Notes on Startups, or how to build a future
It is easier to copy than to make something new. However, fresh creation is always more powerful. Best practices will die out after a while. Technology allows one to work miracles. Try out businesses in formulas and find value in unexpected places. Some of the concepts taught here are based off the course about start-ups in 2012 conducted by the same author.
‘Most people believe in x, but the truth is the opposite of x’. What can x be? There are two types of progress, horizontal or vertical. Horizontal is from going from 1 to n, while vertical is from 0 to 1. China is largely going for horizontal progress by copying. Technology allows for vertical progress. Technology matters more than globalization does. The development has stopped somewhere in the late 1960s and we need to kick start it again. Start-ups tend to produce new technologies. Big organizations are slowed by hierarchy. ‘Question received ideas and re-think business from scratch’.
Behind a popular belief is a contrarian truth. Question what you know about the past. The mid 1990s were bad for the world and the major nations were in recession. Internet changed everything. Netscape and Yahoo went IPO during this period. However, tech investors were too exuberant and this led to a bubble being formed. In 1998, the financial crisis hit. The dot-com mania lasted from Sept 1998 to Mar 2000. Everyone was too optimistic over IT businesses and I started to get wary. Paypal decided to send and receive payments over email. We took a small fee on their transactions and even paid for new joiners. The market crashed right after year 2000. Thankfully, Paypal managed to receive sufficient funding before that. There are 4 key lessons from the crash. They are 1) Make incremental advances; 2) Stay lean and flexible; 3) Improve on the competition; 4) Focus on product, not sales. But the opposite of them might be true as well. 1) Better to risk boldness than triviality; 2) A bad plan is better than no plan; 3) Competitive markets destroy profits; 4) Sales matter as much as product. Learn to think for yourself.
You need to create and then capture value. The airline industry is in a perfect competition industry. Google is an example of a monopoly. Learn to innovate yourself to the top. This shows that differentiation is very important. Monopolies will lie and deny that they are one so as to avoid facing more competition. Non-monopolists like to claim they are very powerful. Do not underestimate the scale of competition. They tend to define themselves as the intersection between smaller markets. Monopolies are bad for the public if there are no technological changes. Some monopolies are good because they offer more to people out there. Monopolies drive innovation because they have the financial resources to innovate further. It is a condition of every successful business.
‘All happy families are alike, each unhappy family is unhappy in its own way.’ Leo Tolstoy (Anna Karenina)
Start a creative monopoly and have products that will benefit others. Competition is an ideology that we all preach. We were brought up that way in schools. I was glad that I didn’t enter law as I would not have been able to create anything new. Karl Marx believed people compete because they are different. To Shakespeare, people bought because they were too similar. Many people like to only focus on their rivals. War is costly, just look at Microsoft vs Google. Be less sensitive to social cues. Don’t lose sight of the big picture. Sometimes, if you can’t beat your opponent, merge with them. When you have to fight, you have to fight and win. Use a clear head to build a monopoly business.
Twitter is valued more highly than New York Times despite the latter being more profitable. This is because the FCFF for Twitter is expected to be higher in the future as compared to NYT. The newspaper is also a sunset industry. LinkedIn and Paypal are companies that will only grow quickly many years into the future and profitability will be low at the beginning. Many people are only concerned with short-term profitability. Most monopolies share the following characteristics: 1) proprietary technology; 2) network effects; 3) economics of scale; 4) branding. PT is great because it makes your business hard to replicate. You should be 10 times better than the next substitute. It is easier to invent something new. Another way is to improve an existing solution. Network effects are when your product is more useful when others use it. You can achieve economies of scale to sell software, as the incremental cost is almost zero. Substance first before branding will work. Start with a very small market and dominate it. Do not be ambitious and try to capture everyone’s attention. Scale up into slightly bigger markets once you have some success. Do not disrupt, like how mobile devices will eventually replace PCs. Disruption is actually facing the competition but using technology to triumph. The last mover will win. He will have the last laugh.
The most successful companies make the core progression – to first dominate a specific niche and then scale to adjacent markets – a part of their founding narrative. – Peter Theil
Does success come from skill or luck? Can you control your future? There are two sides to this. One is that people hoard CCAs and then don’t know what they want to do in life. The other is when people know what they want and they go all out for it. Therefore, there are 4 views, ‘Optimistic-Definite’, ‘Optimistic-Indefinite’,’Pessimistic-Definite’,’Pessimistic-Indefinite’. PI is when you expect a bleak future but don’t know what to do about it. PD is when you know your future is bleak, but you will prepare for it. This is China. OD is when you believe the future will be brighter than the present if you work hard. OI is when you feel finance will eclipse engineering as the way to approach the future. OIs do not plan much. OIs re-arrange already invented stuff. Our future calls for more bankers and lawyers. This does not bode well for ODs. Indefinite finance is when people pass money down the chain and no one actually is value-adding in the process. Modern politicians are concerned with how they are thought at the moment. People like to think short-term. Modern philosophers are mostly optimistic. Rawls and Nozick didn’t have any vision for the future. In general, the above shows that we defer plans for a brighter future. Indefinite-life. The progress for biotech firms is lot slower than software startups because it is much more costly to develop anything. The author is pushing for more people to plan for their futures and follow the OD method. Apple has taught one that through design and careful planning, you can be successful. A business with a good plan tends to be under-rated and under-appreciated. Humans and businesses need to have a definite future. You are not a lottery ticket.
