1. “Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create.” “More important than being the first mover is the last mover. You have to be durable.” “The most critical thing for every startup is to be doing one thing uniquely well, better than anybody else in the world.” This set of statements in my view is about what Michael Porter calls “sustainable competitive advantage” (AKA, moats). Yes, you must create new value to be a great company. But unless you capture some of that value as producer surplus in a sustainable way, the only beneficiary is the customer. One of the best explanations of this value capture point is in Charlie Munger’s fantastic Worldly Wisdom essay: “there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.”
2. “Maybe we focus so much on going from 1 to n because that’s easier to do. There’s little doubt that going from 0 to 1 is qualitatively different, and almost always harder, than copying something n times. And even trying to achieve vertical, 0 to 1 progress presents the challenge of exceptionalism; any founder or inventor doing something new must wonder: am I sane? Or am I crazy?” Doing something that has never been done before is genuinely hard enough that many people consciously or subconsciously would rather chase the tailpipes of others than genuinely innovate “from 0 to 1.” Failing conventionally, rather than succeeding unconventionally, is unfortunately the path chosen by many people.
3. “We see the power of compounding when companies grow virally. Successful businesses tend to have an exponential arc to them. Maybe they grow at 50% a year and it compounds for a number of years. It could be more or less dramatic than that. But that model—some substantial period of exponential growth—is the core of any successful tech company. And during that exponential period, valuations tend to go up exponentially.” It is nonlinear phenomena which drive the 10-2,000X tape measure home runs a venture capitalist needs to be successful. Straying too far from a nonlinear phenomenon like Moore’s Law can be harmful to a venture capitalist’s financial health. For a some great data on the sort of growth one needs in a venture capital backed startup, I suggest you try this video of a Jules Maltz talk from the recent PreMoney conference.
4. “You’re going to start a business you might as well try to start one where, if it works, it will be really successful, rather than one where you’re competing like crazy with thousands of people who are doing something just like you all the time.” That most people misprice the value the value of optionality is the core driver of the venture capitalist trade. Without mispricing, there is no alpha. And the prime territory for optionality is not where thousands of people are looking.
5. “Consider a 2 x 2 matrix. On one axis you have good, high trust people and then you have low trust people. On the other axis you have low alignment structure with poorly set rules, and then a high alignment structure where the rules are well set. Good, high trust people with low alignment structure is basically anarchy. The closest to this that succeeded is Google from 2000 to maybe 2007. Talented people could work on all sorts of different projects and generally operate without a whole lot of constraints. Sometimes the opposite combination—low trust people and lots of rules—can work too. This is basically totalitarianism. Foxconn might be a representative example. Lots of people work there. People are sort of slaves. The company even installs suicide nets to catch workers when they jump off the buildings. But it’s a very productive place, and it sort of works.” The low trust, low alignment model is a dog-eat-dog sort of world argues Thiel. It’s best to avoid this combination. The ideal combination in his view is high-trust people with a structure that provides a high degree of alignment since people are rowing in the same direction, and not by accident. Equity incentives, properly structured, are an important way to think about alignment in startups.
6. “Angel investors may have no clue how to do valuations. Convertible notes allow you to postpone the valuation question for Series A investors to tackle. Other benefits include mathematically eliminating the possibility of having a down round. This can be a problem where angels systemically overvalue companies…. If you must have a down round, it’s probably best that it be a really catastrophic one. That way a lot of the mad people will be completely wiped out and thus won’t show up to cause more problems while you start the hard task of rebuilding. But to repeat, you should never have a down round. If you found a company and every round you raise is an up round, you’ll make at least some money. But if you have a single down round, you probably won’t.” Valuation is hard. There are (according to one count) 135 micro VCs and thousands of individual angels out there, able to mess up a capitalization table via a poorly chosen valuation.
7. “A robust company culture is one in which people have something in common that distinguishes them quite sharply from rest of the world. If everybody likes ice cream, that probably doesn’t matter….you also need to strike the right balance between athletes (competitive people) and nerds (creators) no matter what.” Peter Thiel is describing some of the core elements of a winning culture: a shared unique mission and the right mix of passionate people. Great leaders know how to create that mix. Great investors can spot the right mix of people via pattern recognition and good judgment. As Will Rogers once said: “Good judgment comes from experience, and a lot of that comes from bad judgment.”
8. “VCs …rely on very discreet networks of people that they’ve become affiliated with. That is, they have access to a unique network of entrepreneurs; the network is the core value proposition…” This statement tracks with my post on Reid Hoffman and I won’t repeat this discussion here other than to say that personal networks of all kinds matter more than ever as the world: (1) becomes more and more digital and (2) moves more and more towards Extremistan .
9. “The founders or one or two key senior people at any multimillion-dollar company should probably spend between 25 percent and 33 percent of their time identifying and attracting talent.” Hiring the right people will first and foremost drive the success of a business. The people who do this well have great pattern recognition skills, which is again a part of good judgment. A top venture capitalist said to me once: “When I see the right team I feel like I have seen the pattern before. The people and chemistry will not be exactly the same as other successful teams, but there is nevertheless a pattern. Not the same and yet still familiar.”
10. “Hubris is an issue at every one of these Silicon Valley companies that are successful.” It can be hard to know a lot about some things or even many things and yet still be modest enough that you know you don’t know everything. Finance writer Morgan Housel absolutely nails it when he writes: “there’s a strong correlation between knowledge and humility.” Charlie Munger has said that he seeks “intellectual humility” and has pointed out that “acknowledging what you don’t know is the dawning of wisdom.”
11. “As an investor-entrepreneur, I’ve always tried to be contrarian, to go against the crowd, to identify opportunities in places where people are not looking.” I moved this point to near the bottom of my list for this post since it has been consistently on top in other posts in my series on successful venture capitalists. But I include it nevertheless because it is such a vital point to understand. You can’t do better than average by being average. If you can’t be courageously contrarian, you are guaranteed not to beat the market as an investor.
12. “Actual [venture capital] returns are incredibly skewed. The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i.e. that all companies are created equal, and some just fail, spin wheels, or grow. In reality you get a power law distribution.” Every top venture capitalist understands this point on power laws in venture capital since it is obvious from the performance of their portfolios. To use a baseball analogy, you can’t play “small ball” in venture capital and succeed financially. Venture capital and value investing are both systems designed around discovery rather than forecasting. A value investor buys mispriced assets at a bargain and waits. A venture capitalist buys mispriced optionality at a bargain and waits. While a value investor waits, they read and think a lot. While the venture capitalist waits, they work hard to help portfolio firms with hiring, sales and distribution etc. – knowing 50% of bets will be a total loss.
PandoDaily – Sarah Lacy’s Fireside Chat with Peter Thiel
Blake Masters Essays – Peter Thiel’s CS183: Startup – Stanford, Spring 2012