Competition is for Losers with Peter Thiel (How to Start a Startup 2014: 5)

Alright, good afternoon, today's speaker is Peter Teal. Peter was the founder of PayPal and Paler and Founders Fund and has invested in most of the technology companies in Silica Valley and is going to talk about strategy and

competition

. Thanks for coming, Peter. Brilliant. thank you uh Sam thank you for inviting me thank you for inviting me uh I have a kind of easy FS that I'm completely obsessed with on the business side, which is that, uh, if you're

start

ing a company if you're the founder entrepreneur

start

ing a company, you always want to. aim for Monopoly and, um, and that, and you always want to avoid

competition

, so, therefore, competition is for

losers

, something we'll talk about today.

I'd like to I'd like to start by saying something about the basic idea of ​​when you start one of these companies, how you create value and there's the question of what makes a business valuable and I want to, I want to suggest that there's basically a very simple, very simple formula. : um, you have a valuable company if two things are true, uh, number one, that you create X dollars of value for the world and number two, that you capture y% of X and y The fundamental thing that I think people always overlook in this type of analysis is that X and Y are completely independent variables, so X can be very large, Y can be very small, big, so to create a valuable company you have to basically create something of value and capture a fraction of the value of what you've created and, more or less, just illustrate this as a There is a contrast if you compare the US airline industry.

USA with a company like Google in searches. If you measure by the size of these industries, you could say that airlines are still more important than search if you only measure them. Let's say by revenue there's 195 billion in national revenue in 201 uh 2012 Google had a little over 50 billion um and so on and certainly on some intuitive level if you were to say uh if you were given a choice and you said well, would you? get rid of all air travel or want to get rid of your ability to use search engines, the intuition would be that air travel is something bigger than search and of course these are just the national numbers if you look at this globally . um airlines are much bigger than um than uh than search or Google, but uh, but the profit margins are quite a bit smaller, you know, they were marginally profitable in 2012 12 uh, I think the whole story of 100 years of In the airline industry, cumulative profits in the US have been approximately zero, companies make money, they go bankrupt episodically, they recapitalize and you cycle and repeat, and this is reflected in the capitalization of combined market of airline industries. maybe something like a quarter of the US airline industry, so you have a much smaller search engine than air travel, but much more valuable, and I think this reflects these very different valuations in x. modeling and I think that's why economics professors like to talk about perfect competition.

In some ways it's efficient, especially in a world where things are static because all the consumer surplus is captured by everyone and, uh, and politically it's, uh, what we. "It's what we're told is good in our society, that you want to have competition and this is somehow a good thing, of course there are a lot of negatives, it's generally not so good if you are, you are, you are." We are involved in anything that is hyper-competitive, because often there is no money to be made. I'll come back to this a little bit later, so I think on one end of the spectrum there are industries that are perfectly competitive and on the other.

On the other end of the spectrum, you have things that I would say are monopolies and you know they are much more stable businesses in the long run, you have more capital, and if you get a creative monopoly to invent something new. I think it's symptomatic of having created something really valuable, um, and I think this, you know, the kind of extreme binary view of the world that I always articulate is that there are exactly two types of businesses in this world. There are businesses that are perfectly competitive and there are businesses that are monopolies and there is surprisingly little in between and this dichotomy is not very well understood because people constantly lie about the nature of the businesses they are in and that is why, in my opinion, opinion, this is the most important thing, it's not necessarily the most important thing in business, but I think it's the most important business idea.

People don't understand that there are only these two types of businesses, so let me. say a little bit about the lies that people tell and basically, um, the basics, uh, if you imagine there's a spectrum of companies from perfect competition to Monopoly, um, the apparent differences are pretty small because the people who have monopolies pretend you don't, they'll basically tell you, you know, and it's because you don't want to be regulated by the government, you don't want the government to come after you, so you'll never say you have a monopoly, so anyone who has a monopoly they'll pretend like they're in incredible competition and on the other end of the spectrum, if you are incredibly competitive and if you are in some type of business where you will never make money, you will be tempted to tell a lie that goes in the other direction where you will say that you are doing something unique, um, that's somehow, uh, less competitive than it sounds because, um, because you want to, you want to differentiate, you want to try to attract capital or something like that.

