Питер Тиль - Конкуренция удел неудачников (Y Combinator) - Русские Субтитры

0:00 All right, good afternoon. Uh, today's speaker is Peter Teal. Peter was the founder of PayPal and Palunteer and Founders Fund and has invested in uh most of the tech companies in in Silicon Valley and he's going to talk about strategy and competition. Thank you for coming, Peter. Awesome. Thanks, uh, Sam, thanks for inviting me. Thanks for for having me. Uh I I sort of have a I have a single Eay fees that I'm completely obsessed with in um on on the business side which is that uh if you're starting a company, if you're the founder entrepreneur starting a company, you always want to aim for monopoly and um and that uh and you want to always avoid competition and so uh hence uh

0:45 competition is for losers. Uh something we'll be talking about today. I'd like to um I'd like to start by saying something about um the the basic idea of uh when you start one of these companies um how you go about uh creating value and there's this question what makes a business valuable and I want I want to suggest that there's basically a very simple uh very simple formula that um um you you have a valuable company if two things are true. uh number one that it creates X dollars of value for the world and number two that you capture Y% of X and and the critical thing that uh that I think people always miss in this sort of

1:31 analysis is that X and Y are completely independent variables and so um X can be very big, Y can be very small, X can be of intermediate size and if Y is is reasonably big, you can still get a very big business. So to create a valuable company, you have to basically uh both create something of value and capture some fraction of the value of what you've created. And sort of just to just to illustrate uh this as a as a contrast um there's if you sort of compare the uh US airline industry with a company like uh Google on search uh if you sort of measure by the size of these industries you could you could say that airlines are still

2:17 more important than search. If you just measure it say by revenues, it was 195 billion in uh domestic revenues in uh 2000 2012. Google had uh just north of 50 billion. Um and that's and so and certainly sort of on some intuitive level if you said uh if you were given a choice and said, well, do you want to get rid of air all air travel or do you want to get rid of your ability to use search engines? The intuition would be that air travel is something that's more important than search. And this is of course just the domestic numbers. If you looked at this globally, um airlines are much much bigger than um than uh than than than than search or than Google is. But uh but the profit margins are quite a bit less. Uh you know, they were marginally profitable in 2012. Uh I think the entire hundred-year history of

3:02 the airline industry, the cumulative profits in the US have been approximately zero. You know, companies make money, they episodically go bankrupt, they get recapitalized, and you sort of cycle and and repeat. And this is reflected in you know the the combined market capitalization of the of the airline industries maybe uh something um of the US airline industry something like a quarter that of Google. So so uh you have you have a search engine much much smaller than than air travel but much more valuable and I think this this reflects these very different uh valuations on X and Y. So um you know if we look at perfect competition um you know there are sort of there's some pros and cons to the world of perfect competition. Um on a high level

3:50 uh uh it's always um this is what you study on econ one. It's always it's easy to model which I think is why econ professors like talking about perfect competition. Um it somehow is efficient especially in a world where things are static because you have all the consumer surplus gets captured by everybody and uh and politically it's uh what uh what we're what we're told is good in our society that you you want to have competition and this is somehow a good thing. Um of course there are a lot of negatives. Uh it's it's generally not that good if you're you're um you're involved in anything that's hyperco competitive um because you often don't make money. I'll come back to this a little bit later. So uh so I think at one end of the spectrum you have uh industries that are perfectly competitive and at the other end of the spectrum um you have things that um I

4:35 would say are monopolies and um and they're you know they're much stable longerterm businesses. You have more capital uh and um and if you get a creative monopoly for inventing something new I think it's symptomatic of having created something something really valuable. Um and so I do think this, you know, the the the sort of the the the extreme binary view of the world I I always articulate is that there are exactly two kinds of businesses in this world. There are businesses that are perfectly competitive and there are businesses that are monopolies. And um there's shockingly little that is in between. And uh this dichotomy is not understood very well because uh people uh are constantly lying about the nature of the businesses they're in. Um, and

5:21 this is why this is in my mind this is the most important. It's not necessarily the most important thing in business, but I think it's the most important business idea that people don't understand that there are just these two kinds of businesses. And so, let me say a little bit about the lies that people tell. And so you basically um the basic uh if you sort of imagine that there was a spectrum of companies from perfect competition to monopoly um the um the apparent differences are quite small because the people who have monopolies pretend not to. They will basically say uh you know and it's because you don't want to get regulated by the government. You don't want the government to come after you. So you will never say that you have monopoly. So, anyone who has a monopoly will pretend that they're in incredible competition. And on the other

6:06 end of the spectrum, if you are incredibly competitive, um, and if you're in some sort of business where you will never make any money, um, you will be tempted to tell a lie that goes in the other direction, where you will say that you're doing something unique, um, that, um, is is somehow, uh, less competitive than it looks because, um, because you want to you will want to differentiate. you want to try to attract capital or something like that. So if the monopouists pretend not to have monopolies, the non- monopouists pretend to have monopolies, the apparent difference is very small, whereas the real difference, I would I would submit, is is actually quite big. And so there's this distortion that happens because of the lies people tell about their businesses. And the lies are sort of in these these opposite direction. Let me

6:52 let me drill a little bit down further on the uh the way these lies work. And so, um, you know, the the the basic, uh, lie you tell as a non- monopoly is that we're in a very small market. The basic lie you tell as a monopoly is that the market you're in is much bigger than it looks. And so um and so typically if you want to think of this in sort of set theoretic terms, you could say that a monopoly tells um a lie where you describe your business as the union of these vastly different markets and the non- monopolist describes it as the intersection. So that uh in effect um if you're if you're a non-