Never underestimate exponential growth. We live in a power law. Venture Capitalists follow a J curve because if they get a hit, the growth will grow exponentially. The solution for VCs would be to focus on single-minded pursuit of a few companies rather than keep diversifying. The advice the author gives is to focus and invest in a particular career or business. Don’t keep diversifying. Think about your power law and do not simply just start a business without thinking about it first.
It does matter what you do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future. – Peter Thiel
The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. – Peter Thiel
Conventions are easy, secrets are hard. Mysteries are impossible to understand. How do you find secrets then? Kaczynski believed that the world’s hard problem were already solved, so he targeted institutions and wanted to destroy them so as to reset the tough problems. He was a little crazy. These are also how fundamentalists think. In terms of geography, men has explored most of the Earth already. Incrementalism means we only do what we have to do in order to claim credit. The next is risk aversion. They are scared of being wrong. People are complacent because secret finding is outside your comfort zone. The last is the belief that the world is flat and that someone else would have discovered it first. Hidden injustices are also considered secrets. HP is an example of a fallen company who failed to keep up with innovations. You need to believe in secrets in order to even want to work at them. There are two kinds of secrets, secrets of nature and secrets of people. You should look in a field where there has been less research being conducted in, like nutrition. Usually, it isn’t wise to tell people the secrets you know. Take the hidden paths.
‘A start-up messed up at its foundations cannot be fixed.’ The author cites the US as an example of getting the foundations right with the Bill of Rights, the constitution etc. Founders should shall the same pre-history together. They must complement each other. In business, it is very difficult to grow without a team in place. You need a good structure to manage people. Think about the concepts of ownership, possession and control. Often in big companies, misalignment might be present and you have to watch out for it. A board size of 3 is ideal. A large board doesn’t provide adequate oversight. Only hire full-time employees as they will be the most committed ones. Employees need to be properly compensated. A CEO of a start-up who pays himself too well will not be incentivised to work hard for the company. A humble and frugal CEO deserves more respect. Start-ups can offer part ownership of the company to attract people. However, the proper allocation is important and you do not want to seem unfair. Keep the allocation a secret and do not share this with other employees so as to avoid resentment. Develop a culture of innovation.
Work should be able getting to know your colleagues better and to connect to them on a personal level too. Work should not just be able to make money. The bunch of us at PayPal was known as the PayPal Mafia because we were all very close. You need to make a strong statement in order to hire a talented person. You also need to explain how your culture can fit his personality. You need to promise your new hire that he can do work here which he can find nowhere else. ‘From the outside, everyone in your company should be different in the same way.’ We need new hires to be equally obsessed about the company’s mission. Make everyone responsible for doing one thing. Well-defined roles help to reduce conflict. You are not going to learn from consultants. It is better to be known as a cult.
Distribution of products is the key because it is important even if you build something, you need to market it. Advertising works even if you’re sceptical of it. It works because it plays on human behaviour and psychology. Engineers hate sales people because they think that sales is ‘changing surface appearances without changing the underlying reality.’ All salesmen use persuasion. Sales work when it is hidden. Superior sales distribution can help to create a monopoly too. The customer lifetime value must exceed the customer acquisition cost. Do not attempt to compete with the big boys in marketing ad campaigns when you’re a start-up. One working distribution channel beats all others which have been attempted but failed. A company also needs a good public relation strategy to get the media’ buy-in. Everybody has a product to sell. If you don’t see any salesperson around, you’re the one
It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business – no matter how good the product. – Peter Thiel
Computers are very powerful and can replace many human tasks. The correct approach is to think that computers are complements for humans. Use them to empower people. Globalization means substitution. Computers are good at data processing while humans are good at making sense of things. Computers are tools. They also don’t require many resources, just electricity. Paypal used the computer to flag out suspicious transactions and then humans would screen it again to make sure they were truly fraudulent. NSA uses computers mainly while CIA uses humans mainly. Palantir aims to marry the two. LinkedIn was successful because they didn’t try to write software that would replace recruiters. Amazon and Google both use ‘machine learning’ and feed the machine with a lot of information, run the algorithm and then produce the result. Computers are good at finding patterns but find it difficult to compare data between two different sources. Humans should still develop their own plans because computers are not going to replace us anytime soon.
Why did we get a cleantech bubble? Why did it fail? It failed to answer one of the following 7 questions: 1) The Engineering Question; 2) The Timing Question; 3) The monopoly question; 4) The People Question; 5) The Distribution Question; 6) The Durability Question; 7) The Secret Question. Cleantech products do not offer 10x improvements, and maybe only 2x because it is not so efficient. Timing matters a lot too. The cleantech industry was filled with many small competitors thinking they all had the edge. Define your market correctly and not too small such that you will think you have a large share and hence should be the monopoly. Be wary of those executives who dress very well during sales presentations. Cleantech companies failed to predict competition from low-cost China and could do nothing about it. They all had the same secrets. Social entrepreneurs fail because they can do neither the profit part or social part well. Tesla is an example of a successful cleantech company. They also made the brand fashionable. Once too many have the same idea, a bubble will be formed. The challenge is to start thinking small again.
What character traits matter in a founder? Most people fall in the middle of the curve and are at neither extreme. Founders usually display unusual traits at the beginning and at the end too. Richard Branson is an example of a natural entrepreneur that is unusual. They become insiders and then outsiders again very quickly. Lady Gaga isn’t normal. Founders are like scapegoats, they are extreme and contradictory figures. The author highlights examples like Bill Gates, Steve Jobs etc that are very controversial and unusual. We all need founders and sometimes, it is good that they are strange. Don’t overestimate your power as an individual.