all
right all right good afternoon uh
today's speaker is Peter teal Peter was
the founder of PayPal and paler and
Founders funds and has invested in uh
most of the tech companies in in silica
Valley and he's going to talk about
strategy and competition thank you for
coming Peter awesome thanks uh Sam
thanks for inviting me thanks for for
having me uh I I sort of have a I have a
single eay FS that I'm completely
obsessed with in um on on the business
side which is that uh if you're starting
a company if you're the founder
entrepreneur starting a company you
always want to aim for Monopoly and um
and that uh and you want to always avoid
competition and so uh hence uh
competition is for losers uh something
we'll be talking about
today I'd like to um I'd like to start
by saying something about um the the the
basic idea of uh when you start one of
these companies um how you go about uh
creating value and there's this question
what makes a business valuable and I
want I want to suggest that there's
basically a very simple uh very simple
formula that um um you you have a
valuable company if two things are true
uh number one that it creates X doll of
value for the world and number two that
you capture y% of X and and the critical
thing that uh that I think people always
miss in the sort of analysis is that X
and Y are completely independent
variables and so um X can be very Big Y
can be very small X can be of
intermediate size and if Y is reasonably
big you can still get a very big
business so to create a valuable company
you have to basically uh both create
something of value and capture some
fraction of the value of what you've
created and sort of just to just to
illustrate this as a as a contrast um
there's if you sort of compare the uh US
airline industry with a company like uh
Google on search uh if you sort of
measure by the size of these industries
you could you could say that airlines
are still more important than search if
you just measure it say by revenues it
was 195 billion in uh domestic revenues
in 201 2012 Google had uh just north of
50 billion um and and so and certainly
sort of on some intuitive level if you
said uh if you were given a choice and
said well do you want to get rid of a
all air travel or do you want to get rid
of your ability to use search engines
the intuition would be that air travel
is something that's more important than
search and this is of course just the
domestic numbers if you looked at this
globally um airlines are much much
bigger than um than uh than than than
than Searcher than Google is but uh but
the profit margins are quite a bit less
uh you know they were marginally
profitable in 2012 uh I think the entire
100-year history of the airline industry
the cumulative profits in the US have
been approximately zero know companies
make money they episodically go bankrupt
they get recapitalized and you sort of
cycle and and repeat and this is
reflected in you know the the combined
market capitalization of the of the
airline Industries maybe uh something um
of the US airline industry something
like a quarter that of Google so so uh
you have you have search engine much
much smaller than than air travel but
much more valuable and I think this this
reflects these very different uh
valuations on X and
Y so um you know if we look at perfect
competition um you know there are sort
of there's some pros and cons to the
world of perfect competition um on a
high level uh uh it's always um this is
what you study in econ one it's always
it's easy to model which I think is why
econ professors like talking about
perfect competition um it somehow is
efficient especially in a world where
things are static because you have all
the consumer surplus gets captured by
everybody and uh and politically it's uh
What uh what we're what we're told is
good in our society that you you want to
have competition and this is somehow a
good thing um of course there are a lot
of negatives uh it's it's generally not
that good if you're you're um you're
involved in anything that's hyper
competitive um because you often don't
make money I'll come back to this a
little bit later so uh so I think at one
end of the spectrum you have uh
industries that are perfectly
competitive and at the other end of the
spectrum um you have things that um I
would say are monopolies and um and
they're you know they're much stable
longer term businesses you have more
Capital uh and um and if you get a
creative Monopoly for inventing
something new I think it's symptomatic
of having created something something
really valuable um and so I do think
this you know the the the sort of the
the the extreme binary view of the world
I I always articulate is that there are
exactly two kinds of businesses in this
world there are businesses that are
perfectly competitive and there are
businesses that are monopolies and um
there's shockingly little that is in
between and uh this dichotomy is not
understood very well because uh people
uh are constantly lying about the nature
of the businesses they're in um and this
is why this is in my mind this is the
most important it's not necessarily the
most important thing in business but I
think it's the most important business
idea that people don't understand that
there are just these two kinds of
businesses and so let me say a little
bit about the lies that people tell and
so you basically um the basic uh if you
sort of imagine that there was a
spectrum of companies from perfect
competition to Monopoly um the um the
apparent differences are quite small
because the people who have monopolies
pretend not to they will basically say
uh you know and it's because you don't
want to get regulated by the the
government you don't want the government
to come after you so you will never say
that you have Monopoly so anyone who has
a monopoly will pretend that they're in
incredible competition and on the other
end of the spectrum if you are
incredibly competitive um and if you're
in some sort of business where you will
never make any money um you will be
tempted to tell a lie that goes in the
