Peter Thiel, Competition Is for Losers

This is a discussion of Peter Thiel's Wall Street Journal Essay, Competition Is for Losers. It is part of a series of foundational texts on What is a startup business?

You can purchase Peter Thiel's book below:

Peter Thiel

Peter Thiel, cofounded Paypal and invested in Facebook, amongst other things. He is vocal, and always interesting and original, on a range of topics, but here we will discuss his

The essay captures a key idea in the web of ideas that constitute Thiel's view of startups. Thiel explores these ideas at length in 0 to 1, but this essay is actually a chapter from the book that the Wall Street Journal published, and in many ways it gives us a good sense of the larger theory.

 In 1933, Edward Chamberlain (in Theory of Monopolistic Competition) introduced the idea of product differentiation. To grossly simplify the argument, a firm can charge a premium for a product to the extent that the product is differentiated in valuable dimensions from other commodity products. In an extreme case, the firm could have a monopoly on the service or product, and can charge monopolistic prices.

Monopolies, Profit and Competition

Thiel points out how it is possible to produce such a monopoly: by coming up with a novel product or service. And coming up with a novel product or service (from 0 to 1), is not easy because by definition, it has never been done before.

I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.(Peter Thiel)

He contrasts this with taking an idea that already exists and simply doing more of it by moving it to a different location, or making incremental improvements on it in scale (1 to n). The problem with this kind of business is that it is hyper-competitive and profits quickly erode.

Q: What would Thiel make of companys that excel at going from 1 to n? Consider that Rocket Internet has a thriving business openly based on copying other ideas.

Morality

Thiel spends some time defending monopolies. He claims that our traditional loathing for monopolies only applies in a "static" world where they rent collect in exchange for little added value.

But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. (Peter Thiel)

Framing the "relevant market"

One of the interesting points he brings up is that a monopoly is defined against a market. He gives two examples that illuminate in different ways. He points out that monopolistic companies define the market as large as possible so as not to be accused of legal monopolies, and companies with small markets define the market as narrowly as possible to appear more dominant.

Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? (Peter Thiel)

Find a monopoly

Peter Thiel ends with a great summary, so I'll lets say it.

All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition. (Peter Thiel)

Q: I want to interrogate Thiel's central thesis -- that you should come up with a truly original idea, to go from 0 to 1.

He puts forward examples like Google as an example. But Google was not the first search engine, and there were other search engines at the time. Thiel's most famous investment, Facebook, dominates social networks now but it there were dozens of social network at the time, and the market was dominated by MySpace, which itself had overthrown Friendster.

Are these still good examples of going from 0 to 1?

You can purchase Peter Thiel's book below:

Peter Thiel, Competition Is for Losers

This is a discussion of Peter Thiel's Wall Street Journal Essay, Competition Is for Losers. It is part of a series of foundational texts on What is a startup business?

You can purchase Peter Thiel's book below:

Peter Thiel

Peter Thiel, cofounded Paypal and invested in Facebook, amongst other things. He is vocal, and always interesting and original, on a range of topics, but here we will discuss his

The essay captures a key idea in the web of ideas that constitute Thiel's view of startups. Thiel explores these ideas at length in 0 to 1, but this essay is actually a chapter from the book that the Wall Street Journal published, and in many ways it gives us a good sense of the larger theory.

 In 1933, Edward Chamberlain (in Theory of Monopolistic Competition) introduced the idea of product differentiation. To grossly simplify the argument, a firm can charge a premium for a product to the extent that the product is differentiated in valuable dimensions from other commodity products. In an extreme case, the firm could have a monopoly on the service or product, and can charge monopolistic prices.

Monopolies, Profit and Competition

Thiel points out how it is possible to produce such a monopoly: by coming up with a novel product or service. And coming up with a novel product or service (from 0 to 1), is not easy because by definition, it has never been done before.