If monopolists pretend not to have monopolies and non-monopolists pretend to have monopolies, the apparent difference is very small, while the real difference, I would say, is quite large, so there is this distortion that occurs because of the lies that people he says about his businesses. and the lies are in opposite directions, let me, let me dig a little deeper into the way these lies work, so, you know, the basic lie that you tell as a no-m monopoly is that we're in a very small market, the The basic lie you tell as a Monopoly is that the market you're in is a lot bigger than it seems, and usually, if you want to think about this in sort of established theoretical terms, you could say that a monopolist tells you a lie when you describe your business as the union of these very different markets and the non-monopolist describes it as the intersection, so in effect, if you are not a monopolist, you will rhetorically describe your market as super small, you are the only one person in that market, if you have Monopoly, you'll describe it as super big and, um, and there's a lot of competition in it, so, some examples of how this works in practice, uh. so I always use restaurants as an example of a terrible business, this is always, you know, an idea of ​​mine, you know, capitalism and competition are antonyms. um, capitalist is someone who accumulates capital.

The world of perfect competition is a world where all capital is eliminated by competing. uh you're opening a restaurant business that no one wants to invest in because you just lose money so you have to tell an idiosyncratic narrative and you'll say something like well we're the only british food restaurant in paloalto so it's paloalto british and uh and Of course, that's too small a market because people can drive to Mountain View or even Meno Park, and there probably won't be people who eat nothing but British food, at least there won't be people who are still alive, and that's how it is . um, that's kind of a fictionally narrow market um, there's kind of a Hollywood version of this where, uh, the way movies are always presented is, you know, okay, it's like a college football star, you know, uh he joins an elite group of hackers to um to catch the shark that killed his friend, sorry, and that's a movie that hasn't been made yet, but the question is what's the right category or is the right category, it's just another movie, in which case you know. there's a lot of those it's super competitive, incredibly difficult to make money, no one makes money in Hollywood, uh, making movies, or it's just really really difficult, so you always have this question about whether the intersection is real, does it make sense, does it? value that one should ask and of course there are early versions of this where you and the kind of bad, really bad versions, you just take a whole series of mobile social apps for sharing buzzwords, combine them and have some kind of narrative and whether or not that's a real business or not uh it's uh um it's generally a bad sign, so it's almost this pattern recognition when you have this intersections type rhetoric um, it usually doesn't work, the something from somewhere is actually, mostly just the nothingness of the nothingness and it's like the Stanford of North Dakota, one of a kind, but it's not Stanford, so let's look at the opposite, the opposite lie is, if you're, let's say, the search company that is. down the street from here and it has about a happy 66% market share um and uh, you know, it's completely dominant in the search market um Google has hardly ever described itself as a search engine. these days um and instead, uh he describes himself. in all these different ways, so sometimes it says it's an advertising company, so if it were a search company you'd say, "wow, this has a huge market share that's really crazy, it's like an incredible Monopoly." , it's much bigger than it is." a much stronger monopoly than Microsoft ever had in the 90s, maybe that's why it's making so much money, but if you say it's an advertising market, you could say there's 17 billion in search advertising and that's part of it. from online advertising, which is much bigger and then you know all of our advertising is bigger and then when you get to global advertising, that's about 500 billion, so you're talking about 3 and a half percent. , that is, a small part of this, much larger. market um or if you don't want to be an advertising company you can always say you're a technology company um and then um sorry let me see um and then the and and then um and and the technology market is something like a trillion Doll Market and the narrative that you tell like Google in the technology market is um well, we're competing with all the car companies with our self-driving cars, we're competing with the Apple app on TVs and iPhones, uh, we.

We're competing with Facebook, we're competing with Microsoft on Office products, we're competing with Amazon on cloud services, so we're in this giant tech market where there's competition from every direction, look, look and no, we're not. the monopoly that the government is seeking and we should not be regulated in any way, so I think one always has to be very aware that there are these very powerful incentives to distort the nature of these markets in one way or another. another, so, you know, the evidence of narrow markets in the technology industry is, basically, if you look at some of the big tech companies, Apple, Google, Microsoft, Amazon, they, just, they.