other direction where you will say that
you're doing something unique um that um
is is somehow uh less competitive than
it looks because um because you want to
you will want to differentiate you want
to try to attract capital or something
like that so if the monopolists pretend
not to have monopolies the non-
monopolist pretend to have monopolies
the apparent difference is very small
whereas the real difference I I would
submit is is actually quite big and so
there's this Distortion that happens
because of the lies people tell about
their businesses and the lies are sort
of in these these opposite direction let
me let me drill a little bit down
further on the uh the way these lies
work and so um you know
the the the basic uh lie you tell as a
non-m monopoly is that we're in a very
small Market the basic lie you tell as a
monopoly is that the market you're in is
much bigger than it looks and so um and
so typically if you want to think of
this in sort of set theoretic terms you
could say that a monopoly tells um a a
lie where you describe your business as
the Union of these vastly different
markets and the non- monopolist
describes it as the intersection so that
uh in effect um if you're if you're non
monopolist you will rhetorically
describe your Market as super small
you're the only person in that market if
you have Monopoly you'll describe it as
super big and um and there's lots of
competition in it so uh some examples of
how this how this works in practice uh
so I always use restaurants as the
example of a terrible business this is
always you know sort of my ideaas you
know capitalism and competition are
antonyms um capitalist is someone who
accumulates capital a world of perfect
competition is a world where all the
capital gets competed away so uh you're
opening a restaurant business no one
wants to invest because you just lose
money so you have to tell some
idiosyncratic narrative and you will say
something like well we're the only
British food restaurant in Palo Alto so
it's British paloalto and uh and of
course that's too small a market Market
because people may be able to drive all
the way to Mountain View or even Meno
Park um and there probably are no people
who eat nothing but British food at
least no people are still
alive and so so that is um that's that's
a sort of a fictitiously narrow Market
um there's there's sort of a Hollywood
version of this where uh the way movies
always get pitched is you know okay it's
like a college football star you know uh
joins an elite group of hackers to um to
catch the shark that killed his
friend um sorry and so that's now that
is a movie that has not yet been
made but um but but the question is is
is that the right category or is the
correct category it's just another movie
in which case you know there are lots of
those it's super competitive incredibly
hard to make money no one ever makes
money in Hollywood uh doing movies or
it's really really hard
and so you always have this question
about does the intersection does is it
real does it make sense does it have
value that one should ask and of course
there are startup versions of this where
you and the the sort of the bad really
bad versions you just take a whole
series of buzzword sharing mobile social
apps you combine them and you have some
kind of uh narrative and whether or not
that's a real business or not uh is is
uh um is it's generally a bad sign so
it's it's almost this pattern
recognition when you have this rhetoric
of
the sort of intersections um it it
generally does not work the something of
somewhere is really mostly just the
nothing of nowhere and it's like the
Stanford of North
Dakota uh one of a kind but it's not
Stanford um so let's look at the
opposite the opposite lie is um if you
are uh let's say uh the uh the search uh
company that's down the street from here
and has about a happy 66% market share
um and uh is you know is completely
dominant in the search Market um Google
has not just almost never describes
itself as a search engine these days um
and instead it uh it describes itself in
all these different ways so it sometimes
says it's an advertising company so if
it was search you'd say wow this this
like it's it's it has this huge market
share that's really really crazy it's
it's like a incredible Monopoly it's
much bigger than it's much a much more
robust Monopoly than Microsoft ever has
in the 90s maybe that's why it's making
so much money um but if you uh if you
say it's an advertising Market you could
say well there's search advertising is
17 billion and that's part of uh online
advertising which is much bigger and
then you know all us advertising is
bigger and then by the time you get to
Global advertising that's close to 500
billion and so you're talking about
three and a half% so um a tiny part of
of this much larger
market um or uh if you don't want to be
an advertising company you can always
say that you're a technology
company
um and so
um sorry let me see um and so the and
and so um and and the technology Market
is something like a 1 trillion Doll
Market and the narrative that you tell
as Google in the in the technology
Market is um well we're competing with
all the car companies with our
self-driving cars we're competing with
apple on TVs and
iPhones uh we're competing with Facebook
we're competing with Microsoft on um on
Office Products we're competing with
Amazon on cloud services and so we are
in this giant technology Market where
there's competition in every direction
uh you you look and uh no we're not the
Monopoly the government's looking for
and we should not get regulated in any
way whatsoever and so I think one has to
always be super aware that there are the
these uh these very powerful incentives
to uh to distort the nature of these
markets one way or or the
other so um you know the the the
evidence of narrow markets in the uh in
the tech industry is um is if you
basically just uh if you look at sort of
the some of the big tech companies Apple
Google Microsoft Amazon um they just um
they've just been building up cash for
um year after year and you have these
