Building companies that are doing something completely new
– which impacts the future.
Author of “Zero to One”, Peter Thiel.
Tanay’s Blog 18 Sept 14 enhanced by Peter/CEO Wiz4biz
Startup Topics include technology, network effects, economics of scale, branding, etc. The book makes some very interesting and thought provoking arguments and is full of advice from one of the most fascinating minds in technology – author Peter Thiel (founder/CEO of Paypal & VC in Silicon Valley), who is now worth $2.2B. Summary of key points of the book.
Start a Monopoly. Conventional wisdom seems to suggest that when starting a company, one should look for very large markets that have competitors (so you know there is an actual demand) and make something better than your competitors, to capture a small piece of that large pie. The author suggests that one should aim to start monopolies, and the best way to do so is to start with a very small market, and scale up once you’ve dominated that small market. (like Amazon, Facebook) The reason being simple. There are two kinds of companies in the world, 1) monopolies, which make a lot of money, & 2) non-monopolies, which don’t make any money. Ironically, the monopolies pretend to not be monopolies (for regulatory & other reasons) while non-monopolies pretend to have some degree of monopoly power (for fund-raising other reasons).
Creating Value & Capturing Markets. Companies create X value in the world, and capture Y% of it. X & Y are independent variables, which means that to increase the revenue of a company, one can create more Value, or capture more of the value one creates. Every monopoly is unique, but they tend to share some similar characteristics, though the Author warns against looking at them as boxes to check off: How?
1. Proprietary Technology: This makes a product difficult or impossible to replicate. To lead to a monopolistic advantage, a product should be “significantly” better than the existing ones, and offering a new solution is often the easiest way to be that good. Another possible way is by offering a completely different design (iPhone) with new features.
2. Network Effects: a product with “network effects” becomes more useful as more people use it (ie, Internet, Facebook, Smart phones, iMessage for iPhones)
3. Economies of Scale: the cost advantages that enterprises obtain, due to size, output, or scale of operation, with cost/unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output, and operational efficiency is usually greater with increasing scale, leading to lower variable cost as well.
4. Branding, tends to be important but is almost never enough on its own. A good Brand image leads to pricing power, which allows companies to capture more of the value that it creates (ie, increase & maintain a higher Market Share)
5. Longevity is another important characteristic of a successful company because a good portion of the value of a company comes from the cash flows in the future (ie, the value of being around 5-10 years from now. A company must therefore be able to grow and endure to be valuable.
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