• 1. The Challenge of the Future
• 2. Party Like It’s 1999
• 3. All Happy Companies Are Different
• 4. The Ideology of Competition
• 5. Last Mover Advantage
• 6. You Are Not a Lottery Ticket
• 7. Follow the Money
• 8. Secrets
• 9. Foundations
• 10. The Mechanics of Mafia
• 11. If You Build It, Will They Come?
• 12. Man and Machine
• 13. Seeing Green
• 14. The Founder’s Paradox
• Conclusion: Stagnation or Singularity

1. The Challenge of the Future

The future can take two forms:

• Horizontal progress: 1 to N (replicating things that have been done before)
• Vertical progress: 0 to 1 (doing something no one has done before)

If you were to graph the path of potential progress, Y would be doing new things which we call ‘technology’, X would be doing things that already work in one place and doing them elsewhere which we call ‘globalization’.

In a world of scarce resources, globalization of the status quo is unsustainable without technological advancement.

Our challenge: Imagine and create technologies to make the 21st century more peaceful and prosperous than the 20th.

Startup Thinking

New technology tends to come from new ventures, therefore if you want to make technological leaps, the best way is to start a new venture.

“Startups operate under the principle that you need to work with other people to get stuff done, but you also need to stay small enough that you actually can.”

“A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.”

Question received ideas and rethink business from scratch [?]

2. Party Like It’s 1999

A period characterized by crazy valuations without the earnings or business models to back them up

“Easy to conclude that the market had gone crazy”

The “old” economy of exporting existing technologies to new places (i.e. globalization) wasn’t working as evidenced by the panics, crashes etc. that were happening around the world over the preceding years.

New technology was the only way forward

Mania: September 1998 - March 2000

Irrational exuberance with startups, valuations, and a general lack of business sanity

People who obviously had no business starting or running companies were running them (e.g.: the grad student with 6 simultaneous companies) [?]

Companies who’s entire business model was adding a “.com” to a name or industry

PayPal Mania

PayPal was originally a product that worked but was useless (payment transfers for Palm Pilots)

Pivoted to payments over email

Raised a huge round to finance an unsustainable growth strategy even if the rest of the bubble burst

Lessons Learned

After the crash people began to treat the future as indefinite and globalization replaced technology as the path forward.

People switched back from “clicks” to “bricks” (real estate) and “BRICs” (globalization) which just led to the creation of another bubble in 2008

The backlash from the .com bubble burned in 4 (incorrect) lessons to the tech world:

1. Make incremental advances over what already exists
2. Stay lean and flexible (unplanned)
3. Improve on the competition (marginality)
4. Focus on product, not sales (marketing = waste)

In truth, the opposite principles are probably more correct:

1. It is better to risk boldness than triviality
2. A bad plan is better than no plan
3. Competitive markets destroy profits
4. Sales matters just as much as product

2000 was obviously a time of widespread irrationality but also a moment of unexpected clarity.

People looked far into the future and saw themselves as capable of creating the technology we needed to get there.

To move forward:

“How much of what you know is shaped by mistaken reactions to past mistakes?”

3. All Happy Companies Are Different

“What valuable company is no one building?”

Value creation is not enough, you must also capture some of that value. (Airlines vs. Google)

Competitive markets destroy profits.

“If you want to create and capture value, don’t build an undifferentiated commodity business.”

Lies People Tell

If you have a spectrum of Perfect Competition (left) to Monopoly (right), most people imagine that firms are relatively similarly placed:

Perfect Competition <----------A---B----------> Monopoly

When in reality, most businesses are much closer to one extreme that we (or they) would like to admit:

Perfect Competition <-A---------------------B-> Monopoly

The confusion comes from the ways that the companies are incentivized to represent themselves.

Monopoly: “We’re common and therefore weak!”
Competitive: “We’re special and therefore strong!”

Startups are tempted to understate competition and define their market so narrowly so as to dominate that market by default.

Q: What is the actual relevant market? Not the one that makes you look best.