incredibly High profit margins and I
would I would say that the the one of
the reasons the tech industry in the US
has been uh has been so successful
financially is because it's it's prone
to creating all these monopoly-like
businesses and that's that's um and it's
reflected uh by the fact that these
companies just accumulate so much cash
they don't even know what what to do
with it Beyond a certain point um and
so so let me say um let me say a few
things about uh about how to how to
build a monopoly and I think uh I think
the one of the sort of very
counterintuitive ideas that comes out of
this Monopoly uh thread is that um you
want to go after small markets if you're
a
startup um you know you want to get to
Monopoly you're starting a new company
you want to get to Monopoly um Monopoly
is you have a large share of a market
how do you get to a large share of a
market you start with a really small
market and you take over that whole
market and then uh and then over time
you find ways to expand that market in
in concentric circles and uh the thing
that's always a big mistake is going
after a giant market on uh on day one
because that's typically evidence that
um that you somehow haven't defined the
categories correctly that and it's it
normally means that there's going to be
too much competition in one way or
another and so I think almost all the
sucessful companies uh in Silicon Valley
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 just um a bookstore we
have all the books in the world so it's
it's a it's a it's a better bookstore
than anybody else has in the world when
it starts in the 90s it's online there's
things you can do you can't do before
and then you gradually expand into all
sorts of different forms of e-commerce
and other things beyond that um you know
eBay you start with Pez dispensers you
move on to beanie babies and eventually
uh it's it's all these different um
auctions for all these sorts of
different Goods um and uh and what was
very counterintuitive about what's very
counterintuitive about many of these
companies is they often start with
markets that are so small that people
don't think um they don't think that
they're uh valuable at all when when you
get
started um the the PayPal version of
this was uh was you know we started with
uh with power sellers on eBay which was
about 20,000 people when when we first
saw this happening in December of 99
January 2000 right after we launched uh
there was a sense that uh that these
were all um it was such a small Market
it was terrible we thought these were
terrible customers to have it's just
people selling junk on the internet why
in the world do we want to be going
after this Market but um but you you
know you there was a way to get a
product that was much better for
everybody in that market you could um
and we got to something like 25 30% you
know Market penetration in two or three
months and you got some lockin you got
brand recognition and you're able to to
build the business from there so um so I
always think these um these these very
small markets are are quite underrated
uh the Facebook version of this I always
give is that uh you know the initial
Market at Facebook was 10,000 people at
Harvard it went from 0 to 60% market
share in 10 days that was a very
auspicious start um the way this gets
analyzed in Business Schools is always
um that's ridiculous it's such a small
Market it can't have any value at all
and so I think the business school
analysis of Facebook early on or of uh
PayPal early on or of eBay early on is
that the markets were perhaps so small
as to have uh almost no value uh and
they they would have had little value
had they stayed small but it turned out
there were ways to then grow them
concentrically and that's what made them
uh that's what made them so valuable um
now I think the opposite version of this
is always where you have super big
markets and um and I there's so much so
many different things that went wrong
with all the clean tech companies in the
last decade but uh but one one theme
that ran through almost all of them was
they all started with massive markets
and every clean tech PowerPoint
presentation that one saw in the Years
2005 to 2008 which was sort of the clean
tech bubble in in Valley started 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 sort of a
a minnow in a vast ocean um that's not a
good place to be that means that you
have tons of competitors and you don't
even know who all the competitors are
and so you want to be you know you want
to be a one-of-a-kind company where it's
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
10th thinf film solar panel company you
don't want to be the H 100th restaurant
in paloalto um You restaurant industry
is a trillion dollar industry so if you
do a market size analysis you'd conclude
restaurants are a fantastic business to
go into and it's often large markets
large existing markets typically mean
that you have uh tons of competition
very very hard to uh to differentiate so
the first very
counterintuitive in uh idea is is to go
after small markets often markets that
are so small people don't even notice
them they don't think they make sense
that's where you get a foothold and then
um and then if those markets are able to
expand you can uh scale into a big
Monopoly
business um you know um a second uh sort
of there's sort of several different uh
characteristics of these Monopoly
businesses um that I like to um focus on
and uh there's probably no no sort of
single formula to it and I I always
think that uh that technology there's
always a sense that you know the history
of technology is such that every every
moment happens only once and so you know
the next Mark Zuckerberg won't build a
social network the next uh uh the next
Larry Page won't be building a search
engine the next uh Bill Gates won't be
building an operating system and if
you're copying these people you're not
learning from them but it's it's and so
um there is always um these very unique
businesses that are doing something
that's not been done before end up um
end up having the potential to be a
