Please find below our key takeaways from a brilliant presentation made by Legendary investor Peter Thiel. Peter Thiel runs two fantastic organizations to help Founders grow their business. Do Visit them: https://foundersfund.com/ and https://thielfellowship.org/. Also read this brilliant book Zero to One authored by Peter Thiel. (Link: https://www.amazon.in/Zero-One-Start-Build-Future/dp/0753555190). (Emphasis Ours)
What makes a business Valuable?
It creates $X values for the world and you Capture $Y value of it. And both X and Y are totally independent.
There are 2 types of businesses
1) Businesses that are perfectly competitive
2) Businesses that have monopolies
Entrepreneurs often lie about the true nature of their business either due to fear of being regulated by the government in case of monopolies or to show that the business is very attractive in case of Perfect Competition.
For example, Google, Google has 66% market share in Search Engine market but it often classifies itself as Advertising or Tech Company. So, the benefit of classifying itself as a tech or advertisement company is they become a small part of a larger pie.
Like in tech market they say they are competing with automobiles cos with their self-driving cars, with amazon on cloud products, with Microsoft on office products and so on. So, all this is just a narrative saying we are not a Monopoly to avoid government regulation.
How to build a monopoly?
Start Small and Expand à It is easier to dominate small markets and acquire the whole market and then expand the market later.
Like amazon, started with just a book store and now expanded into all of e-commerce and much more.
Start Big and shrink à Large existing markets usually have huge competition. Like restaurants, they market is huge but competition is immense.
Characteristics of monopolies
- Proprietary technology Like Amazon, PayPal, Apple
- Network Effects
- Economies of Scale
- Branding
It is not enough to have a monopoly for a certain time, you need to have it for a longer period of time. Most times we overvalue growth and undervalue durability. The question that whether this company will be there a decade from now, that is what dominated the Value equation.
Successful Monopolies
1) Vertically Integrated Monopolies à This is a very complex co-ordination, a lot of pieces to fit together and when you assembled it you got a tremendous advantage. A single breakthrough wasn’t achieved, they innovated on a lot of dimensions like tesla, Spacex, Ford
2) Software: Economies of Scale, low marginal cost, high adoption rate which in return helps in capturing higher market share
Competition as a Validation à People’s identities get so wrapped up in winning this competition that they have lost sight of what is valuable.