Non-monopolists talk about themselves in terms of intersections (British Food n Palo Alto)

Monopolies talk about themselves in terms of unions (Search u Mobile u Advertising)

Ruthless People

Highly competitive markets and industries push people towards margin squeezing behavior (ruthlessness) — the alternative is failure

If takes monopoly profits to get enough breathing room to focus on anything other than preserving your margins.

Monopoly Capitalism

Monopolies are only negative in a world where those monopolies cannot be unseated.

The world is not static, the possibility to achieve monopoly profits is a powerful incentive to create new technology and innovation (governments recognize this with patent offices)

Apple’s monopoly profits from the iPhone are clearly a result of creating greater abundance, not artificial scarcity

In an environment where competition is possible, all monopolies are temporary.

“In business, equilibrium means stasis, and stasis means death.”

“Every business is successful exactly to the extent that it does something that others cannot.”

“All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”

4. The Ideology of Competition

Competition is a social obsession that we are trained to respond to effectively since birth through the educational system (grades, standardized tests, class rank, etc.).

Pursuing ‘winning the competition’ usually distracts us from potentially more valuable uses of time (Supreme Court clerk vs. PayPal, for Peter).

War and Peace

The concept that business ultimately requires competition (war) is flawed. Competition is a huge drain on resources and encourages a focus on old opportunities and what has worked in the past rather than looking for and pursuing new opportunities.

There is a big pull towards getting caught in a crowd competing for obvious prizes.

“Competition can make people hallucinate opportunities where none exist” (Y2K online pet stores)

In the few cases where conflict is unavoidable, best to strike hard and end it quickly.

“Recognize competition as a destructive force rather than a sign of value”

5. Last Mover Advantage

A great company is defined by its ability to generate cash flows in the future, not in the short term.

Low growth businesses lead to short term cash flows
High growth businesses lead to long term cash flows

Growth alone isn’t enough, a company must grow and endure (Zynga)

“Will this business still be around a decade from now?”

Characteristics of Monopoly

All monopolies are unique but the all tend to have:

• Proprietary technology
• Network effects
• Economies of scale
• Branding

Proprietary Technology

The biggest advantage a company can have, makes it hard to replicate (Google)

Rule of thumb: New technology must be more than 10x better than the alternatives or it will not be recognized as anything other than a marginal improvement.

The easiest (most cost effective?) way to find a 10x improvement is to invent something completely new.

For example:

• PayPal for eBay purchases
• Amazon for book selection
• Apple for the iPhone or iPad

Network Effects

When a product becomes more useful with scale

You will never get big enough to achieve network effects unless your product is valuable enough to your first users while the network is small

Network effect businesses must start with a small market and grow

Economies of Scale

When a company gets more efficient as it grows

Software businesses do this easily while service (or atom) businesses have a much harder time

Branding

Branding tactics can be copies (minimalism, material quality, etc.) but they lose impact without consistency and cohesion

Branding can be a powerful effect but:

“No company can be built on branding alone.”

Building a Monopoly

The above characteristics define a monopoly but you will never get there unless you grow in a very careful and deliberate way.

Start Small and Monopolize

On starting small:

“It’s easier to dominate a small market than a large one.”

Corollary: Small does not mean nonexistent

The perfect market is:

“A small group of people concentrated together and served by few or no competitors.”

Trying to compete in a big market leads to either no starting point and therefore no competition, or competition and therefore a race to zero margins.

Scaling Up

Dominate a small market and then expand gradually into adjacent markets.

Amazon: Books → CDs → Videos → Software → Everything

Ebay: Beanie Babies → Other hobby items → Everything unique

Sequencing markets correctly is a very underrated skill.

Don’t Disrupt

‘Disruption’ as a concept was coined to describe threats to established companies and as such, it’s inherently competitive.

If your company is defined by its opposition to older firms than it can’t be completely new and therefore is probably never going to be a monopoly.

‘Disruption’ also attracts attention and implies that you’re destroying an incumbent — in this situation incumbents will usually fight back. (Napster)

The Last Will Be First

Being the first mover is nice but only if no one else comes along and unseats you — it’s a tactic, not a goal.