monopoly if you're you know the the the
opening the opening line in um Anna
kenina is that all happy companies sorry
all happy families all happy families
are alike all unhappy families are
unhappy in their own special way and the
opposite is true in business where I
think all happy companies are different
because they're doing something very
unique all unhappy companies are alike
because they fail to escape the
essential sameness that is competition
and so so one one sort of characteristic
of a monopoly technology company is some
sort of proprietary technology um 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 so Amazon had over
10 times as many books I it's maybe not
that high-tech but you figure out a way
to sell 10 times as many books in an
efficient online way you know PayPal the
alternative for PayPal was using um was
using uh uh checks to uh send money on
eBay took 7 to 10 days to clear PayPal
could do it more than 10 times as fast
so you want to have some sort of very uh
very powerful Improvement in some um on
on in some order maybe an order of
magnitude Improvement on some key
Dimension um of course you know if you
if you actually come with something
totally new um it's it's it's just like
an infinite Improvement so I would say
the the iPhone was the first smartphone
that worked and so that's you know
that's like maybe maybe not infinite but
it's sort of definitely an order of
magnitude or more of an improvement so I
think uh the the technology is designed
to give you a massive Delta over over
the next the next best thing I think um
I think there often are network effects
that can kick in that really help the
thing that's very um and these these
lead to monopolies over time the thing
that's very tricky about Network effects
is uh they're often uh they're often
very hard to get started and so um so
even though everyone understands how
valuable they are uh there's always this
incredibly tricky question why is it
valuable to the first person who's doing
something um economies of scale uh if
you have something that with very high
fixed costs very low marginal costs uh
that's typically a monopoly like
business and then um then there's this
thing uh of of branding uh which is sort
of like just uh this idea that gets
lodged in people's brains I I never
quite understand how branding Works uh
so I never invest in companies which
just about branding but it is I think a
real phenomenon that uh that creates uh
that creates real value I think one of
the things um I'm going to come back to
this a little bit towards the end but
one of the things that's very striking
is that software businesses are often um
are for some reason uh very good at some
of these things they're especially good
at the economies of scale part because
uh the marginal cost of software zero
and so if you get something that works
in software um it's often significantly
better than the existing solution and
then you have these tremendous economies
of scale and you can scale fairly
quickly so even if the market start
small um you can grow your business
quickly enough to uh stay um stay at the
same size as the growing market and uh
and maintain the sort of Monopoly uh
Power now the critical thing about these
monopolies is um is it's it's not enough
to have a monopoly for just a moment the
critical thing is to have one that lasts
over time um and so you know in Silicon
value is always the sort of idea that
you want to be the first mover and I I
always think it's it's in some ways um
the better framing is you want to be the
last mover you want to be the last
company in a category those are the ones
that are really valuable Microsoft was
the last operating system at least for
many decades uh Google is the last
search engine Facebook will be valuable
if it turns out to be the last social
networking site and um and one way to
one way to think of this uh last mover
uh value is this idea that most of the
value in these companies exists far in
the future um if you do sort of a
discounted cash flow analysis of a
business you look at you have sort of
all these profit streams you have a
growth rate the growth rate is much
higher than the discount rate and so
most of the value exists far in the
future I did I did this exercise at
PayPal in March of 2001 we had been in
business for about 27 months and um and
we sort of had had you know the growth
rate was 100% a year we were discounting
future cash flows by about 30% and it
turned out that about 3/4 of the value
of the business as of 2001 came from
cash flows in years 2011 and Beyond and
um and whenever you do the math on any
of these tech companies you get to an
answer that's something like that so if
you are trying to analyze any of the
tech companies in Silicon Valley arbnb
Twitter uh Facebook um any emerging
internet companies all the ones in y
combin
um the math tells you that 3/4 80 85% of
the value is coming from cash flows in
years 2024 and Beyond it's very very far
in the future and uh and so one of the
things that uh we always overvalue in
Silicon Valley is growth rates and we
undervalue durability because uh growth
is something you can measure in the here
and now and you can always track that
very precisely um the question of
whether a company's still going to be
around a decade from now
that's actually what what dominates the
value equation and that sort of is a
much more uh qualitative sort of a thing
and so if if we um if we went back to
this idea of these characteristics of
Monopoly uh proprietary technology
Network effects economies of scale um um
you can think of these these
characteristics as ones that exist at a
moment in time where you capture a
market and take it over but you also
want to think about are these things
going to last over time and so there's a
Time Dimension to all these
characteristics so Network effects often
have a great time element where as the
network scales the network effects
actually get more robust and so if you
have a network effect business that's
often one that uh um can become a um a
bigger and stronger Monopoly over time