I've been accumulating cash year after year and you have incredibly high profit margins and I would say one of the reasons the tech industry in the US has been so financially successful is because they are prone to creating all these Monopoly type businesses. and that's, um, and it's reflected in the fact that these companies are just hoarding so much cash that they don't even know what to do with it. Beyond a certain point, um, and so on, let me tell you. Let me say a few things about how to build a monopoly and I think one of those very counterintuitive ideas that comes out of this Monopoly is that you want to go after small markets.

If you're a

startup

, you know you want to get to Monopoly, you're starting a new company, you want to get to Monopoly, um Monopoly, you have a big market share, how do you get to a big market share? You start with a really small market and you take over that entire market and then over time you find ways to expand that market in concentric circles and what is always a big mistake is chasing a giant market. The first day, because that's usually evidence that somehow you haven't defined the categories correctly, and that usually means there's going to be too much competition one way or another, which is why I think almost every successful company in Silicon Valley .

I had some model of starting with small markets and expanding and you know, if you take Amazon, you start with, you start with, you know, a bookstore, we have all the books in the world, so it's a better bookstore than any other. has in the world when it starts in the '90s it's online there are things you can do that you couldn't do before and then you gradually expand into all kinds of different forms of e-commerce and other things beyond that, you know, eBay, you start with Pez dispensers, raisins to babies with hats, and finally, it's all these different auctions for all these different types of products,um and uh, and what was very contradictory about what it is.

What's very contradictory with a lot of these companies is that they often start with markets that are so small that people don't think, they don't think they're valuable at all when you start, PayPal's version of this was Was that you? We started with powerful sellers on eBay, which was around 20,000 people when we first saw this happen in December 99 January 2000, right after we launched. There was a feeling that all of these were. It was such. Small market, it was terrible, we thought these were terrible customers, there are just people selling crap on the internet, why do we want to go after this market, but you know there was a way to get a product that was much better for everyone in that market.

You could, um, and we get to something like 25 30%, you know. Market penetration in two or 3 months and you got some traction, you got brand recognition and you can build the business from there. So, I always think that these very small markets are quite underrated. The Facebook version of this that I always give is that, you know, the initial market on Facebook was 10,000 people at Harvard, it went from zero to 60% market share. in 10 days was a very auspicious start, the way this is analyzed in business schools is always ridiculous, it is such a small market that it cannot have any value at all, so I think Facebook's analysis of the business schools from the beginning or PayPal at the beginning or eBay at the beginning is that the markets were perhaps so small that they were almost worthless and would have had little value if they had stayed small, but it turned out that there were ways to make them grow concentrically. and that's what made them, that's what made them so valuable.

Now I think the opposite version of this is always where you have super large markets and there are so many different things that went wrong with all the cleantech companies in the last decade, but one theme that ran through almost all of them was that they all started with massive markets. and every cleantech PowerPoint presentation one saw in the years 2005 to 2008, which was kind of a cleantech bubble in Silicon Valley. To begin with, we're in the energy market, we're in a market that's measured in hundreds of billions or trillions of dollars and, um, and then you know, once you're kind of a minnow in a vast ocean, um, that it's not a good place to be that means you have tons of competitors and you don't even know who all the competitors are, so you want to be, you know you want to be a one-of-a-kind company, where you're the only one in a small ecosystem, You don't want to be the fourth online pet food company, you don't want to be the tenth thin film solar panel company, you don't want to be the hundredth H restaurant in Paloalto, you know, the restaurant industry is a billion dollar industry.

Dollars. So if you do a market size analysis, you would include that restaurants are a fantastic business to get into and they are often large markets. Existing large markets usually mean you have tons of competition, very, very difficult to differentiate, so the first int. The idea is to go after small markets, often markets that are so small that people don't even notice them and think they make sense, that's where you get a foothold and then, um, and then if those markets can expand , you can scale it to a big Monopoly business, you know, wait a second, there are several different characteristics of these Monopoly businesses, which I like to focus on, and there probably isn't any kind of one-size-fits-all formula and I always think that, that In technology there's always this feeling that you know the history of technology is such that every moment happens only once, so you know the next Mark Zuckerberg won't build a social network, the next, uh, the next Larry Page won't. will build. a search engine the next Bill Gates won't build an operating system and if you're copying these people you're not learning from them, but that's the way it is, and that's why there are always these unique companies that are doing something that hasn't been done before, end up, end up having the potential to be a monopoly if you know that the opening line opening in um Anna Kenina is that all happy companies sorry, all happy families, all happy families are equal, all unhappy families.

