Peter Thiel is a billionaire entrepreneur, venture capitalist, and co-founder of PayPal. He is a controversial figure in the tech industry for his focus on building monopolies “competition is for losers” and his political views. Yet, Thiel’s track record speaks for itself, and entrepreneurs should listen to his inputs and recommendations.
Thiel's approach to business has been shaped by his background in philosophy and law, as well as his experiences as an entrepreneur. He’s the founder of such impressive successes as PayPal and Palantir.
Thiel's focus on building monopolies can be traced back to his time at PayPal, where he saw firsthand how difficult it was to compete in the online payment space. PayPal faced stiff competition, mainly from traditional payment companies like Visa.
PayPal, in which his former competitor Elon Musk joined him, strongly benefited from the surge of eBay and its new marketplace. Paypal could prevail over incumbent players because it was addressing a market segment which was completely new. In a way, Paypal re-defined or created the online payment category and avoided competing directly against established companies.
Creating value is not only about size. It’s predominantly about pricing power:
The main parts of Thiel’s arguments for value creation are the following:
-New venture Cash Flows take time to materialize. A the creation time, the predominant part of the value comes from cash flows which are far into the future.
-A company should therefore focus on generating cash flows on the long run
-Long run cash flows come from a strong (dominant) position on a market segment. A dominant position is the only one enabling pricing power, and hence above average margins (and returns)
-In the software and digital industries at large, network effects can lead to dominant positions and sometimes de-facto monopolies (winner takes all)
-You do not have to start on a big market. PayPal started on a small (emerging) market: online payments for market places and websites.
He has since applied this philosophy to his other ventures, including Palantir and Founders Fund.
Thiel's belief that competition is for losers is based on the idea that competition is a zero-sum game. In his view, when companies compete, they are simply dividing up a fixed pie, rather than creating something new. Thiel argues that instead of competing, companies should focus on creating a new market, where they can be the dominant player.
Thiel outlined his philosophy in a presentation at Harvard Business School in 2013, titled "Competition is for Losers."
In the presentation, Thiel argued that competition is not only bad for individual companies, but also for society as a whole. He pointed to examples like Google, Facebook, and Amazon, which have all achieved dominant market positions through a combination of innovation and aggressive tactics.
Thiel's approach to building monopolies has been controversial, with some critics arguing that it stifles innovation and hurts consumers. They point to examples like Microsoft in the 1990s, which used its dominant market position to crush competitors and maintain its monopoly. However, Thiel argues that monopolies can actually be good for innovation, because they allow companies to take risks and invest in long-term projects that might not be possible in a more competitive market.
Regardless of where you stand on Thiel's philosophy, there is no denying that he has been incredibly successful as an entrepreneur and investor. He has been involved in the founding of some of the most successful companies of the last decade, including PayPal, Palantir, and Facebook. And while his approach to business may be controversial, there is no denying that it has been effective.