It’s far better to be the last mover in the market, aka the one who captures monopoly profits.

Do this by starting small, dominating your market, and scaling.

6. You Are Not a Lottery Ticket

Is success a matter of luck or is it something that can be trained? Designed?

Can You Control Your Future?

You have two choices, either you can view the future as definite and try to shape and change it or treat it as indefinite and assume you cant impact it at all.

Indefinite thinking is the source of a lot of the world’s disfunction.

“Instead of pursuing many-sided mediocrity and calling it ‘well roundedness,’ a definite person determines the one best thing to do and then does it.”

“Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive — to be a monopoly of one.”

• Indefinite Pessimism: Europe, Present
• Definite Optimism: US, 1950s - 1960s
• Indefinite Optimism: US, 1982 - Present
• Definite Pessimism: China, Present

Indefinite Pessimism

”[The indefinite pessimist] looks out on a bleak future, but he has no idea what to do about it.”

“…react to events as they happen and hope that things don’t get worse.”

Definite Pessimism

”[The definite pessimist] believes the future can be known, but since it will be bleak, he must prepare for it.”

E.g.: Chinese resource hoarding in offshore accounts

Definite Optimism

”[The definite optimist believes] the future will be better than the present if he plans and works to make it better.”

Characterized by the primacy of professions with tangible output: Doctors, Scientists, Engineers, Businessmen

Outputs of this approach include the Suez and Panama Canals, the Golden Gate Bridge, the Manhattan Project, and the Apollo Missions.

People in this mode welcome big plans and ideas and ask if they will work.

Indefinite Optimism

Between the 1982 bull market and the present is when finance eclipsed engineering as the dominant way to approach the future

”[The indefinite optimist knows] the future will be better but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely.”

Characterized by the primacy of professions of middlemen: bankers, lawyers, private equity, consultants

Strange impact of Baby Boomers — things just got better all the time as they grew up which leads to thinking improvement always happens without any intentional effort

They passed these values down to their kids and promoted indefinite careers

“A whole generate learned from childhood to overrate the power of chance and underrate the importance of planning.”

Our Indefinitely Optimistic World

Indefinite Finance

“Finance epitomizes indefinite thinking because it is the only way to make money when you have no idea how to create wealth.”

Diversification reflects indefinite thinking

Indefinite Politics

The proliferation of polling has bred a generation of politicians (and political observers) who are more concerned with next week’s opinions than a 10-20 year vision

Government used to be able to coordinate complex projects (Apollo, Manhattan) but at this point mostly provides insurance programs (Social Security, Medicare, etc.)

Indefinite Philosophy

Ancient

• Pessimistic (Plato, Epicurus, Aristotle)

Modern

• Optimistic (Marx, Hegel, Spencer)
• Indefinite (Rawls, Nozick)

“In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future.”

Indefinite Life

In the 1600s many people were working on life extension

At this point that field is fairly quiet with actuarial tables and insurance having replaced the pursuit of progress

Medical and biotech depend on random chance to make new compounds and treatments

Is Indefinite Optimism Even Possible?

The other three approaches have fairly straightforward paths, indefinite optimism does not

The best candidate for a mechanism is evolution and evolution metaphors have become omnipresent in business

This is a fine way to build a 1 to N business but never a 0 to 1 business

“In startups, intelligent design works best.”

The Return of Design

Apple is a clear example of a company where intentional design (business, not experiential) was prioritized (Jobs trashing product lines when he came back)

When big businesses acquire startups they almost always offer too much or too little

If the startup has no more definite future plans they pay too much.

If the startup has definite plans for the future they pay too little.