They are unhappy in their own way and the opposite is true in business, where I think all happy companies are different because they are doing something very unique. All unhappy companies are the same because they cannot escape the essential similarity that is competition and so on. One type of characteristic of a monopolistic technology company is some type of proprietary technology. My somewhat arbitrary and crazy rule of thumb is that you want to have technology that is an order of magnitude better than the next best thing, which is why Amazon had over 10 times as much. many books.

It may not be that high-tech, but you discover a way to sell 10 times more books efficiently online. You know PayPal, the alternative to PayPal was to use um, I was using checks to send money on eBay. It took 7 to 10 days to clear PayPal could do it more than 10 times faster, so you want to have some kind of very powerful improvement in some order, maybe an order of magnitude. Improvement in some key dimension, of course, you know if If you really come with something totally new, it's like an infinite improvement, so I would say that the iPhone was the first smartphone that worked, and you know, maybe it's not infinite , but it's definitely an order of magnitude or more of an improvement, so I think the technology is designed to give you a massive Delta on the next, next best option, I think there are often network effects that can kick in that really they help which is very um and these lead to monopolies over time.

What's very complicated about network effects is that they are often very difficult to get started and although everyone understands how valuable they are, there is always this incredibly thing. complicated question why is it valuable to the first person who is doing something, economies of scale, if you have something with very high fixed costs, very low marginal costs, that is usually a monopoly type business and then there is this branding thing. uh, which is something like this idea that lodges in people's brains. I never fully understand how the brand works. So I never invest in companies where it's just about the brand, but I think it's a real phenomenon that it creates. real value I think one of the things I'll come back to a little bit towards the end, but one of the things that's very surprising is that software companies are often, for whatever reason, very good at some of these things. they're especially good at the economies of scale part because the marginal cost of software is zero and so if you get something that works in software, it's often significantly better than the existing solution and then you have these tremendous economies of scale and You can scale pretty quickly, so even if the market starts small, you can grow your business fast enough to stay the same size as the growing market and maintain the Monopoly, Power type.

Now, the fundamental thing about these monopolies is um, it's not enough to have a monopoly for a moment, the critical thing is to have one that lasts over time, um, and so you know, in s value there is always the kind of idea that you want to be the first to move and I always think it's, in some ways, the best framework is that you want to be the last to move, you want to be the last company in a category, those are the ones that are really valuable. Microsoft was the last operating system for at least many decades.

Google is. the latest search engine, Facebook, will be valuable if it turns out to be the latest social networking site and, um, and one way to think about this last value, uh, is this IDE where most of the value of these companies exists currently. the future, um, if you do a kind of discounted cash flow analysis of a company, you see that you have all these earnings streams, you have a growth rate, the growth rate is much higher than the discount rate, so what most of the value exists a lot. going forward I did this exercise at PayPal in March 2001, we had been in business for about 27 months and, um, and if we knew the growth rate was 100% annually, we were counting future cash flows at about 30 % and it turned out that about 3/4 of the value of the business in 2001 came from cash flows in the years 2011 and beyond and um and every time you do the math on any of these technology companies you get an answer that is something like this, If you're trying to analyze any of the tech companies in Silicon Valley, Airbnb, Twitter, Facebook, any Internet

startup

, all the ones in the combinator, the math tells you that 34 80 85% of the value comes from flows of cash. in the years 2024 and beyond, is very, very far in the future and, therefore, one of the things that we always overvalue in Silicon Valley are growth rates and we underestimate durability because growth is something that can be measured in the here and now.