uh proprietary technology is always a
little bit of a tricky one so you want
something that's an order of magnitude
better than uh the stateoftheart in the
world today and that's how you get
people's attention that's how you ially
break through but then um you don't want
to be superseded by somebody else and so
there are all these areas of innovation
where there was tremendous Innovation
but no one made any money so uh you know
discribe Manufacturing in the 1980s um
you could imp you could do a better dis
build a better describ than anybody else
you could take over the whole world and
two years later someone else would come
along and replace yours and in the
course of 15 years you got vastly
improved dis drives so it had great
benefit to Consumers but um it didn't
actually help the people who started
these companies and so there's always
this uh question about having a huge
breakthrough in technology but then also
being able to say explain why uh yours
will be the last breakthrough uh or at
least the last breakthrough for a long
time or will you make a breakthrough and
then you can keep improving on it at a
quick enough Pace that no one can ever
catch up so if you have a structure of
um a structure of the future where
there's a lot of innovation and other
people will come up with new things in
the thing you're working on um that's
great for society it's um it's actually
not that good for your business
typically um and then um economies of
scale uh where I talked about so so I
think anyway so I think this last mover
thing is is very critical I'm always
tempted you know I don't want to overdo
the chess analogies but you know the
first mover in chess is someone who
plays white white is about a one-third
of a pawn Advantage so there's a small
advantage to uh going first you want to
be the last
um who who wins the game and so there's
the Kappa Blanca world champion uh uh
chess champion Kappa Blanca line you
must begin by studying the end game and
and I do think that's um well I wouldn't
say that's the only thing you should
study I think this uh the sort of
perspective of asking these questions
why will this still be the leading
company 10 15 20 years from now is a uh
is a really critical one to to try to
think
through let me um let me sort of uh I
want to sort of go in two slightly other
directions with this Monopoly versus
competition idea and I think um so I
think this is the the central idea uh in
my mind for for business for starting
business for thinking about them and U
and there are some some very um
interesting perspectives I think it
gives on the whole you know on the whole
history of innovation and technology and
science because um you know we we've
lived through um we've lived through U
you know 250 300 years of incredible
technological progress in you know many
many different domains uh you know steam
engine to Railways
to telephones Refrigeration household
appliances um you know the computer
Revolution Aviation all sorts of
different areas of technological
innovation and then there's sort of
analogous thing that one can say about
science where uh we've lived through
centuries of of enormous amounts of
innovation in in in science as well and
um and the the thing that I think um
people always miss when they think about
these things is um is that um because X
and Y are independent variables um some
of these things can be extremely
valuable Innovations but uh the people
who invent them who come up with them do
not get rewarded for this and uh and
certainly if you go back to um you need
to create X doll in value you capture y%
of X I would suggest that the History of
Science has generally been one where Y
is 0% across the board the scientists
never make any money um they're always
deluded into thinking that they live in
a just universe that will reward them
for their work and for their inventions
and this is probably the fundamental
delusion that uh that scientists tend to
suffer from in our in our society um and
and even in technology there are sort of
many different areas of Technology where
um where there were great innovations
that created tremendous value for
society but uh but people uh did not uh
did not actually capture uh that much of
the of the value and so I think there is
this sort of whole uh history of um
science and technology that can be told
from the perspective of how much value
was actually captured and um and
certainly there are entire sectors where
people didn't capture anything so you
you're the smartest physicist of the
20th century you come up with relativity
you come up with general relativity you
don't get to be a billionaire you don't
even get to be a millionaire um it just
it just somehow doesn't work that way um
the railroads incredibly valuable most
of them just went bankrupt because it
was too much competition um W Brothers
um you fly the first plane you don't
make any money and so I think there is
sort of the structure to these
industries that's uh that's very
important um and I think the uh the
thing that's actually rare are the
success cases most the so it's actually
you really think about the history in
this in this 250e sweep um it's unus Y
is almost always 0% it's always zero in
science it's almost always in in
technology and so it's very rare where
people made money you know the early uh
the late uh 18th early 19th century the
first Industrial Revolution was the
textile mills you had the steam engine
you sort of automated things and you had
these Relentless improvements that
people improved efficiency of textile
factories of manufacturing generally at
a clip of 5 to 7% every year year after
year decade after decade you had 60 70
years of tremendous improvement from
1780 to
1850 um but even in 1850 most of the
wealth in Britain was still held by the
landed aristocracy uh the workers didn't
you know the workers didn't make that
much the capitalists didn't make that
much either it was all competed away
there were hundreds of people running
textile factories it was an industry
that just uh um the structure of the
competition prevented people from from
making any money um and so I think there
