- Successful people find value in unexpected places and they do by thinking about business from first principles instead of applying formulas.
- Peter Thiel’s mandatory interview question – “What important truth do very few people agree with you on?”
- Going from 1 to n is horizontal progress. An example is globalization where you take something that works at one place and replicate it elsewhere in the world.
- Going from 0 to 1 is vertical progress or ‘technology’.
- A startup is the largest group of people you can convince of a plan to build a different future. Its hard to do it alone and impossible to do it in big organizations.
- “How much of what you know about business is shaped by mistaken reactions to past mistakes?” A lot of people took away the wrong lessons thanks to the dot-com bubble.
Competition v/s Monopoly
- Creating value is not enough – you also need to capture some of the value you create. For example, Google creates less value than airlines (monetarily) but airlines capture very little of what they create and Google captures a lot.
- Competition destroys profit. Aim for monopoly. Capitalism and competition are opposed.
- Both competitive companies and monopoly players are incentivized to bend the truth. Competition players will frame their market as an intersection of several markets to make them seem more relevant than they are. Monopolies will frame their market as a union of several markets to make them seem smaller than they actually are.
- The competitive ecosystem pushes people towards ruthlessnes or death. Paypal and X.com decided to merge because they were losing a lot of energy competing as opposed to building what they wanted to.
- In business, money is either an important thing or everything. Monopolists can afford to think about things other than money. Non-monopolists can’t.
- All happy companies are different (they found monopoly in a different way). All failed companies are alike – they failed to escape competition.
- “All Rhodes scholars had a great future in their past.” Refers to how competition destroys individual potential.
- In business, if you recognize competition as a destructive force, you are already more sane than most. Use the clear head to build a monopoly.
Building a Monopoly
- Aim for long-term growth, not near-term. See Paypal and LinkedIn (long-term value) v/s Zynga and Groupon (short-term growth).
- Good predictors of long-term cash flow in the future:
- Proprietary technology: Creates a 10x improvement; 10-20% improvements will be easily overlooked.
- Network effects
- Economies of scale
- Brand: Should be backed by substance (e.g. Apple) than be just a coolness indicator (e.g. Yahoo’s recent attempts).
- Start with a small market and then scale up. Paypal initially focused on eBay sellers, Amazon initially focused on books. The opposite – claiming a small fraction of a large market never works because there is either no good starting
point or there is too much competition. Good examples are failed valley solar companies such as Solyndra.
- Dominate a specific niche and then scale up slowly and gradually. Barriers on the way to scaling up will teach you lessons important for the future of the company.
- Don’t ‘disrupt’ – you lose by challenging exist larger players. Napster lost by irking the US recording industry. Paypal gained by framing itself as ‘expanding the payments market’ rather than challenging Visa.
The case for definite optimism
- Definite optimist: “The future will be better if I plan and work to make it better”
- Definite optimism explains the progress in America in the 1950s and 1960s.
- You are not a lottery ticket and success is not a matter of chance.
- If Malcolm Gladwell’s Outliers is right, what explains several hundreds of people who have created multiple multi-million dollar businesses and the few like Steve Jobs and Elon Musk who have created multiple multi-billion dollar businesses?
Acknowledging the power law
- Power law: One thing dominates the rest in a pack, with an exponential
distribution. Example – returns of a venture capital portfolio.
- Power law applies to you as an individual too.
- VCs often fail to see the power law because in the middle of a fund, the results are not clear. Some companies are growing linearly and some exponentially – and the difference between linear and exponential growth isn’t clear early on.
- Think hard about where your actions fall on the power law curve. Life is not a ‘portfolio’ – follow the power law instead of diversifying.
- Applications of power law to individuals
- Differences between companies are more important than differences in roles within companies. Its better to be an employee in an exponentially growing company than own 100% of a linearly growing or stagnant one.
- One market matters a lot more than the others, for a given company.
Building a mafia
- Successful startups are like cults. People on the inside are fanatically right about something that people on the outside have missed.
- “Why should the 20th employee join your company?” Good answers revolve around company mission and the team.
- Defining roles reduces conflict. Make every individual do ONE thing.
The importance of sales
- All salesmen are actors – their priority is persuasion, not sincerity.
- Like acting, sales works best when it is hidden.
- There is a reason why no title in sales, marketing or advertising has anything to do with the role. ‘Account executives’ sell advertising. People don’t want to be reminded when they are being sold to.
- Whatever the career, sales ability distinguishes the superstars from the also-rans.
- Superior sales and distribution by itself can create a monopoly, even with no product distribution. The converse is not true.
Seven points for every company to answer
- Solar companies failed all 7. Tesla got all 7 right.
1. Breakthrough technology instead of incremental improvements
2. Right timing
3. Monopoly – start with a big share of a small market.
4. Right team
5. Good distribution
6. A defensible market position 10-20 years into the future.
7. ‘Secret’ – identified a unique opportunity that others don’t see.
- Founders lie on extreme ends of individual traits (too shy v/s too extroverted, millionaire v/s raggy background). We should be more tolerant of founders who seem strange or extreme.
- A view of the future where technology just ‘takes off’, transcends the current limits of our understanding.
- Best understood by reading Ray Kurzweil’s thoughts.