We can always track that very precisely, the question of whether a company will still be around a decade from now, that's actually what dominates the value equation and that's a much more qualitative thing, and if, if, if we came back to this idea of these features of Monopoly uh proprietary technology Network effects economies of scale um um, you can think of these features as those that exist at a time when you capture a market and take over it, but I also want to think about whether these things are going to last over time and therefore there is a time dimension to all of these characteristics, so network effects often have a great time element where, as the network scales, network effects actually they become more robust, so if you have a network. effect business which is often one that uh um can become a um a bigger and stronger Monopoly over time a proprietary technology is always a little bit complicated, so you want something that's an order of magnitude better than the state of the- art in the world today and that's how you get people's attention, that's how you initially break through, but then you don't want to be replaced by anyone else, so there are all these areas of innovation where there was an innovation tremendous but no one did it. any money, so, you know, Drive Manufacturing in the 1980s, um, you could make a better dis, build a better dis Drive than anyone else, you could take over the whole world and two years later, someone else would come along and replace the yours and in Over the course of 15 years, vastly improved disk drives were obtained, so it had a great benefit for consumers, but it didn't really help the people who started these companies, so the question always arises of have a breakthrough in technology but then also be I can say, explain why yours will be the last breakthrough, or at least the last breakthrough for a long time, or you will make a breakthrough and then be able to keep improving it at a rate fast enough to that no one can reach it.

If you have a structure of the future where there is a lot of innovation and other people will come up with new things that you are working on, that is great for society, in reality, it is usually not so good for your business. um and then um economies of scale uh I talked about that so I think anyway, I think this last move thing is very critical. I'm always tempted, you know, I don't want to delay the chess analogies, but you know the first move. in chess it's someone who plays white, white has about a third pawn advantage so there is a slight advantage to going first, you want to be the last one to move, who wins the game so there will always be the world champion Kappa White chess set.

White Kappa Line, you should start by studying the endgame and I think that's good, I wouldn't say it's the only thing you should study. I think this is the kind of perspective to ask these questions, why will he continue to be the leader? company 10 15 20 years from now is really critical to try to think through, let me, let me, I want to go in two slightly different directions with this idea of ​​monop versus competition and I think Well, I think this is the central idea in my mind for the businesses, to start businesses, to think about them and U, and there are some very interesting perspectives that I think it offers in general, you know, in the entire history of innovation and technology and science because, you know, we have lived, we have lived, you know, 250 300 years of incredible technological progress in many, many different domains, you know, from the steam engine to railroads to telephones, refrigeration appliances, um, you.

I know the aviation computing revolution in all sorts of different areas of technological innovation and then there's something similar that can be said about science, where we've experienced centuries of enormous amounts of innovation in science as well and um and the What I think What people always overlook when they think about these things is that, because X and Y are independent variables, some of these things can be extremelyvaluable.Innovations, but the people who invent them and ideate them are not rewarded for this and certainly if you go back to um, you need to create X dollars in value, you capture y% of X.

I would suggest that the history of science. Overall, it's been one of the reasons it's 0% across the board, scientists never make money, they're always fooled into thinking they live in a fair universe that will reward them for their work and inventions, and this is probably the fundamental deception. That's what scientists tend to suffer from in our society and even in technology there are many different areas of technology where there were great innovations that created tremendous value for society, but people didn't do it. It didn't really capture much of the value, so I think there is this kind of complete story of science and technology that can be told from the perspective of how much value was actually captured, and certainly there is complete data. sectors where people didn't grasp anything so you're the smartest physicist of the 20th century you come up with special relativity you come up with general relativity you don't become a billionaire you don't even become a millionaire um it's just that somehow it doesn't work in that way um the railroads are incredibly valuable, most of them just went out of business because it was too much competition um right brothers um, you fly the first plane, you don't make any money, so I think there's a kind of structure in these industries that is very important and I think what's really rare are the success stories, so you actually really think about the history of this 250-year sweep, it's unusual.

And it's almost always 0%, it's always zero in science, almost always in technology, so it's very rare that people made money, you know, at the beginning of the late 18th century and early 19th century, the first Industrial Revolution were the textile factories, you had the steam. The engine automated things and you had these relentless improvements where people improved the efficiency of textile manufacturing factories, usually at a rate of 5 to 7% every year, year after year, decade after decade, you had 60 70 years of tremendous improvements from 1780 to 1850. um, but even in 1850 most of the wealth in Britain was still in the hands of the landed aristocracy.