are in my mind there probably are only
two broad categories in the entire
history of the last 250 years where
people have actually uh come up with new
things and made money doing so um one is
uh these sort of vertically integrated
complex monopolies which people uh did
build in the Second Industrial
Revolution at the end of the 19th and
start of the 20th century and so this
was like Ford it was the vertically
integrated oil companies like Standard
Oil um and what these vertically
integrated monopolies uh typically
required was this very complex
coordination you got a lot of pieces to
fit together in just the right way uh
when you assembled it you had a
tremendous Advantage this is actually uh
done surprisingly little today and so I
think this is sort of a business form
that um when people can pull it off is
very valuable it's typically fairly
Capital intensive uh we live sort of in
a in a in a culture where it's very hard
to get people to buy into anything
that's super complicated and takes very
long to build uh but I you know when I
sort of think about my colleague Elon
Musk from PayPal success with Tesla and
SpaceX uh I think the key to these
companies was the complex vertically
integrated Monopoly structure they had
so if you sort of look at Tesla or
SpaceX if you ask you know was there
sort of a single breakthrough I mean
they certainly innovated on a lot of
Dimensions I don't think there was a
single 10x breakthrough you know in
battery storage or you know uh maybe
working on some things on rocketry but
they hadn't there was no sort of single
massive breakthrough but what was really
impressive was integrating all these
pieces together and um and doing it in a
way that was more vertically integrated
than most of their competitors so Tesla
you also integrated The Car Distributors
so they wouldn't uh steal all the money
as has happened with the rest of the car
industry in the US or SpaceX um you
basically uh pulled in all the
subcontractors um uh where most of the
large uh aerospace companies have single
Source subcontractors that are able to
sort of charge uh Monopoly profits and
make it very hard for the integrated
aerospace companies to make money um and
so uh vertical integration I think is
sort of a a very underexplored modality
of of technological progress that people
uh would uh would do well to look at
more and then I think there is there is
something about software itself that's
very very powerful um software has these
incredible economies of scale these low
marginal costs and there is something
about the world of bits as opposed to
the world of atoms where you can often
get very fast adoption and and the fast
adoption is critical to capturing and
taking over markets because even if you
have a small Market if the adoption rate
is too slow there'll be enough time for
other people to enter that market and
compete with you whereas if you have a
small to midsized Market and have a fast
adoption rate you can take over this
market and so and so I think this is one
of the reasons Silicon Valley has done
so well and why software has been this
phenomenal industry and what I what I
would suggest uh what I want to leave
you with is there are sort of 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 of um creating X Dollar in
value and capturing y% 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 and I'm not even
saying people should always be motivated
by money or something like this but I I
think we should we should be a little
bit more critical of this as a
rationalization we should ask is this a
rationalization um uh to obscure the
fact that y equals 0% and the scientists
are operating in this uh in this sort of
world where all the uh all the
Innovation is effectively competed away
and they can't capture and any of it
directly and then the uh 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 um in the world being
done full stop and so if people at
Twitter make uh billions of dollars it
must be that Twitter is worth far more
than anything Einstein did um and um and
uh and what that sort of rationalization
tends to obscure is again that X and Y
are independent variables and there are
these businesses where you capture a lot
of X and there others where you don't
and so and so I do think um I do think
the history of innovation has been this
uh this history where uh the the the the
microeconomics the structure of these
industries has mattered a tremendous
amount and when um and um and and and
there is sort of this this story where
some people have made vast fortunes
because they were in Industries with the
right structure and other people uh made
uh nothing at all because um because
they were in these sort 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 uh
this sort of overarching theme for this
talk this competition is for losers idea
which um is always this provocative way
to to title things because we always
think of the losers as the people who
are not good at competing we think of
the losers as the people who are um slow
on the sports on the track team in high
school or who do a little bit less well
on the standardized tests um and don't
get into the right schools and so we
always think of losers as people who
can't compete um and I want us to really
rethink and and revalue this and
consider whether it's possible that
competition itself um is off that we we
we're sort of it's not just the case
that we don't understand this Monopoly
competition dichotomy intellectually so
sort of been talking about why why you
wouldn't understand it intellectually
because um people lie about it it's
distorted we have all these uh 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
where we find ourselves you know very
very attracted to competition in in one
form or another um we find it reassuring
if other people do things the word ape
already in the time of Shakespeare meant
both primate and imitate uh and there is
something about human nature that's
deeply mimetic imitative apik sheeplike
leming like heard like um and it's this
very very problematic uh thing that uh
