What valuable service is not yet being provided? Answering this question is the first step toward creating a company that don’t have to bother with competitors. Peter Thiel asks this question often in Zero to One. Notes on Startups, or How to Build the Future, which provides wide array of unorthodox rules underlying creation of natural monopolies by start-ups.
According to Peter Thiel monopoly is not a pathology, or an exception, but a company that is consciously planned to achieve and sustain leading position at the market. Context for bringing attention of Peter Thiel’s readers to monopolies relates to reflection of the author on contemporary stat-up’s market choices. Pether Thiel believes that every big, existing market is a bad choice for a newcomer is a bad choice, and a big, existing market with rival companies is even worse.
Therefore author introduces and thoroughly explains logics and reasons of success of contemporary monopolies, these are companies with significant market shares in what they do, such as Google, Airbnb, or Uber. In that context category of competitionless monopolies might have particular importance for start-ups aspiring to status of unicorns.
So what differs unicorns companies from the little ponies? According to Peter Thiel one of the most important rules is that the technology, which company aspiring to be a monopoly wants to introduce to the market, should be at least 10 times better than its closest substitute. Creation and protection of intellectual property related to such technology is the first step of competitive advantage based on a monopoly status and enabling to outperform competitors. Another factors actively contributing to creation of monopoly are combined effects of economies of scale, company’s network and its brand.
Peter Thiel shares loads of valuable tips, which founders of start-ups can take into account in order to build and maximize their value. According to Peter Thiel founders should have a lot of common experiences prior to set-up of the company, and should think of management team consisting of not less than 3, but no more than 5 members. It’s also important that its CEO pays themselves no more than USD 150 thousands per year. The team, built by founders, should consist only of people, who can fully engage in company’s activity, except external accountants or lawyers of course. There is no place for part-time employees or remote working during the stage when company wants to build its value exponentially. Monopoly status aspiring start-ups should know why they do something important, and why anyone else is not doing it. This is the basis to attract first employees, who don’t have to be offered with high salaries, but non-financial compensation as well, including share in equity in the company they build. According to Peter Thiel such approach to compensation makes long term engagement of first employees more plausible. It’s also important to clearly define areas of responsibilities of new employees. Clear definition and assessment of performance against results in clear area of responsibility enables to avoid conflicts of interest between employees.
Peter Thiel also shares on distribution channels of start-ups products, services, or solutions; and introduces concept of customer acquisition costs being always lower than the customer lifetime value. Only high price of offered good justifies high marketing expenses.
Peter Thiel reveals insights on rules that Venture Capital firms use to make their decisions on investments into prospecting start-ups. One of such rule is that Venture Capital firms can only afford to invest in companies, which return on investment might exceed value of whole Venture Capital firm. Author makes a comment, that because of such a strict rule, there are no other rules.
It looks that, as a partner in Founders Fund, Peter Thiel sticks to what he claimed in Zero to One. Notes on Startups, or How to Build the Future. Founders Fund carefully selects and invests in start-ups, which are not popular, difficult to assess, and bear high technology risk, but create their own place at the market.
Before launching Founders Fund Peter Thiel co-founded PayPal, which in 2002 was acquired by eBay for USD 1,5 bln. In 2005 he joined board of directors at Facebook and was one of the first external investors. USD 500k he invested into Facebook turned in almost USD 400 mln during first public offering of the company.
So, what valuable service is not yet being provided ?