You Are Not a Lottery Ticket

Indefinite thinking needs to be replaced in philosophy, politics, etc. but those environments are highly resistant to change

A startup is a vehicle for change that you can have definite mastery over

A successful startup is the best way to inject definite thinking into these domains

7. Follow the Money

“Money makes money” or perhaps more accurately, “value makes value”

The world operates exponentially, not linearly (Pareto’s Italian land ownership and pea pod yield)

“Power law” dynamics define much of our world, especially in business

The Power Law of Venture Capital

Most startups fail and most VC funds fail with them

People almost always underestimate just how different winners are from losers (in these domains and in many others)

The error is thinking that returns will be normally distributed (which leads to portfolio diversification which is indefinite thinking)

“The biggest secret in VC is that the best investment in a successful fund outperforms the entire rest of the fund combined.”

Therefore an intelligent investor should:

“Only invest in companies that have the potential to return the value of the entire fund.”

Once your investments become so indefinite that they start needing diversification or hedging you’ve already lost

Why People Don’t See the Power Law

Because the compounding over time does not reflect daily observations until very near the end

The differences between winners and losers, success and failure hide in plain sight

What to Do with the Power Law

Life is not diversifiable

Focus relentlessly on something you’re good at doing (assuming you believe it will be valuable in the future)

The differences between companies dwarf the differences within companies

For many (or perhaps most?) it makes more sense to attach yourself to a company with huge potential than to start your own

If you do decide to start a company, remember power law dynamics come in to play in many other ways

• One market will probably outperform the rest combined
• One distribution strategy will probably outperform the rest combined
• One use of time will probably outperform the rest combined
• One decision will probably outperform the rest combined

8. Secrets

Every successful company has a secret at its core — something important and unknown, hard but doable

Why Aren’t People Looking for Secrets?

The idea that additional technological advancement is so hard to be nearly impossible is pervasive

“If everything worth doing has already been done, you may as well feign an allergy to achievement and become a barista.”

This idea is shared by fundamentalists of all types (aka people who want to go back to a simpler/easier/better time)

Why do so many believe that there are no hard (but not impossible) problems left to solve?

1. Geography? (there are no more unexplored areas)
2. Incrementalism
3. Risk aversion (fear of failure)
4. Complacency (rent collecting)
5. Flatness (of the world, economy, talent pool, etc.)

The World According to Convention

Hypothesis: We’ve already solved all solvable problems therefore our world’s conventions are in the best possible state therefore our world has no injustice

The idea there aren’t any more hard but solvable problems leads to fantasies like the efficient market hypothesis despite persistent evidence to the contrary (bubbles, irrationality, etc.)

What happens when a company stops believing in secrets?

HP led by rent collectors instead of new tech R&D

The Case for Secrets

Discovering secrets requires someone to have faith that hard does not equal impossible and to actually spend time looking (Andrew Wiles w/ Fermat’s last theorem)

There are myriad secrets in science, medicine, and business left to discover. We only need someone to recklessly defy convention by looking for them

How to Find Secrets

There are two types of secrets:

• Secrets about nature; to find them you must study the natural world
• Secrets about people; to find them you must study what people don’t know about themselves or what they hide intentionally

This leads to two questions when deciding what kind of company to build:

• What secrets is nature not telling you?
• What secrets are people not telling you?

People secrets are relatively unappreciated because they don’t require any special training or expertise to ask:

• What are people not allowed to talk about?
• What is taboo?
• What is forbidden?

“The best place to look for secrets is where no one else is looking” (nutrition, taxis)

What to Do with Secrets

Once you find a secret who do you tell?

Exactly as many people as you need to (this is also known as a company)

“A great company is a conspiracy to change the world.”

9. Foundations

There are a few things that every great company must get right at the beginning

“Theil’s law: A startup messed up at its foundation cannot be fixed.”

Founding Matrimony

The first and most important decision is who you start the company with

Founders should share history and work well together

Ownership, Possession, and Control

You need everyone (not just the founders) to work well together and get along and you need rules in place to make sure the social contract is understood and followed

To prevent future misalignment it’s useful to outline who has which of these:

• Ownership (financial ownership, equity)
• Possession (day to day operations)
• Control (formal governance of affairs)

In theory these distinctions are simple but misalignment is still very possible (DMV, big corporations)

“A board of three is ideal. Your board should never exceed five people, unless it is publicly held.”

