Breakfast Bytes Blogs

I was reminded recently of a video/transcript that I remember coming across when it was fresh, five or six years ago. This was one lecture at Sam Altman's Stanford Startup Class where Peter Thiel was the guest lecturer. His central thesis was that you want to be a monopoly, and that competition is for losers. In particular, you don't want first-mover advantage, you want last-mover advantage. In an example that even he says is just a bit too cute, in chess, white is the first mover. The last mover is the winner.

Google wasn't the first search engine, remember Yahoo!, AltaVista, Lycos, Excite, and more. But Google is basically the last search engine with a huge market share. Facebook wasn't the first social network, remember Friendster, Orkut, MySpace, and more. But Facebook is the last. Windows wasn't the first desktop PC operating system, remember CP/M, DR-DOS, and more. But it was the last. Linux wasn't the first server operating system, remember VMS, Windows/NT, whatever IBM calls their operating system this week, and more. But today almost every server farm runs Linux, because it was the last. In fact, as I've pointed out before, the TOP500 list of the world's 500 fastest supercomputers has a dropdown menu so you can restrict the list by operating system—but these days that menu only has one choice since all 500 supercomputers run Linux. For more on just how improbable that is, read my post from August 25th this year, "I'm Doing an Operating System, Just a Hobby, Won't Be Big and Professional".

But being a monopoly is not just for huge companies with trillion-dollar valuations. It applies to startups, and, to a lesser extent, new product releases from established companies. You need to have a dominant market position in a small market. When Paypal was getting going, Peter said that it struggled to get traction. They needed to be a big player in a small market. So it focused on power sellers on Ebay. Instead of its market being "everyone who might want to make an online payment" it was the 20,000 power sellers on Ebay. Once it had a lot of them using Paypal, it started to get all the people who purchased a product from a power seller—and since they were power sellers they had a lot of customers in aggregate. So Paypal soon had a large fraction of all sellers on Ebay. It ended up acquiring Paypal.

Or how about this one? An online yearbook for Harvard students might not strike you as a $100 billion idea. But that's how Facebook started. It was the dominant (only) player in a small market (Harvard has 23,000 students). Then in all universities. Now the world.

But this is not a rehash of my earlier post It's the Second Mouse That Gets the Cheese about how startups tend to fail by being too early rather than being too late.

Zero to One

The phrase "Last Mover Advantage" is actually a chapter from Peter Thiel's book Zero to One, subtitle Notes on Startups, or How to Build the Future. Here's where the title comes from (the opening paragraph of the book):

Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them. Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange.

This book had an interesting genesis. In a 2012 course at Stanford Law School, Peter taught "Computer Science 183: Startup". In the audience was student Blake Masters. He wrote detailed notes on the lectures which became an internet sensation, read by many people on the day they appeared (me being one of them). Afterward, Peter worked with him to rework the notes into the book. If you look at the cover, it is by "Peter Thiel with Blake Masters".

One thing covered in the book (and the course) is Peter's famous interview question:

What important truth do very few people agree with you on?

Peter's own answer to his question is:

most people think the future of the world will be defined by globalization, but the truth is that technology matters more.

I won't rehash the whole book (you should just read it, it is on everyone's list of top 10 books about business). Towards the end of the book, in a chapter called "Seeing Green", Peter takes a look at clean technology aka cleantech. At the start of the 21st century, everyone agreed that the next big thing was clean technology. Literally thousands of cleantech companies were founded and $50B was invested. The problem with this approach was that it might have been an important truth that cleantech was the next big thing, but everyone agreed, so it was no basis for a defensible business. In 2012 alone, more than 40 solar manufacturers went out of business.

Peter has seven questions every business must answer, and without answers to them, the business will crash. They are:

1. The Engineering Question: Can you create breakthrough technology instead of incremental improvements?

2. The Timing Question: Is now the right time to start your particular business?

3. The Monopoly Question: Are you starting with a big share of a small market?

4. The People Question: Do you have the right team?

5. The Distribution Question: Do you have a way to not just create but deliver your product?

6. The Durability Question: Will your market position be defensible 10 and 20 years into the future?

7. The Secret Question: Have you identified a unique opportunity that others don’t see?

In the rest of the chapter, Peter looks into cleantech in more detail, and at several specific companies such as Solyndra or SpectraWatt. He names the guilty!

In some ways, question 7 is the most important, and it is the same question as Peter's interview question. Great companies have secrets: specific reasons for success that other people don't see. Did anybody get cleantech right?

In his opinion, one: Tesla. And what was its answer to the all-important question 7:

Tesla knew that fashion drove interest in cleantech. Rich people especially wanted to appear “green,” even if it meant driving a boxy Prius or clunky Honda Insight. Those cars only made drivers look cool by association with the famous eco-conscious movie stars who owned them as well. So Tesla decided to build cars that made drivers look cool, period—Leonardo DiCaprio even ditched his Prius for an expensive (and expensive-looking) Tesla Roadster. While generic cleantech companies struggled to differentiate themselves, Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.

That was how Tesla got started, with roadsters for movie stars, venture capitalists, and anyone who could afford its $100K+ price tag.. Of course, now Tesla has a much bigger range of cars, but still all more pricey than an equivalent ICE (internal combustion engine) vehicle. It's still somewhat of a fashion statement. But it is aiming at the mass market, producing a car that is as cheap as an equivalent $25K ICE vehicle. Not to mention trucks. And battery storage for solar.

Learn More

You can watch Sam Altman's startup class where Peter Thiel was the guest lecturer:

But best of all, read the book Zero to One. It is a quick read of 200 pages. If you are still in doubt, read Derek Thompson's (co-founder of Paypal) Atlantic piece Peter Thiel's Zero to One Might Be the Best Business Book I've Read.

Or, if you want to be cheap, Blake Masters' original notes are still online.

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