Uh, the workers, didn't they know that the workers didn't earn that much? hundreds of people running textile factories was an industry where just, um, the structure of competition prevented people from making money, so I think there's probably only two broad categories in the entire history of the industry in my opinion. . Over the past 250 years, people have come up with new things and made money doing it. One of them is these kinds of complex, vertically integrated monopolies that people built in the Second Industrial Revolution in the late 19th and early 20th centuries. century and this was like Ford, it was the vertically integrated oil companies like Standard Oil um and what these vertically integrated monopolies typically required was this very complex coordination, you had a lot of pieces to fit together in the right way, uh, when you put them together If you had a tremendous advantage, this is actually done surprisingly little nowadays, so I think this is a kind of form of business that, when people can achieve it, is very valuable, usually requires quite a bit of capital.

We live in a kind of in a. in a culture where it's very difficult to get people to buy something that is super complicated and takes a long time to build, but you know, when I think about my colleague Elon Musk's success at PayPal with Tesla and SpaceX, I think the key to these companies was the complex vertically integrated Monopoly structure that they had, so if you look at Tesla or SpaceX, if you ask, do you know if there was any kind of breakthrough, I mean, they certainly innovated in many dimensions, I don't think there is.

It was a single 10x advance in battery storage or you know, maybe working on some things in rockets but they hadn't done it, there wasn't any kind of massive advance, but what was really impressive was integrating all these pieces together and doing it in In a way it was more vertically integrated than most of its competitors, so Tesla also integrated The Car Distributors so they wouldn't steal all the money like has happened with the rest of the auto industry in the US or SpaceX, basically, you took everything out. the subcontractors, um uh, where most of the big aerospace companies have single source subcontractors that can collect monopoly profits and make it very difficult for integrated aerospace companies to make money, so vertical integration I think is kind of of vertical integration. little explored mode of technological progress that people would do well to look at more and then I think there is something about software itself that is very, very powerful, software has these incredible economies of scale, these low marginal costs and there is something about the world of bits compared to the world of atoms where you can often get very fast adoption and fast adoption is critical to capturing and taking over markets because even if you have a small market the adoption rate is too slow there.

There will be enough time for other people to enter that market and compete with you, whereas if you have a small or medium market and you have a fast adoption rate, you can take over this market and I think this is one of the reasons why Silicon Valley has done so well and why software has been this phenomenal industry and what I would suggest, what I would like to leave you with is that there are different rationalizations that people give for why certain things work and why certain things don't. . It doesn't work and I think these rationalizations always obscure the issue of creating X dollars in value and capturing y% of do. charitable reasons and that you're not a good scientist if you're motivated by money and I'm not even saying that people should always be motivated by money or anything like that, but I think we should be a little more critical of this as a rationalization that we should asking us is a rationalization to obscure the fact that y equals 0% and scientists are operating in this kind of world where all innovation is effectively eliminated by competition and they can't.

If we don't capture any of that directly and then the software distortion that often occurs is because people are making huge fortunes in software, we infer that this is the most valuable thing being done in the world, period and so on. , if people on Twitter make uh billions of dollars it must be that Twitter is worth a lot more than anything Einstein ever made um and um and uh and what that kind of rationalization tends to obscure is again that X and Y are variables independent and there are these businesses where you capture a lot of structure of these industries has been of enormous importance and when um and um and and there is a kind of story where some people have made great fortunes because they were in industries with the right structure and other people did nothing at all because they were in this type of very competitive things. and we shouldn't just rationalize that way.

I think it's worth understanding this better and then finally, let me come back to this, this kind of general theme for this talk, this competition is for

losers

, idea that is always this provocative way of titles because we always think of losers as the people who aren't good at competing, we think of losers as people who are slow at sports on the track team in high school or who do a little less well on standardized tests um and don't get into the right schools, so we always think of losers as people who can't compete um and I want us to really rethink and reevaluate this and consider whether it's possible for competition itself to be outside of that. we, we, it's not just the case that we don't intellectually understand this Monopoly competition dichotomy, so we've been talking about why you wouldn't understand it intellectually because, um, people lie about it, it's distorted, we have all these Eh , the history of innovation rationalizes what's happening in all these very, very strange ways, but I think it's more than just an intellectual blind spot.