On the Bus or off the Bus

Avoid part time, contractors, remote workers, etc. — all are risks for misaligned incentives

Cash Is Not King

There’s a clear pattern between low paid CEOs and company performance (focus on LTV)

The CEO should either be the lowest paid person in the company (signaling) or the highest paid (ceiling)

Vested Interests

Equity is the one form of compensation which best aligns incentives but it is effectively impossible to allocate in a way that won’t cause resentment

Solution: keep allocations secret

Extending the Founding

A founding only really happens once but the best companies establish a founding’s openness to invention as a persistent company value

10. The Mechanics of Mafia

“Company culture doesn’t exist apart from the company itself.”

All of the perks in the world won’t help inject culture if there is no unifying mission — it’s just window dressing

Beyond Professionalism

In PayPal, they assembled a culture so strong that it transcended the company itself spawning 7+ $1B companies and a ‘Mafia’

The way to build the mafia wasn’t hiring the most talented people (law firm) but to hire people that would be close knit

“They had to be talented, but even more than that they had to be excited about working specifically with us.”

Recruiting Conspirators

Equity, salary, and working with smart people aren’t enough to catch top talent, those are a given anywhere they go

More valuable are specifics about your mission (and why you are the only ones that can get it done)

You must also explain why your company is a good fit for them personally

“Above all, don’t fight the perk war.”

What’s Under Silicon Valley’s Hoodies?

“From the outside, everyone in your company should be different in the same way.”

The early PayPal team worked so well together because they all shared the same interests and obsessions (Cryptonomicon, Star Wars, currency)

Do One Thing

“On the inside, every individual should be sharply distinguished by her work.”

Internal conflict tends to happen when people are competing for the same responsibilities. To solve this, assign and evaluate people on one (and only one) thing

Internal strife makes companies vulnerable to outside threats

Most companies fail from the inside out

Of Cults and Consultants

Cults and consultants are on two ends of the same spectrum

The best startups are like slightly less extreme cults

11. If You Build It, Will They Come?

Startups tend to underestimate (and even demonize) the importance of sales and distribution

Nerds vs. Salesmen

Because technical work is so easily evaluated, it’s easy for technical people to undervalue the nontechnical (and hard) work of sales and marketing

Sales Is Hidden

We only really react negatively to sales when it is done poorly (i.e.: obviously)

The best sales people make us buy without us realizing we’ve been sold to

If you have a great product without a way to sell it, you have a bad product

How to Sell a Product

Superior sales and distribution can make a monopoly out of even an undifferentiated product

A superior product cannot become a monopoly with undifferentiated distribution

LTV and CAC are closely related

Complex Sales (1m - 100m)

Average deal sizes over 7 figures need very high touch consultative sales (SpaceX → NASA)

Complex sales companies do well if they grow 50—100% over a decade

They don’t have much potential for virality

Deals tend to build on each other over time

Personal Sales (10k - 100k)

The challenge in this range is to establish a process for a modestly sized sales team (Box)

Grass roots, land & expand approach

Distribution Doldrums

There’s a dead zone between personal sales and traditional advertising

These are businesses that really need personal sales but don’t have the LTV to support it

Marketing and Advertising

Low priced products with mass appeal and no viral distribution (Laundry detergent, Warby Parker)

Viral Marketing

Virality: when core functionality encourages people to invite others

“Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.”

Ideal target for viral advertising: a small niche with frequent interactions (eBay hobby goods sellers)

The Power Law Distribution

One distribution method is usually better than all of the others combined for a business

Selling to Non-Customers

You must sell your company to potential employees and customers too

Everybody Sells

If you don’t see the salesperson, you are the salesperson

12. Man and Machine

“The most valuable companies of coming decades will be build by entrepreneurs who seek to empower people rather than to make them obsolete.”

Substitution vs. Complementarity

“Computers will take our jobs is a fear of substitution but computers are complementary.”

