradually expand into related and slightly broader

Starting point is 00:43:19 markets. Jeff Bezos uses Playbook to a T. Bezos's founding vision was to dominate all of online retail, but he very deliberately started with books. And even in books, Amazon appeal to a niche customer base. Amazon was a quite attractive option to purchase books for anyone who was located far from a bookstore or was looking for unusual books that just weren't held in stores. Then they gradually added new categories and dominated new segments. This idea actually reminds me a lot of portfolio construction. When you try to analyze every stock in the market, you end up mastering none of them. But when you focus deeply on a small number of businesses you truly understand, you can give yourself a real edge. Bezos applied that same discipline to e-commerce. When one small

Starting point is 00:44:08 battle decisively before moving on to the next. The last point I'd add on this is the amount of discipline it takes to focus small initially and dominate that small market. You can imagine that Bezos, he could have gone out, raised a ton of money, and just started selling everything. But he had that discipline and understanding that he wanted to be the best at one thing for a small subset of customers. And once he did that, he could then expand and gradually capture that significant market opportunity. One concept we've discussed quite a bit on the show as it relates to stock investing is the concept of luck versus skill. I know people that believe that having massive success in either business or stock investing is mainly a factor of luck. Malcolm Gladwell, author of The Outliers,

Starting point is 00:44:51 he declared that success results from a series of lucky breaks in arbitrary advantages. Warren Buffett famously considers himself a winner of the ovarian lottery and Jeff Bezos attributes Amazon's success to an incredible planetary alignment in jokes that it was half luck, half good timing, and the rest brains. But when you look at serial entrepreneurs with multiple big wins like Elon Musk, Jack Dorsey, Steve Jobs, they've created multiple billion-dollar companies. So it's sort of hard to argue that success is just a factor of luck. It's impossible to settle this debate objectively because creating Amazon isn't a science experiment. We only get to see this play out one time, and unfortunately, we don't get to see the 1,000 other parallel universes.

Starting point is 00:45:39 Statistics just doesn't work with the sample size of one. But I'd suspect that most who listen to this show don't believe that life is just a matter of chance. I, of course, believe that we do have an ability to shape our own future. There's also the idea that one must create their own luck. A trillion-dollar company just does not happen by accident. But it also doesn't happen without countless circumstances that are outside the founders control. An entrepreneur might be able to stack up win after when because they have that

Starting point is 00:46:08 momentum. And this inherently gives them an advantage relative to other people. T.L. even pulls a quote from the Bible here. Matthew 2529 states, for whoever has will be given more and they will have an abundance. Whoever does not have, even what they have will be taken from them. This is part of the reason why the Pareto principle or the 80-20 rule exists. In 1906, Vilfredo Paredo discovered that 80% of the land in Italy was owned by just 20% of the people. And 20% of the peepods and his garden produced 80% of the peas. This phenomenon tends to show up everywhere in the natural and social world. The biggest cities dwarf all of the small towns put together,

Starting point is 00:46:50 and monopoly businesses capture more value than millions of undifferentiated competitors. As a venture capitalist, Teal understands this power law dynamic as well as anybody. Many people view the world through a normal distribution. In the venture world, this would mean that bad companies fail, average companies stayed flat, and good companies double or triple in value. The reality is that the majority fail and a few big winners deliver all of the results. In Teal's Founders Fund in this 2005 funding round, Facebook returned more than all of the others combined, and Palantir was on a similar trajectory.

Starting point is 00:47:25 This reality could lead many VC investors to just select a ton of different companies to invest, in, hoping that just one of them will become the next Facebook. But Teal actually looks at it differently. He'll only invest in companies that actually have the potential to return the value of the entire fund, which eliminates the vast majority of opportunities. Although the power law is important for the specialized minds in venture capital, I think it's actually an important concept for all of us to take away because all of us are investors in our own way. Because creating a lot of value in the business world is just difficult, most people probably shouldn't be starting their own business. It reminds me of the Steve Jobs quote, the people who are crazy enough to think that they can change the world

Starting point is 00:48:08 are the ones who do, and how Jensen Wong stated that if he could start over, he would not have started Nvidia because it was just such a painful experience. Schools teach us to be well-rounded and know a little bit about a lot of subjects, but the power law rewards those who specialize and are in the top 1% of the top 1%. In the business world, dabblers never win. Traditional dogma will tell you that it doesn't matter what you do as long as you do it well. Teal believes the opposite. It of course does matter what you do, and you should focus relentlessly on something you're good at doing. Before that, you must think hard about whether it will be valuable in the future. Teal titled Chapter 9 Foundations. And I found this chapter to be particularly interesting and

Starting point is 00:48:54 could relate with several of the points he made here. He's highlighted the importance of the foundation so often to his friends that they coined the term Teal's Law. He explains that a startup messed up at its foundation cannot be fixed. So there's a few key things that a company must get right in the very beginning. The founding fathers of the United States seem to appreciate this reality as they were quite thoughtful about the founding of a new country and the opportunity to start something new that could be great. They spent a few months pondering important questions, like how much power should the central government have and how should representation in Congress be divided? Whatever your views on the compromises they've reached, they've been hard to change ever since.