I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.(Peter Thiel)

He contrasts this with taking an idea that already exists and simply doing more of it by moving it to a different location, or making incremental improvements on it in scale (1 to n). The problem with this kind of business is that it is hyper-competitive and profits quickly erode.

Q: What would Thiel make of companys that excel at going from 1 to n? Consider that Rocket Internet has a thriving business openly based on copying other ideas.

Morality

Thiel spends some time defending monopolies. He claims that our traditional loathing for monopolies only applies in a "static" world where they rent collect in exchange for little added value.

But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. (Peter Thiel)

Framing the "relevant market"

One of the interesting points he brings up is that a monopoly is defined against a market. He gives two examples that illuminate in different ways. He points out that monopolistic companies define the market as large as possible so as not to be accused of legal monopolies, and companies with small markets define the market as narrowly as possible to appear more dominant.

Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? (Peter Thiel)

Find a monopoly

Peter Thiel ends with a great summary, so I'll lets say it.

All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition. (Peter Thiel)

Q: I want to interrogate Thiel's central thesis -- that you should come up with a truly original idea, to go from 0 to 1.

He puts forward examples like Google as an example. But Google was not the first search engine, and there were other search engines at the time. Thiel's most famous investment, Facebook, dominates social networks now but it there were dozens of social network at the time, and the market was dominated by MySpace, which itself had overthrown Friendster.

Are these still good examples of going from 0 to 1?

You can purchase Peter Thiel's book below:

What is a Startup Business?

Before we start to talk about what a startup business is, lets talk about why it is important to define it.

 

Define a startup

Definitions are tricky, because they often exclude examples one wishes to include, and they include examples that one wishes to include.

Relying on commonplace assumptions about a set of features will lead to absurd claims as to what constitutes a startup.

What isn't a startup?

The commonplace idea of a startup is a new business, but there is a myth around the startup. Eric Ries in What's a startup? describes the mythology of the startup in the following terms:

What all of these pictures have in common is a narrative that goes something like this: scrappy outsiders, possessed of a unique genius, took outrageous risks and worked incomprehensible hours to beat the odds. (Ries)

But a new business, even a risky one, and hard working founders fall short of the definition of startup. The great counter example here would be the restaurant. Restaurants are risky, and require people to work "incomprehensible hour", but there seems to be wide agreement that a restaurant is not what people mean by a startup. Paul Graham uses it in his essay Startup=Growth, as an example of what is not, in his terms, a startup:

Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. (Graham)

Peter Thiel also uses the restaurant business as a counter-example in his essay Competition Is for Losers:

Imagine you're running one of those restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every efficiency: That is why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. (Peter Thiel)

Note that Thiel isn't explicitly talking about the definition of a startup, but is rendering advice.
Definitions and advice

Implicit in the definition of a startup is a normative claim about what you ought to do as a startup. When Graham talks about growth as definitive of a startup, he follows up to tell us that you should do what you can to grow a startup. When Thiel advises startups to produce a large innovation that takes us from "0 to 1", he implies that a startup, as opposed to say a restaurant, is a company that engages in an attempt to go from "0 to 1."

There isn't one main definition of a startup, but there are some key practitioners and theorists in the field who have come up with influential definitions. They happen to be men but if a reader has women to suggest, I will gladly add them to this list. They are many important and influential women in the field, but I haven't come across a definition of startups from them.

Here are some of the people from the "Seminal Essays" section.

 Paul Graham

Paul Graham: A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit". The only essential thing is growth. Everything else we associate with startups follows from growth. (Graham)

This is from Paul Graham's essay "Startup=Growth".

 

Marc Andreesen

The only thing that matters is getting to product/market fit. (Andreesen)

This is from Marc Andreesen on the Product Market fit.

 

Peter Thiel

All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition. (Thiel)

From Peter Thiel's Competition Is for Losers.

 

Steve Blank

Steve Blank: a startup is an organization formed to search for a repeatable and scalable business model. (Blank)

From Steve Blank on what's a startup.

 

Eric Reis

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. (Reis)

from Eric Reis' on What is startup.