In this lecture of How to Start a Startup, Peter Thiel, the founder of PayPal, Palantir and Founders Fund explains why competition is for losers. There are only two kinds of businesses, he says; the perfectly competitive ones and the monopolies. No, there is no such thing as “in between”. If this came as a bit of a shocker, then it’s because people constantly lie about the kind of businesses they’re in, explains Peter.
The goldmine vs the fictitiously narrow market
Most often, both these businesses indulge in opposite lies – people who have monopolies pretend they have incredible competition to prevent the government from breathing down their necks and those non-monopolies are tempted to say a lie in the other direction – that they’re doing something unique because they want to differentiate. Breaking it down to set theoretic terms, you could say that the monopolist describes his business as the union of vastly different markets whereas the non-monopolist, barely thriving in competition, likes to call it an intersection of these.
The lion’s share is yours if you chase the small markets
When you’re starting a new company, you want monopoly. How do you get hold of that coveted chunk of the market? You aim for the small market, take over and incrementally expand in concentric circles till you own the market. This is one of those counter intuitive ideas that has worked for all those tech giants – Apple, Google, Amazon, Microsoft, underscores Peter.
Are you a minnow in the vast ocean? You might want to restrategize
Your restaurant industry is a trillion dollar industry. So if you do a market size analysis, you conclude restaurants are fantastic business to go into. A no-brainer, huh? But you don’t want to be the hundredth restaurant in Palo Alto or the fourth online pet food company or even the tenth solar panel company. Why? Because the competition will make it very very hard for you to differentiate, says Peter. The idea is to go after the small markets that people think makes zero sense and get a foothold, expand those markets and scale into a monopoly.
Piece of cake!
“We go for things that lots of other people are going for. It’s not that there is wisdom of crowds, it’s not that lots of people trying to do something is the best proof of that being valuable. I think it’s when lots of people are trying to do something, that is often proof of insanity. There are twenty thousand people a year who move to Los Angeles to become movie stars, about twenty of them make it.”