Peter Thiel on Startups: The focus of your startup should be on capturing value

HIPLegal is hosting a brown-bag lunch series for entrepreneurs, to watch and discuss videos of an exciting educational series, “How to Start a Startup.” Sam Altman, President of Y Combinator, is teaching this series as a class at Stanford this fall and is making the classes available online. Along with guest lecturers like Marissa Mayer, Peter Thiel, and Ben Horowitz, he will be covering the fundamentals: how to come up with ideas and evaluate them, how to get users and grow, how to do sales and marketing, how to hire, how to raise money, company culture, operations and management, business strategy, and more.

HIPLegal is meeting weekly to view and discuss each session on Wednesdays from 4:00-5:30 pm at our office (20195 Stevens Creek Blvd., Suite 250, Cupertino). We watch one video per week (50 minutes) and then hold a discussion for about 40 minutes. We brainstorm ideas, bounce them off each other, and refine them over the course of the series. This is a 20 session program that should be a great program for anyone who is in the process of starting a company or is thinking about one day diving into entrepreneurship. The full curriculum and the videos to date are here.

Please fill out the survey here and let us know if you are interested in attending the series with us.

Session 5 – Peter Thiel, Founder, Paypal & Palantir, and Partner, Founders Fund, “Business Strategy and Monopoly Theory.”


“Competition is for losers.” Aim for a monopoly.

The focus of your startup should be on capturing value.

“X” is the value your business creates.

“Y” is the percentage of X that your business actually captures.

X and Y are independent variables.

You can create a lot of value, and capture none of it. (For example, most scientists create value, but don’t capture any of the return.) Or you can create a small value, but capture all of it. You have to make sure you understand both of these variables.

The fundamental delusion is that great innovations that create tremendous value for society will make you rich. This isn’t true. Just because you create value doesn’t mean you will capture that value.

There are two types of competitive situations – those in which businesses are competitive and those in which one company has a monopoly. Companies tend to downplay (“lie about”) the competitive situation they are in, with companies in competitive markets defining their slice narrowly (focusing on the intersection of different characteristics of the market) to give the impression of a monopoly, and companies with monopolies defining their markets broadly (focusing on the union of different characteristics of the market) to give the impression of competition. The result is these two categories look quite similar when in fact they are very different.

How to Build a Monopoly

Go after small markets. It is easier to dominate a small market and grow from there. For example, eBay started with Pez dispensers, PayPal started with power sellers on eBay. Both expanded from those initial small markets. Some segments, like clean tech, took an approach of starting big and then shrinking. This resulted in tons of competitors.

The characteristics of a monopoly include proprietary technology. It must be an order of magnitude better than the next, best thing or totally new (infinitely better than anything else because there is nothing else). You either have to have a breakthrough that will be the last breakthrough for a while in your industry, or you have to keep improving fast enough so no one can catch up.

Other characteristics include network effects, economies of scale, and branding. These characteristics may exist at one moment in time, but will they stand the test of time? It is critical to have a monopoly that lasts over time, which typically is the last mover (the last breakthrough) who maintains that position. Most value in companies is from cash flow in the future. We tend to overvalue growth rates and undervalue durability. Durability should dominate the value analysis. Study the end game to determine why the company will be relevant 10 years from now.

Two monopoly success cases are: (1) vertically-integrated complex monopolies (successful historically, but complex to coordinate and capital intensive, so not done so much anymore); and (2) software (which has great economies of scale, low marginalized costs, fast adoption, and continues to capture and take over markets).
The psychology of competition is that we are attracted to it and we find comfort in the fact that others are doing what we are doing. But, there is no wisdom in crowds. Competition does make you better, but comes at a price.

Ultimately, consider what is truly important and valuable and focus on that.

On Wednesday, October 29th, we will watch Session 7, Alex Schultz, VP Growth, Facebook, “Growth.” Sign up here if you can join us. Email if you’d like to participate by phone.