Thiel’s Law

Peter Thiel offers his original perspectives on investing, future profits and the venture capital “Power Law.” His illuminating essays began as lectures for his famous class on start-ups at Stanford University.

Thiel – the founder and original CEO of PayPal, the first outside investor in Facebook and a partner in the venture capital Founders Fund – contends that doing what’s already been done takes you on a journey to nowhere, from “1 to n.” But when you create something new, like a business, a product or a work of art, you travel from “0 to 1.”

Today our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and progressive than the 20th.Peter Thiel

This New York Times number one bestseller drew rave reviews and has become a business classic. The Economist said, “Crisply written, rational and practical, Zero to One should be read not just by aspiring entrepreneurs but by anyone seeking a thoughtful alternative to the current pervasive gloom about the prospects for the world.” The New Republic called it, “an extended polemic against stagnation, convention and uninspired thinking.”

Horizontal/ Vertical 

Peter Thiel says that whatever common wisdom regards as the smartest way to do business is the surest route to failure. He urges you to find or invent the road never taken and take it. 

Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.Peter Thiel

Consider the difference between horizontal and vertical progress. Horizontal progress duplicates or iterates something that is already successful. Globalization defines horizontal progress; it does the same tasks in new locations. Vertical progress makes something new, such as a new technology.

False Wisdom

The 2000 collapse of the dot-com bubble generated four fallacious axioms that still dominate Silicon Valley thinking. Ignore this false wisdom which tells you to advance incrementally, to stay flexible, to improve over your competition and to focus on products over sales. In contrast, Thiel believes any plan beats no plan – the downside of bit-by-bit thinking and too much flexibility. He says original solutions (not copying your rivals) are always best. And you should value products and sales equally.

The first step to thinking clearly is to question what we know about the past.Peter Thiel

Calculate your Customer Acquisition Cost (CAC), the amount you spend to get a customer. Compare it to your Customer Lifetime Value (CLV), the total average profit you gain from one customer. Your CAC, Thiel says, must never exceed your CLV. And, the more your product costs, the higher your CAC is going to be.

If your product costs as much as, for example, Elon Musk’s SpaceX rocket service, you will spend a lot of time and money finding, cultivating and selling to customers. At that level, you won’t have salespeople. Your executives will talk directly with your potential customers’ executives. At start-ups, everyone sells. As CEO, if you don’t have anyone fulfilling that role, the salesperson is you. Establish procedures that enable your small sales team to get your product to the largest possible market.

Monopoly. 

Facebook and PayPal attained monopoly status by becoming the first movers in their markets. Tesla attained its functional monopoly by performing brilliantly in technology, timing, monopoly practices, teamwork, distribution, durability and the ability to keep internal secrets.

Tesla’s first product “dominated” a small niche: “Electric sports cars.” Fully 3,000 drivers bought one, at $109,000 each, providing astonishing cash flow. Having only one product let Tesla focus on R&D for its next car, the Model S, which helped it take ownership of the market for upscale electric sedans.

By monopoly, we mean the kind of company that is so good at what it does that no other firm can offer a close substitute. Google is a good example…it hasn’t competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo.Peter Thiel

Google exemplifies Thiel’s repeated insight that truly successful businesses become monopolies. It doesn’t crush innovation as old monopolies did because, secure in its position, Google can innovate all it likes.

Competition

Thiel offers profound advice in stark, bite-sized chunks: Start small in a field you can monopolize. Consider taking over a small market. Find a community that a likely competitor doesn’t serve. Don’t try to disrupt established companies. Avoid competition. 

The greater the competition is in a field, the less profit you can make there. Thiel may surprise readers when he argues that acquiring your competition or merging with it beats fighting.

Propaganda about the value of competition corrupts Americans from childhood. Thiel’s company launched PayPal in 1999. Elon Musk’s X.com soon followed. They wasted time and energy competing. In early 2000, both Musk and Thiel feared an impending dot-com meltdown. They met in a coffee shop – not in one another’s offices – and worked out an even merger.

Power Law

Most new businesses don’t succeed. These companies align with a Power Law that says only a few will thrive. The author offers the fascinating insight that investors who seek a diverse portfolio will never invest as they should in likely big winners.

You can apply the Power Law to your life, perhaps by rethinking your goals. For instance, starting a company may not be your most profitable choice. You may earn more by joining a profit-making, rising company. As one company is likely to outperform all others exponentially, certain markets will do the same. Seek a market with the same diligence you would exercise when seeking an investment.

Beginnings

Start-ups depend on founding partners, so Thiel compares selecting a partner to choosing a spouse. He cautions you to sort out who has legal ownership of the firm’s equity, who is in charge and who governs the firm.

That is what a start-up has to do: question received ideas and rethink business from scratch. Peter Thiel

Pay good people what they’re worth, but remember one immutable rule: The less a firm pays its CEO, the better it will perform, because an underpaid CEO will work to increase the company’s value. Given that Thiel became a billionaire from venture capital profits, his low ceiling on CEO pay seems amusingly outdated.

Bob Dylan, The Unabomber and Profits

Not every world-changing entrepreneurial investor quotes Faust, Bob Dylan and the Unabomber. Peter Thiel does. He’s known to be a difficult man, famous for his feuds with the media and his inability to suffer those he regards as fools. Thankfully, he doesn’t try to settle any scores in this handy, pithy and unsentimental manual for building and holding onto profits.

Thiel breaks the VC and investment worlds down to specific principles and repeats and repeats that anyone pursuing those principles will prevail. Though he does not shy away from the first person, you will discover surprisingly little insight into his personality. While his prose is pedestrian, Thiel’s ideas – even dating from 2014 – may yet be revelatory for CEOs, investors, entrepreneurs and business students.

Though few authors write with Thiel’s directness, or from the pinnacle of his success, these books provide compelling companion reading: The Innovator’s Dilemma: The Revolutionary Book that Will Change the Way You Do Business by Clayton M. Christensen; The Hard Thing About Hard Things: Building a Business Where There Are No Easy Answers by Ben Horowitz; and Market Wizards: Interviews with Top Traders by Jack D. Schwager.