Starting point is 00:49:38 For example, today, California has the same representation in the Senate as Alaska, even though it has 50 times as many people. Teal believes that companies are like countries in this way. Bad decisions made early on, like choosing the wrong partner or hiring the wrong people, are very hard to correct after those decisions are made. The first and most crucial decision for a founder is who you start the company with. Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce. If the founders end up developing irreconcilable differences, then it's the company that suffers. Because of this reality, Teal wants to deeply understand the founding teams,

Starting point is 00:50:19 their technical abilities, how their skills complement each other, and how well they work together. I've worked at a couple of different smaller companies in my career, and the first one I worked at out of college, they had two founders that worked very well together. The CEO was younger, more entrepreneurial, and just loved making a sale. The co-founder he brought on board was older, more experience, and he just enjoyed getting deep into the weeds on projects. And he really helped balance out the CEO's desire to constantly start new things before he's finish starting his other five projects. But in order to go from zero to one, it takes more than just the founders. It takes a team. And that team must be aligned with the company's long-term vision.

Starting point is 00:50:59 Teal talks a little bit about misalignment in any company. And to anticipate the likely sources of misalignment in a company, it's useful to distinguish between three concepts. First is ownership, who legally owns the company's equity. The second is possession, who actually runs the company on a day-to-day basis. And third is control. Who formerly governs the company's affairs? A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession, and a board of directors usually comprising founders and investors exercises control. But as you add more people into the equation, the opportunity for misalignment can grow. Teal highlights the DMV as an example of misalignment

Starting point is 00:51:43 at its most extreme. For those not based in the U.S., the DMV stands for the Department of Motor Vehicles, and I think most of us here in the U.S. have at least had one poor experience there. Broadly speaking, the DMV is known for its long wait times, unmotivated or indifferent service, and what feels like a situation that's just hopeless to try and improve. The DMV is what you get when bureaucracy grows so large that no one has a real incentive to improve the outcomes. Big corporations do better than the DMV, but they're still prone to misalignment.

Starting point is 00:52:15 If you look at a large company like General Motors, for example, the CEO will own some of the company's stock, but only a trivial portion of the total. Therefore, he's incentivized to publish quarterly results that are good enough for him to keep his high salary in corporate jet. Teal believes that as a general rule, everyone involved in the company should be hired full-time. Of course, this doesn't always work as you need to hire outside lawyers or accountants. But anyone who doesn't own stock options or draw a regular salary is fundamentally misaligned. They can tend to be biased for claiming value in the near term and not be helpful in creating

Starting point is 00:52:51 long-term value. To this point, Teal ties in the saying from Ken Casey. You're either on the bus or off the bus. Teal is also quite interested in how the founders compensate themselves. Interestingly, one of the clearest patterns he's noticed from investing in hundreds of startups is the less the CEO gets paid, the better the company does. He believes that there's no reason for the CEO of an early-stage venture-backed startup to receive more than $150,000 per year in salary. This is because high pay incentivizes the CEO to defend the status quo

Starting point is 00:53:24 along with their salary and not work with everyone else to bring problems to the surface and fix them aggressively. On the contrary, a CEO with the low salary and high equity stake will focus on increasing the value of the company as a whole. Low CEO pay also sets the standard for everybody else. If the CEO's clearly all in in making the company successful, then they're more likely to get buy-in from everybody else around them. I wanted to close out today's episode by discussing a company that potentially had its own zero-to-one moment and currently might be a bit misunderstood or underappreciated by the market,

Starting point is 00:54:00 and that company is Uber. I currently do not own a position in Uber, but my co-host Stig Broderson recently initiated a position and pitched it here on the show. And my colleagues, Sean O'Malley and Daniel Malka, they added it to their intrinsic value portfolio just last year. I should also mention that Bill Ackman's firm, Pershing Square, they've built up a nearly $3 billion position in Uber. In Ackman's 2024 annual letter, he wrote,

Starting point is 00:54:27 The Pershing Square Fund acquired a position in early 2025 as the decline. in Uber's share price at the end of 24 provided an opportunity to acquire Uber at an extremely attractive valuation. This was made possible due to concerns regarding a perceived long-term threat from autonomous vehicles. We believe these concerns are misplaced, end quote. Ackman expects Uber to compound earnings at 30% plus over the next several years, thanks to their robust growth and gross bookings and their high level of operating leverage. Uber started out as a dream for Garrett Camp, Uber's co-founder. After selling his first company stumble upon to eBay for $75 million, in 2008, his frustration with the taxi industry

Starting point is 00:55:11 led him to wonder whether a ride-hailing service could be delivered through mobile phones. This was just one year after the launch of the iPhone, so Camp was very early to the game on this idea. He lived in San Francisco, and as crazy as it sounds, San Francisco deliberately kept the number of taxi permits capped at 1,500. So this guaranteed that there would be more demand for taxis than there was supply. And you know, you had slow wait times, good compensation for drivers. The overall service was just terrible. Camp posed the idea to author, investor, and podcaster, Tim Ferriss while having drinks at a bar and Ferris thought it was just a wonderful idea. And the creation of Uber was just a classic zero to one moment because it didn't just improve

Starting point is 00:55:54 Taxis, it created an entirely new way to get from point A to point B through their massive driver network. In hindsight, taxis were an obvious industry ripe for disruption. It tends to just not be the best experience. And as a value investor, I prefer not to see my bill tick up in front of me mile after mile. With Uber, most people all around the world can summon a car with a touch of a button, have transparent pricing and live tracking from the start. In Uber also unlocked the value of millions of personal vehicles that were sitting idle. If we applied Teal's framework to Uber, Uber actually didn't compete in an existing market at first. It made the old market just obsolete by inventing something entirely new.

