Thread by @marketplunger1

[MEGA THREAD]

Competition is for Losers by @peterthiel

Thiel discusses five important ideas:

1. Capturing Value
2. Lies People Tell
3. How To Build a Monopoly
4. Last Mover Advantage
5. History of Innovation
6. Psychology of Competition

Let's dig in!

bit.ly/32nKk1q

1) Capturing Value --

Lesson: If you have a valuable company, two things are true:

a) Create X dollars of value for the world
b) You capture Y% of X

What people miss: X and Y are completely independent variables.

Google - smaller market/larger value
Airlines - inverse

1b) Perfect Competition

Pros:

- Easy to model
- Efficient in static world
- Politically Stable

Cons:

- Psychologically unhealthy
- Irrelevant in dynamic world
- Preempts question of value

What we're told: You want competition in society and it's a GOOD thing.

But is it?

1c) Monopolies

Pros:

- Incentive to innovate
- Stable, longterm planning
- Deeper financing
- Symptomatic of creation

Cons:

- Lower output, higher prices
- Price discrimination
- Stifle innovation (*yuge*)
- Tying

Two kinds of biz:

1. Perfectly competitive
2. Monopolies

2) Lies That People Tell (LTPT)

- Monopolies will pretend they're in incredible competition (e.g., Google & anti-trust regs)

- High competition will pretend that they're doing something unique (to attract capital, differentiate, etc.)

Here's the lie vs. reality visualized:

2a) Narratives: The Lies You Tell

- Non-monopolies: "We're in a narrow market"

- Monopolies: "We're in a huge market"

Ex 1: Restaurants

- Investors KNOW they lose money. So you differentiate, saying, "we're the only ones that do "x""

Ex 2: Blockbuster movies / Overhyped flop

2c) Narratives - Startup Version

a) Take a bunch of buzzwords
b) Jam them together in a cool looking UI
c) Say you do all of these things

These things *generally* don't work.

Examples include:

- "The Stanford of North Dakota"

2d) Narratives - The Opposite Lie

Google says its part of a HUGE market, but is that true?

- US Search Advertising: $17B market (3.5%)

That's a small market that Google DOMINATES.

But framing matters. The woder you expand your market, the larger the *perceived* competition

2e) Evidence of Narrow Markets

Many of today's tech giants have gobs of cash and high margins.

- : 40% GM
- : 65% GM
- : 78% GM

Here's why: They've ALL done an excellent job at creating MONOPOLIES within their smaller markets.

So how do we build one? Onward!

3) How To Build A Monopoly

Start small and monopolize: it's easier to dominate a small market than a larger one.

Examples:

- starting w/ books
- with Harvard U campus
- w/ beanie babbies
- w/ Power Sellers on

The smaller the market, the better.

3a) How (Not) To Build a Monopoly

One theme: They all started with massive markets

- Every clean-tech slide deck featured a massive TAM
- Minnow in a vast ocean

You can feed yourself a lie that because the market is so large, it MUST be a great business.

Not true:

4) Last Mover Advantage

- You want to be the LAST company in a category (e.g., as the LAST search company)

Why: Most value exists far into the future

A DCF tells us this!

- Growth rate > discount rate = ⬆️ Future Value
- 3/4 of company value comes from 10+ years ahead

4a) Growth Rates & Durability

Love this part from Thiel ...

"One of the things we always overvalue is growth rates, and we always undervalue durability."

Lessons:

- High growth w/ no durability = 😢
- Low growth w/ durability = 🙂
- High growth w/ durability = 🥳

5) History of Innovation

What people ALWAYS miss when they think about innovation:

- Some innovations can be EXTREMELY valuable, but those that create them don't get rewarded (X and Y are independent!)

- History of science is Y = 0 where scientists never make any money

5a) Science: Y = 0

Innovative success doesn't equal financial success.

A few examples:

- Einstein's general relativity: No millions $
- Railroads: Bankrupt due to competition
- Wright Brothers: Fly first plane, don't make money
- 1800's Textile factories

It's a hard game.

5b) Two Categories Of Profitable Innovation

a) Vertically integrated complex monopolies

- Capital intensive, super complicated, takes forever to build (e.g., Ford, SpaceX)

b) Software

- Economies of scale, low marginal cost, high adoption rate (world of bits is powerful)

5c) Rationalizations: Why Things Work/Don't Work

Science: "Scientists aren't motivated by money"

- Skews the fact that scientists live in a world where Y = 0%?

Software: "People make $ in software, it MUST be the most valuable thing."

- Microeconomics of a business matters

6) Psych. of Competition

What we normally think: Losers are the ones that CAN'T compete

But what if we don't understand the complexity of competition?

What if competition is the real loser?

Reminder: Monopolies > Fierce Competition

6a) Mimetic Preferences

Humans LIKE competition. Here's why:

a) Reassuring when other people do things
b) Human nature is deeply mimetic
c) We seek competition as a form of validation (education, career, investments)

"It's not wisdom of crowds. It's definition of insanity."

6b) Competition as Identity

Thiel's story of leaving a prestigious law firm is perfect example of the competition vacuum.

"I didn't know it was possible to leave Alcatraz [law firm]"

"In reality, all you had to do was walk out the front door"

People CRAVE competition.

7) Ending Thoughts

Thiel leaves us with two powerful thoughts:

a) Competition makes you better, but it comes at a tremendous price of not asking bigger questions

b) Don't go through the tiny door everyone else is trying to get in. Go around the corner and take the vast gate.

If you've made it this far, I congratulate you.

Please send me feedback on this thread. If you liked it and want me to make more threads off my favorite YT videos, let me know!

We're all trying to get a little smarter each day.