we need to always think through and and
try to overcome and and there is always
this question about um competition um as
as a form of validation where we we go
for things that lots of other people are
going for and um it's not that there is
wisdom in crowds it's not when lots of
people are trying to do something that
that's proof of uh it being valuable I
think it's when lots of people are
trying to do something that is often um
that is often proof of of insanity there
20,000 people a year who move to Los
Angeles to become movie stars about 20
of them make it um I think the Olympics
are a little bit better because you have
a you know um you can sort of figure out
pretty quickly whether you're good or
not so it's there's a little bit less of
a dead weight loss to society um you
know um um you know your your the sort
of educational experience at a place uh
the the the pre- Stanford educational
experience um there's always sort of a
non-competitive characterization where I
think most of the people in this room
had machine guns they were competing
with people with bows and arrows so um
it wasn't exactly a parallel competition
when you were in junior high school and
high school um there's always a question
does the tournament make sense as you
keep going and this is uh and so um
there is always this question if people
go on to grad school or post
post-doctoral educations does the
intensity of the competition really make
sense there's the uh the you know
classic uh Henry Kissinger line that uh
um describing his fellow faculty at
Harvard that the uh um the battles were
so ferocious because the stakes were so
small describing sort of Academia and um
and and you sort of think on one level
this is a description of insanity you
know why would people fight like crazy
when the stakes are so small but it's
also I think simply a function of the
logic of the situation when it's imp
really hard to differentiate yourself
from other people when the differences
are when the objective differences
really are small then uh you have to uh
compete ferociously to maintain uh a
difference of one sort uh or another
another um that's often more imaginary
than real there's always sort of the
personal uh version of this that I I
tell where um I was sort of hyper hypert
tracked I you know my eth grade Junior
High School yearbook one of my friends
wrote in you know I know you'll get into
Stanford in four years as a sophomore I
sort of went into went to Stanford four
years later uh at the end of High School
uh went to Stanford Law School uh you
know ended up um at a big law firm in uh
New York uh where from the outside
everybody wanted to get in on the side
everybody wanted to leave um and and you
had um and it was this very strange
Dynamic where after I uh sort of
realized this was maybe not the best
idea um and I left after s months and 3
days you know one of the people down the
hall from me uh told me um it's really
reassuring to see you leave Peter I had
no idea that it was possible to escape
from Alcatraz which of course all you
had to do was go out the front door and
not come back but um but so much of
people's identities got wrapped up in in
winning these competitions that they
somehow lost sight of what was important
what was valuable you know competition
does make you better at whatever it is
that you're competing on because when
you're competing you're um comparing
yourself with the people around you
you're figuring out how do I beat the
people next to me how do I do somewhat
better at whatever it is they're doing
and you will get better at that thing
I'm not I'm not questioning that I'm not
denying that but um but it often comes
at this tremendous price that uh you
stop asking some bigger question
questions about what's truly important
and truly valuable and so I would I
would say that uh don't always go
through the tiny little door that
everyone's trying to rush through maybe
go around the corner and go through the
vast gate that no one's taking thank you
very
much I guess time for you want to take a
few questions
or
question oh yeah uh people want to take
I'll take a few questions we have a few
minutes time
yeah go ahead um since as you mentioned
earlier often monopolies and per
competition often look similar because
the narratives people tell the Nar tell
ourselves do you have any ways to easily
determine the difference when you're
looking at an idea or evaluating your
own idea well I I'd say the question I'm
I always try to focus on is what is the
actual market so not what's The
Narrative of the market because you can
always tell a fictional story about a
market that's much bigger or much
smaller but what is the what is the real
objective market so it's always yeah you
always try to figure it out and you
realize people have incentives to
powerfully distort these
things yeah so which of the aspects of
monopolies that you mentioned would you
say software comp like Google
Excel um well they have uh they have
Network effects with the the ad Network
they had proprietary technology that
gave them the initial lead because they
had the the page rank algorithm which
was uh sort of an order of magnitude
better than any other search search
engine you have economies of scale uh
because of the need to store you know
all these different uh sites and at this
point you have brand so Google has all
four maybe maybe the proprietary
technology is somewhat weaker at this
point but definitely it had all four and
maybe three and a half out of four now
yeah how does this apply to paler and
second what's I second is what what's
with the iPhone headph oh this is that's
that's a that's a this sort of a set of
companies are doing different copycat
payment systems on on mobile phones
there's square there's PayPal sort of
they have the just they just have sort
of different shapes that's how they
differentiate themselves one as a
triangle one is a square um and so you
know um maybe at some point the Apes
will run out of shapes or something like
that but um but I think um no paler we
we started with a focus on on um the um
intelligence Community which is small