Globalization Means Substitution

People tend to have the same cognitive strengths as other people

Globalization increases the supply of people with roughly the same skills

Technology Means Complementarity

People and computers are good at fundamentally different things

Technology allows for specialization

“Computers are tools, not rivals.”

Complimentary Businesses

When fighting transaction fraud at PayPal they tried an automated approach first but it was ineffective, fraudsters could adapt faster than they algorithm could

The best approach was blended — the algorithms would flag suspicious transactions and humans would review them

This blended approach led to founding Palantir

Linkedin took the same approach with products for recruiters

The Ideology of Computer Science

Focuses on replacing human effort, not complimenting it (machine learning, big data, etc.)

The most valuable companies will ask “How can computers help humans solve hard problems?”

Even Smarter Computers: Friend or Foe?

There’s a lot of fear about the impact of ‘strong AI’ but we are a long way away from there right now

That fear shouldn’t stop us from building better computers today

“Indefinite fears about the far future shouldn’t stop us from making definite plans today.”

13. Seeing Green

In the early 2000s thousands of clean tech companies were started and almost all of them have since failed

Why?

Because they ignored one or more of the seven questions a business must answer:

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 in 10 and 20 years into the future?

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

The Engineering Question

Companies must aim for a 10x improvement over their competition, only then will people take you seriously and accept the risk of switching from what they are doing to what you want them to do

The Timing Question

“Entering a slow-moving market can be a good strategy, but only if you have a definite and realistic plan to take it over.”

The Monopoly Question

Exaggerating your uniqueness is a poor way to answer this question (thin-film solar)

Identify actual competitors

Thin-film → Solar → Renewable → Energy

The People Question

If the business requires technologists, hire (or as a VC, invest in) technologists. (suits running clean tech companies)

The Distribution Question

Make it easy for customers to buy (Better Place electric cars)

The Durability Question

Ask ‘what will stop someone from wiping out my business 20 years from now?’

Clean tech got blindsided by fracking

The Secret Question

If everyone describes your future success using broad conventions that everyone sees you are probably in trouble

The Myth of Social Entrepreneurship

Most nonprofits tend to push the same set of agendas, one more won’t add anything unique to the conversation

What is good for society is what is different

Tesla: 7 for 7

One of the few clean tech companies to nail all seven questions

• Technology: superior
• Timing: government subsidies in 2009
• Monopoly: tiny market (luxury electric)
• Team: highest bar
• Distribution: own the dealerships
• Durability: head start and innovating fast
• Secret: fashion drives clean tech

Energy 2.0

Tesla proves clean tech can work, the other companies just did a bad job of framing and strategy

“An entrepreneur can’t benefit from a macro scale insight unless his own plans begin at the micro scale.”

“No sector will ever be so important that merely participating in it will be enough to build a great company.”

14. The Founder’s Paradox

“It’s more powerful but at the same time more dangerous for a company to be led by a distinctive individual instead of an interchangeable manager.”

The Difference Engine

Founders tend to be eccentric but it’s not clear if this is innate or a reinforced behavior (Branson, Parker, Gaga)

Where Kings Come From

“The famous and infamous have always served as vessels for public sentiment: they’re praised amid prosperity and blamed for misfortune.”

Founders/leaders(/executives?) serve the same societal purpose

American Royalty

Fame/adulation tends to be binary (Elvis, Hughes, Gates)

The Return of the King

Jobs (in, kicked out, brought back)

A company’s success is highly dependent on one person — in this way they resemble monarchies

Lesson: we need founders, arguably the more extreme or unusual the better

Great founders are valuable/important not for their own contributions but because they bring out the best in others

“The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenfranchisement for wisdom.”

Conclusion: Stagnation or Singularity

The ancients saw history as a continual cycle between prosperity and ruin

Recently we’ve started to hope that we will reach a quality of life plateau and stay there

The third option is a collapse so devastating that we can’t recover

Without continued technological progress stagnation will happen, leading to conflict

The fourth option is that continued technological advancement leads to a singularity (Kurzweil)

“We cannot take for granted that the future will be better, and that means we need to work to create it today.”