Startup Class Lecture 5 Notes – Peter Thiel

These are my notes from Lecture 5 of the Startup Class taught by Sam Altman. Peter Thiel gave a guest lecture on business strategy and monopoly theory. There’s a bit of overlap with material he covered in his book and so my piece on learnings from Zero to One might also be of interest.

My notes from previous lectures are here.

What makes a company valuable

  • Create $X of value in the world and capture Y% of it.
  • X and Y are independent variables.
  • Big piece of small pie or small piece of a big pie?
  • Compare the airline industry to Google: Airline industry has much more revenue, but much lower profit margin. Google worth more than all airline companies in the US combined.

Perfect Competition

  • Advantages
    • Easy to model
    • Efficient in a static world
  • Disadvantages
    • No value to creator
    • Irrelevant in a dynamic world


  • Advantages
    • Incentives to innovate
    • Stable
  • Disadvantages
    • Lower output, higher prices
    • Price discrimination
    • Stifle innovation

Distortion between Perfect Competition and Monopoly

There are basically only two kinds of businesses: perfectly competitive ones and monopolies. It’s a dichotomy that’s not very well understood, because each kind of business tries to pretend to be the other, and so the difference between them is distorted.

Businesses that have monopoly will pretend not to and competitive businesses will try to be more unique. This leads to a distortion where the two kinds of companies appear a lot closer than they are.

  • Non monopolies tend to position themselves as the only player in a narrow market (i.e describe their market as an intersection of markets)
  • Monopolies tend to position themselves as competing in a large market (i.e describe their market as a union of markets)
  • If you’re opening a restaurant in PA (a perfectly competitive market), you would say something like you’re the only British restaurant in Palo Alto, trying to show how you’re unique.
  • If you’re say Google (a monopoly in search), you would describe yourself as an advertising/technology company (which are much larger markets), where you aren’t a monopoly and so there’s no reason for the government regulation.

How to Build a Monopoly

  • Start small and monopolize
    • Examples: Amazon, Paypal, eBay, Facebook
    • it’s much easier to dominate a small market
    • always dangerous to go after a large market from day one
    • if you think your market is large it most definitely is (think all the cleantech companies in the energy market)
  • Expand that market once you’ve dominated the smaller one

“The opening line in Anna Karenina is that all happy families are alike and all unhappy families are unhappy in their own special way. 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 failed to escape the essential sameness in competition.”

Characteristics of Monopoly

  • Proprietary technology (good rule of thumb is 10x better than alternative)
  • Network effects
  • Economies of scale
  • Branding

Software companies very good at some of these (Economies of scale tend to be 0)

Last Mover Advantage

  • People believe that there is a first mover advantage
  • It’s actually better to be the last mover.
  • Companies that are last in their category tend to be very valuable.
  • Reason is that most of the value (75%+) of growing companies comes from cash flows in the future.
  • Therefore, a company needs to be able to stick around and be durable.
  • Value equation dominated by whether company will be around a decade by now.
  • Therefore, it’s not enough to have a monopoly for a moment: need to make sure that it lasts over time
  • Network effects are good because they lead to robust monopolies. Proprietary technology is tricky because it doesn’t give you durability by itself, since in an innovative market, new technologies might launch to compete against your company.

History of Innovation

  • In the history of innovation, there have been a lot of technologies/inventions which were very valuable (large X), but the creator didn’t capture any of the value (low Y).
  • In the 19th/20th century Y tended to be 0, largely due to very high competition.
  • Only two categories of companies have been able to capture value in the last 250 years or so:
    • Vertically integrated monopolies: very complex, own all the parts and fit the various pieces together
    • Software companies: low marginal costs, world of bits allows for faster adoption vis-à-vis world of atoms.

Psychology of Competition

“Competition is for losers.”

  • We always think of losers as those that can’t compete.
  • We don’t understand the dichotomy intellectually because of the distortion
  • But there’s also a psychological blind spot where we’re attracted to competition
    • Find it reassuring if other people are doing something – competition as validation/wisdom of crowds
    • Lots of people trying to do something is instead the definition of insanity