Starting point is 00:56:39 So the other day, I was on a call with a member from our mastermind community, and he's a member who just loves to talk stocks. For his portfolio, he was actually most excited about both Uber and Lyft. He mentioned to me that he viewed Uber. as the next trillion-dollar company, which of course is a comment that always piques my interest. As of the time of recording, Uber's market cap is below $200 billion. That would imply a 5x increase in the value of the company from today's prices. Uber's writing the secular growth trend of both ride-hailing and delivery. And after pondering it, after several episodes and discussions, I can't help but think that there's just quite an opportunity ahead for this company.

Starting point is 00:57:21 Gen Z grew up with the world at their fingertips. The answer to any question was a Google search away. They could contact any of their friends with the touch of a button. Any item could be delivered to their doorstep within two days. And now with Uber, they can get a meal delivered right to them or call up a ride on a moment's notice. Uber is well positioned to continue to usher in the era of convenience as their dense network both minimizes prices and creates best-in-class latency with average wait times of

Starting point is 00:57:51 just four minutes, creating a strong value proposition for customers. So our community member who lives in a major U.S. city here, he also mentioned how much of a no-brainer it is to use Uber in the metro area. So when you consider the costs of the vehicle, insurance, maintenance, gas, parking, depreciation, Uber makes it significantly cheaper to use transportation. And with their Uber-1 program, their most frequent users earn credits on rides, get priority access to top-readed drivers, get access to $0 delivery fees and other exclusive promotions. And I just can't help but wonder whether Uber is Wall Street's next tech darling, just hiding in plain sight.

Starting point is 00:58:31 Given that Uber was unprofitable for so long, I personally just developed this bias against seriously looking into the company. Plus, there's the market's worries around autonomous vehicles and how will that impact their 8 million drivers globally who provide these services. So the question then becomes, how does the dynamic? change with the rise of autonomous vehicles. Will there be a few AV providers that chip away at the fragmented supply of vehicles that Uber's tapping into? Or will there be several providers that will then be reliant on Uber to provide the liquidity and demand to keep these vehicles moving

Starting point is 00:59:09 as much as possible? The good news for Uber is they have a 15-year head start and they've built a network that customers are just accustomed to using. Uber is one of those companies where the name itself is a verb. I ubered home after the game last night. I think it makes sense that instead of consumers having, say, four different ride-hailing apps, they have one, you know, maybe two. That aggregates the supply and makes the experience as seamless and convenient as possible. Uber has already announced partnerships with several AV companies, which positions them as the global demand aggregator for the autonomous era. But behind the AV overhang the company is facing, the business is also seeing a significant inflection of profitability.

Starting point is 00:59:53 So when you just look at the free cash flow, for example, Uber lost nearly $5 billion in 2019, and after inflecting in 2022, you've seen free cash flow skyrocket to over $8 billion today. So it's sort of ironic how Uber, it got a ton of flack for years for being unprofitable, handing out discounted rides at the expense of shareholders. And then today, they've built out a dominant network. that continues to provide new types of offerings such as route sharing for more cost-conscious customers and Uber Direct, which allows customers to get same-day delivery from businesses. And as I was listening to a talk the CEO was giving, he mentioned something about

Starting point is 01:00:32 two-wheeler and three-wheeler offerings. I was like, okay, what is this? I guess it's some of their more popular offerings in India, which allows customers to order a motorcycle taxi or a three-wheeler vehicle. So they're getting quite creative in ways to tap into this app and there's this network they've built. Anyways, there's just so much to talk about with regards to Uber. If you're pretty interested in Uber like I am, be sure to stay tuned for my episode coming out in a couple of weeks where I'll be sharing the story of Uber and how exactly their zero to one moment played out. I'd love to get feedback on the Uber investment thesis. I think it's an incredibly interesting company to look at. So feel free to shoot me a note on LinkedIn or X. You can find me. Pretty easy.

Starting point is 01:01:16 Just search for my name, Clay Fink. So with that, I think we'll close out the episode there. Thanks a lot for tuning in. And I hope to see you again next time. Thanks for listening to TIP. Follow We Study Billionaires on your favorite podcast app and visit the Investorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results.

Starting point is 01:01:51 Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors' Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services or advertisers do not constitute endorsements and the Investors' Podcast Network is not responsible for any claims made by them. Copyright by the Investors' podcast network. All rights reserved.

We Study Billionaires - The Investor’s Podcast Network - TIP786: Zero to One by Peter Thiel

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