I think it's also a psychological blind spot that we find ourselves in, you know, very, very attracted to competition in one way or another. another um we find it reassuring if other people do things the word ape already in Shakespeare's time meant both primate and imitate uh and there is something in human nature that is deeply mimetic imitative aplike leming similar to a sheep like a CD um and it's like that , very problematic thing that we should always think through and try to overcome and there's always this question about competition as a form of validation where we look for things that a lot of other people look for and um it's not that there's wisdom in crowds, it's not When a lot of people are trying to do something that is proof that it is valuable.

I think it's when a lot of people are trying to do something that it's often a test of insanity. There are 20,000 people a year who moved to Los Angeles to become movie stars, about 20 of them made it. I think the Olympics are a little bit better because you know, you can find out pretty quickly if you're good or not. so there's a little less weight loss for society um you know um um you know you're the kind of educational experience in a place uh pre-Stanford educational experience um there's always kind of a non-competitive characterization where I think most the people in this room had machine guns and were competing with people with bows and arrows, so it wasn't exactly a parallel competition when you were in middle school and in high school, there's always one question: the tournament? it makes sense as you go on and this is uh and then um there's always this question if people go to graduate school or postdoctoral education, does the intensity of competition really make sense?

There's the classic, you know, Henry Kissinger. line that uh um describes his fellow faculty at Harvard that uh um the battles were so fierce because the stakes were so small that it describes a kind of Academy and um and and in some ways you think that on one level this is a description crazy, do you know why? people fight like crazy when the stakes are very low, but I also think it's simply a function of the logic of the situation when it's very difficult to differentiate yourself from other people when the differences are when the objective differences are really small, then you have to compete fiercely to maintain a difference of one kind or another um that's often more imaginary than real there's always kind of a personal version of this that I tell you where, um, I was tracked as hyper hypertized.

You know, in my eighth grade. High school yearbook one of my friends wrote in You know, I know you're going to Stanford in four years as a sophomore. I entered Stanford four years later, at the end of high school, I went to Stanford Law School. uh, you know, I ended up at a big law firm in New York, uh, where from the outside everyone wanted in, from the inside, everyone wanted to leave, and you had, and it was this very strange dynamic, where after that, uh I sort . I realized that maybe this wasn't the best idea and I left after 7 months and 3 days, you know, one of the people at the end of the hall told me, it's really heartwarming to see you leave Peter.

I had no idea it was possible. to escape from Alcatraz, which, of course, all you had to do was walk out the front door and not come back, but, but a lot of people's identities got wrapped up in winning these competitions, which they somehow lost seen what was important. It was valuable, you know competition makes you better at whatever you're competing in because when you're competing you're comparing yourself to the people around you and you're figuring out how can I beat the people next to me. How can I do a little better at whatever they're doing and you'll get better at it?

I'm not, I don't question it, I don't deny it, but it often comes with a tremendous price that, uh. you stop asking bigger questions about what is truly important and truly valuable, so I would say don't always go through the little door that everyone is trying to get through, maybe turn the corner and go through the big door that no one is going to accept many times. thank you I guess it's time you want to answer some questions or S oh yeah people want to answer I'll answer some questions we have a few minutes yeah go ahead since yeah like you mentioned before.

Monopolies and competition often look similar because of the narratives that people tell Nares that we tell ourselves. Do you have a way to easily determine the difference when looking at an idea or evaluating your own idea? I would say the question is I always try to focus on what the real market is, noton what the market narrative is, because you can always tell a fictional story about a market that is much bigger or much smaller, but what is the real target market, so it's always yes, you always try to figure it out and you , real people, have incentives to powerfully distort these things.

Yeah, so which of the aspects of monopolies that you mentioned would you say is comp software like Google Excel? Well, they have Network. Effects with the ad network they had proprietary technology that gave them the head start because they had the page ranking algorithm that was in some ways an order of magnitude better than any other search engine. You have economies of scale due to necessity. to store, you know all these different sites and at this point you have the brand, so Google has all four, maybe the proprietary technology is a little weaker at this point, but it definitely had all four and maybe three and a half of four Now, yes, how.

