This lecture is given by Peter Thiel, founder of PayPal and he is also an investor in a lot of companies in Sillicon Valley.
He thinks that you always want to aim for monopoly. Something unique and very difficult to replicate by your competitors. If you have a valuable bussiness two things are true.
Number one: your bussiness creates "X" dollars of value for the world. Number two: you capture "Y" percent of "X".
Is important no note that "X" and "Y" are independant variables. So the concept of a valuable company is to basically both create something of value and capture some fraction of the value of what you've created.
The problem on being in a hyper competitive market is that you probably you aren't making money. In the other hand monopolies are much more stable and long term business. I do believe, though that the perception of "making money" of Peter Thiel is on one extreme: he is thinking in creating a company that is worth billions of dollars. With this in mind, I can understand that is "easier" to (try to) become a monopoly; its a better position in the market, you can buy competition, you dictate where you want to go, and you are probably making an awful amount of money out of it. But this does not means that we cannot create a modest business model that can generate a good amount of money (but not valued in the +billon scale). I don't like the speech that much because of that; in other talks the aim is the same (to become huge) but what they teach you can be applied to other subjects or in a smaller scale.
To become a monopoly there is only one way: to find a small market and find ways of expanding it over time. To do that the idea is to get a really good product that covers the needs to a small group of people, from there, start expanding. Facebook was a social network for Harvard and it went from zero to sixty percent market share in ten days. Expanding first to other collages, and then opening to the world was in a way "open the market".
The way this gets analyzed in business schools is always, that's so ridiculous, it's such a small market, it can't have any value at all. So I think the business school analysis of Facebook early on, or of Paypal early on, or of Ebay early on, is that the markets were perhaps so small as to have almost no value and that they would've had little value had they they stayed small, but it turned out there were ways to grow them concentrically and that's what made them so valuable.
OK. Here I cannot disagree more in what he's saying; of course bussiness schools tell you that small markets are probably worthless; if somebody has tried to do business in this market and failed, unable to expand, unable to grow, thats why the market is so small. And In business schools they MUST tell you that small markets are worthless, but if you are lucky enough and create a product that will grow super fast, you'll expand the market despite the size of it, not because of it. What is the percentage of companies that start doing something in small markets, for small market niche and they have been unsuccessful? Probably thousands of companies a year? How many companies have been successful doing it, maybe a handful. While I understand the concept Thiel is trying to teach, I do believe that is more valuable to talk about how to grow, how to create a good product, how to get ascendant conversion rates than talking about "go for a small market and become a multinational".
It remembers me something like this:
First, get a small market nobody is interested in. Then build a monopoly out of it.
In other books they say that if you go for a big market with some competition probably you've found something that people are willing to pay for (they are already doing it). Even Paul Graham says that. Maybe focusing in what can you do better and how to differentiate with the competence is more interesting.
My sort of crazy, somewhat arbitrary rule of thumb is you want to have a technology that's an order of magnitude better than the next best thing.
Another part of the talk I strongly disagree with is about innovation over the last few centuries and how the scientists have captured (or not) value out of it:
The thing that I think people always miss when they think about these things, is that because "X" and "Y" are independent variables, some of these things can be extremely valuable innovations, but the people who invent them, who come up with them, do not get rewarded for this. Certainly if you go back to you need to create X dollars in value and you capture Y percent of X, I would suggest that the history of science has generally been one where Y is zero percent across the board, the scientists never make any money. They're always deluded into thinking that they live in a just universe that will reward them for their work and for their inventions. This is probably the fundamental delusion that scientists tend to suffer from in our society. Even in technology there are sort of many different areas of technology where there were great innovations that created tremendous value for society, but people did not actually capture much of the value.
I'm almost disappointed in this way of looking the world always with lens of money. I think is despicable. Scientists do science. They are not businessman. They have to focus on inventing new things, discovering new stuff, writing papers, etc. Thats what they are passionate about, and not about making money. What Peter suggests, that people that has invented things of great value and they have not retained any of its value is something that does not bother me. While its true that some scientists, and even artists, have lived an awful live and they have been recognized when they were already dead, I do believe that is not important to always think about the money.
If we talk about software, there are people that have done awesome open source projects, generating loads of value and they have captured very little out of it, because money is outside the equation and its only a positive side effect that comes with very little effort. Again, software developers are not entrepreneurs, they don't want to create a business out of they passion, but enjoy it (of course they need to make a living out of something).
there are these different rationalizations people give for why certain things work and why certain things don't work, and I think these rationalizations always obscure this question on creating "X" dollars in value and capturing "Y" percent of "X." So, the science rationalization we’re always told is that the scientists aren't interested in making money. They’re doing it for charitable reasons and that you're not a good scientist if you’re motivated by money. I'm not even saying people should always be motivated by money or something like this, but I think we should wish to be a little bit more critical of this as a rationalization. We should ask is this a rationalization to obscure the fact that "Y" equals zero percent and the scientists are operating in this sort of world where all the innovation is effectively competed away and they can't capture any of it directly.
Again, more misconceptions from my point of view. Not willing to make money (be a businessman or entrepreneur) does not imply the opposite, that you do your work for charitable reasons. The main point here is that people are driven by their passions and interests, and they tend to value more to do things they like than they like than trying to think how they can make money out of something they have invented/discovered. Being out of their interest but acknowledging that is something that can be valuable (and exploitable) for others, I believe that it explains why scientist "give away" their chances to become millionaire just because their are not interested in the process of achieving it.
The software distortion that often happens is because people are making such vast fortunes in software, we infer that this is the most valuable thing in the world being done full stop. And so people at Twitter make billions of dollars, it must be that Twitter is worth far more than anything Einstein did.
The one who thinks that "money" is the only metric of success is a fool. I've never heard of anybody making this rationale but is seems so flawed to me.
So, here it ends the lecture. As you can see I haven't liked the lecture that much. He's the CEO of PayPal and probably this stuff has worked for him, but I'm not buying it. As an extra point, somebody of the public asks him what he thinks Lean Startups. Since I'm reading a book about it, and finding it really interesting as a good approach for knowing what your users may or may not like, I'll paste the answer here:
Yes, of course, so the question is what do I think about lean startups and iterative thinking where you get feedback from people versus complexity that may not work. I'm personally quite skeptical of all the lean startup methodology. I think the really great companies did something that was somewhat more of a quantum improvement that really differentiated them from everybody else. They typically did not do massive customer surveys, the people who ran these companies sometimes, not always, suffered from mild forms of Aspergers, so they were not actually that influenced, not that easily deterred, by what other people told them to do. I do think we're way too focused on iteration as a modality and not enough on trying to have a virtual ESP link with the public and figuring it out ourselves. I would say the risk question is always a very tricky one, because it's often the case that you don't have enough time to really mitigate risk. If you're going to take enough time to figure out what people want, you often will have missed the boat by then. And then of course there is always the risk of doing something that's not that significant or meaningful. You could say that a track in law school is a low risk track from one perspective, but it may still be a very high risk track in the sense that maybe you have a high risk of not doing something meaningful with your life. We have to think about risk in these very complicated ways. I think risk is this complicated concept.