submarket um you had a proprietary
technology that used a very very
different approach um uh where it was
focused on the human um computer uh
synthesis rather than the uh sub
substitution which I think is the
dominant Paradigm so there's a whole set
of things I would say on the on the
market approach and the and the
proprietary
technology uh yes um we have design
thinking methodology and uh we uh
startup thinking um which is used to
mitigate Risk by not creating things
that people don't want but how do young
innovators uh have inspiration to create
complex systems that last time can you
repeat the question yeah so the question
is um what do I think about about lean
startups uh um iterative thinking where
you get uh feedback from people uh
versus uh complexity that may not work
so I I am personally quite skeptical of
all the uh Lean Startup methodology I
think the the the really great companies
um did something was sort of somewhat
more of a Quantum Improvement that
really differentiated them from
everybody else um they they they
typically did not do massive you know
customer surveys the people who ran
these companies uh sometimes not always
suffered from mild forms of Asbergers so
they were not actually that influenced
not that easily deterred by what other
people thought or told them to do um so
I I do think we're we're way too focused
on um iteration as a modality and not
enough on trying to um have um you know
um a virtual ESP link with the public
and figuring it out ourselves um I I
would say that uh let me see um I I
would say that uh the um I I'm not quite
the risk question I think is was a very
tricky one because there are um you know
there it's it's not it's often I think
it's often the case that you don't have
enough time to really mitigate risk if
if you're going to take enough time to
figure out what people want um you often
will have missed the boat by then um and
um and then of course there's always the
risk of of doing something that's uh
that's not that uh significant or
meaningful so you know you could say a
track in um in law school is a lowrisk
track from one perspective it may still
be a very high-risk track in the sense
that maybe you not um have a high risk
of not doing something meaningful with
your life so we have to think about risk
in these uh in these very complicated
way I think risk is sort of this very uh
complicated concept yes you talk about
the last move Advantage but then doesn't
that imply that there's already
competition to begin with on the chest
piece on the chest
board um yeah so there's always this uh
terminology thing so I would I would say
that uh there are uh there are
categories in which people sort of are
bundled together I would say the
Monopoly businesses were in in effect
they they really were a big first mover
in some sense you could say you could
say Google was not the first search
engine there were other search engines
before but on one dimension they were
dramatically better than everybody else
so they were the first one with page
rank with with sort of a automated
approach um Facebook was not the first
uh social networking site my friend Reed
Hoffman started one in 1997 they called
it social Nets they already had the name
social networking uh in the name of
their company 7 years before Facebook uh
their idea was that it was going to be
this virtual cyers space where I'd be a
dog and you'd be a cat and we'd have all
these different rules about how we'd
interact with each other in this virtual
alternate reality Facebook was the first
one to get real identity so it was so
I'd say I hope Facebook will be the last
social networking site it was the first
one in a very important Dimension people
often would not think of it as the first
because they'd sort of lump all these
things together one more question okay
one more question let's take one here uh
if you're theoretically someone who uh
worked at Golden Sachs out of college
and left out six months and is now
studying computer science at Stanford uh
how would you recommend rethinking uh of
that um you know I don't I don't have a
I don't have a great um I'm not great at
the Psychotherapy stuff so I don't I
don't quite know how to I don't quite
know how to uh how to solve this that
there are these um you know there are
these very odd studies they've done on
people who go to um business school
there's one they've done at Harvard
Business School where um it's sort of
the anti- asberg um personality where we
have people who are super extroverted uh
generally have low convictions uh few
ideas and you have sort of a hot house
environment you put all these people in
for two years and at the end of it uh
they systematically end up the largest
cohort systematically ends up doing the
wrong thing they try to catch the last
wave you know uh 1989 everyone at
Harvard triy to work for mikee milin it
was one or two years before he went to
jail for all the junk bond stuff they
were never interested in Silicon Valley
OR tech except for 999 2000 when they
timed the dot bubble peing perfectly um
they did uh and then you know 05 to7 was
housing uh private Equity stuff like
this so so I do think um I do think this
uh tendency for us to see competition as
validation is um is very deep um I don't
think there's some any sort of easy
psychological formula to uh to avoid it
so I don't I don't quite know how to uh
what sort of therapy to to recommend but
um but my my my first my first starting
point which is only like it's maybe 10%
of the way is to never underestimate how
big a problem it is we always think this
is something that afflicts other people
so it's easy for me to point to people
in Business Schools or people at Harvard
or people on Wall Street I think it
actually does afflict all of us to a
very profound degree we always think of
advertising as things that work on other
people how who are all these stupid
people who fall for All Those ads on TV
they obviously work to some extent and
they work to a disturbing extent on all
of us and it's something we we all
should work to
overcome thank you very
[Applause]
much