Does this apply to the palest and second? What do you like? Second is what but with the iPhone uh headph oh this is that is a set of companies that are making different copycat payment systems on mobile phones there is a square there is a PayPal type they simply have different shapes, this is how they differentiate one like a triangle , another one is a square um and you know, um maybe at some point the apes will run out of shapes or something, but um, but I think um non palente here we start with a focus on um the intelligence community, which is a small submarket um, you had a proprietary technology that used a very, very different approach, um uh, where it focused on human synthesis, um computer, uh, rather than uh uh substitution, which I think is the dominant paradigm, so there's a whole set of things I would say about market focus and proprietary technology uh yeah um we have a design thinking methodology and uh lean uh startup thinking um, which is It's used to mitigate risk by not creating things that people doesn't want to, but how can young innovators be inspired to create complex systems that last?

Can you repeat the question? Yes, so the question is: what do I think about lean startups? Thinking about where you get people's feedback versus complexity that may not work, so I'm personally quite skeptical about the whole Lean Startup methodology. I think really big companies doing something was kind of a quantum improvement. really set them apart from everyone else, they usually didn't do massive customer surveys, the people who ran these companies, sometimes they didn't always suffer from wild forms of bers, so they really weren't that influenced or put off as easily by what What other people thought. or I told them to do it, so I think we're too focused on iteration as a modality and not enough on trying to have, you know, a virtual ESP link with the public and discover it ourselves.

I would say uh, let me see um I would say uh, um. I'm not a risk question. I think it's always a very complicated question because there's um, you know, there, it's not, it's frequent, I think it's frequent. the case that you don't have enough time to really mitigate the risk if you're going to take enough time to figure out what people want um you'll often have missed the boat by then um and um and then of course there's always the risk of doing something that's not that significant or significant, so you know you could say that a career in law school is a low risk career from one perspective, it can still be a very high risk career in the sense of that you may not be at high risk of not doing something meaningful with your life, so we have to think about risk in this very complicated way.

I think the risk is for this concept very complicated. Yes, you are talking about the last move. Advantage but then that doesn't imply that there's already competition on the chest piece on the chest board to begin with, um, yeah, there's always this terminology, so I would say there are categories that people are grouped into. As a whole, I would say that Monopoly's businesses were indeed, they really were a great pioneer in a sense, you could say that Google was not the first search engine, there were other search engines before, but in one dimension they were dramatically better than all.

Otherwise, they were the first to have page rank with a kind of automated approach. Facebook was not the first social networking site. My friend Reed Hoffman started one in 1997. They called it a social network, so they already had the name social network. the name of his company years before Facebook uh, his idea was that it was going to be this virtual cyers space where I would be a dog and you would be a cat and we would have all these different rules for how we interact with each other in this alternative virtual reality Facebook was the first to get a real identity, so I would say I hope Facebook is the last social networking site, it was the first in a very important dimension that people usually use.

Don't consider it as the first because in a way they group all these things together. I have one more question, okay, one more question, let's take one here. Yes, in theory, you're someone who worked at Golden Sachs after college and skipped six. months and now he's studying computer science at Stanford uh how would you recommend rethinking that? No, I don't really know how, I don't really know how to, uh, how to figure this out, that there are these, um, you know, that there are these very strange studies that they've done on people who go to business school. one they did at Harvard Business School where, um, it's kind of an anti-asger personality, um, we have people who are super extroverted, they generally have low convictions, few ideas and you have a kind of hothouse environment where you put all these people. for two years and in the end, they systematically end up being the largest cohort, they systematically end up doing the wrong thing, they try to catch the last wave, you know, 1989, everyone at Harvard tried to work for Mike Milin, it was a year or two. before they went to jail for all the junk bond stuff, they were never interested in silicon valley or tech except in 99 2000 when they timed the dotcom bubble peeing perfectly, they did it, and then you know that 05 a 7 housed private equity stuff like this.

So I think this tendency of us to see competition as validation is very profound. I don't think there's any kind of easy psychological formula to avoid it, so I don't do it. I don't really know how, what kind of therapy to recommend, but, my first starting point, which is only like 10% of the way, is to never underestimate how big the problem is, we always think this. It's something that afflicts other people, so it's easy for me to point to people from business schools or people from Harvard or people from Wall Street. I think it actually afflicts all of us to a very deep degree, we always think of advertising as something that works. about other people, who are all these stupid people who fall for all those ads on TV?

They obviously work to some extent and they work disturbingly on all of us and it's something we should all work to overcome. Thank you so much.