7:38 monopolist, you will rhetorically describe your market as super small. you're the only person in that market. If you have monopoly, you will describe it as super big and um and there's lots of competition in it. So, some examples of how this how this works in practice. Uh so, I always use restaurants as the example of a terrible business. And this is always, you know, sort of my ideas, you know, capitalism and competition are antonyms. Um capital someone who accumulates capital. A world of perfect competition is a world where all the capital gets competed away. So, uh, you're opening a restaurant business. No one wants to invest because you just lose money. So, you have to tell some idiosyncratic narrative and you will say something like, "Well, we're the only British food restaurant in PaloAlto." So, it's British PaloAlto and uh, and of

8:25 course, that's too small a market because people may be able to drive all the way to Mountain View or even Menlo Park. Um, and there probably are no people who eat nothing but British food. At least no people are still alive. And so, so that is um that's that's a sort of a fictitiously narrow market. Um there's there's sort of a Hollywood version of this where uh the way movies always get pitched is, you know, okay, it's like a college football star, you know, uh joins an elite group of hackers to um to catch the shark that killed his friend. Um sorry. And so that's now that is a movie that has not yet been made. But um but but the question is is is

9:12 that the right category or is the correct category it's just another movie in which case you know there are lots of those. It's super competitive incredibly hard to make money. No one ever makes money in Hollywood uh doing movies or it's really really hard. And so you always have this question about does the intersection does is it real? Does it make sense? Does it have value? That one should ask. And of course, there are startup versions of this where you and the the sort of the bad really bad versions. You just take a whole series of buzzwords sharing mobile social apps. You combine them and you have some kind of uh narrative. And whether or not that's a real business or not uh is is uh um is it's generally a bad sign. So it's it's almost this pattern recognition. When you have this rhetoric of this sort of intersections,

9:58 um it it generally does not work. The something of somewhere is really mostly just the nothing of nowhere. And it's like the Stanford of North Dakota. Uh one of a kind, but it's not Stanford. Um so let's look at the opposite. The opposite lie is um if you are uh let's say uh the uh the search uh company that's down the street from here and has about a happy 66% market share um and uh is you know is completely dominant in the search market. Um Google has not almost never describes itself as a search engine these days. Um and instead it uh it describes itself in all these different ways. So it sometimes says it's an advertising company. So if it

10:44 was search, you'd say, "Wow, this it's like it's it's it has this huge market share that's really really crazy. It's it's like a incredible monopoly. It's much bigger than it's much a much more robust monopoly than Microsoft ever had in the '90s. Maybe that's why it's making so much money." Um but if you uh if you say it's an advertising market, you could say well there's search advertising is 17 billion and that's part of uh online advertising which is much bigger and then you know all US advertising is bigger and then by the time you get to global advertising that's close to 500 billion and so you're talking about three and a half%. So, um, a tiny part of, uh, of this much larger market. Um, or, uh, if you don't

11:30 want to be an advertising company, you can always say that you're a technology company. Um, and so, um, sorry, let me see. Um, and so the and and so, um, and and the technology market is something like a 1 trillion dollar market. And uh the narrative that you tell as Google in the in the technology market is um well we're competing with all the car companies with our self-driving cars. We're competing with Apple on TVs and iPhones. Uh we're competing with Facebook. We're competing with Microsoft on um on office products. We're competing with Amazon on cloud services. And so we are in this giant technology market where there's competition in every direction uh you

12:16 you look. And uh no, we're not the monopoly the government's looking for and we should not get regulated in any way whatsoever. And so I think one has to always be super aware that there are these uh these very powerful incentives to uh to distort the nature of these markets one way or or the other. So um you know the the the evidence of narrow markets in the uh in the tech industry is um is if you basically just uh if you look at sort of the some of the big tech companies Apple, Google, Microsoft, Amazon um they just um they've just been building up cash for um year after year and you have these incredibly high profit margins. And I would I would say that the the one of

13:01 the reasons the tech industry in the US has been uh has been so successful financially is because it's it's prone to creating all these monopoly- like businesses. And that's that's um and it's reflected uh by the fact that these companies just accumulate so much cash they don't even know what what to do with it beyond a certain point. Um and so so let me say um let me say a few things about uh about how to how to build a monopoly. And I think uh I think the one of the sort of very counterintuitive ideas that comes out of this monopoly uh thread is that um you want to go after small markets. If you're a startup um you know you want to get to monopoly,

13:48 you're starting a new company, you want to get to monopoly. Um, monopoly is you have a large share of a market. How do you get to a large share of a market? You start with a really small market and you take over that whole market and then uh and then over time you find ways to expand that market in in concentric circles. And uh the thing that's always a big mistake is going after a giant market on uh on day one because that's typically evidence that um that you somehow haven't define the categories correctly that and it's it normally means that there's going to be too much competition in one way or another. And so I think almost all the successful companies uh in Silicon Valley had some model of starting with small markets and expanding. And you know, if you take

14:36 Amazon, you start with you start with, you know, just um a bookstore. We have all the books in the world. So it's it's a it's a it's a better bookstore than anybody else has in the world when it starts in the '9s. It's online. There's things you can do you can't do before. And then you gradually expand into all sorts of different forms of e-commerce and other things beyond that. um you know, eBay, you start with Pez dispensers, you move on to Beanie Babies, and eventually, uh it's it's all these different um auctions for all these sorts of different goods. Um and, uh and what was very counterintuitive about what's very counterintuitive about many of these companies is they often start with markets that are so small that people don't think um they don't think that they're uh valuable at all

15:22 when when you get started. Um the the PayPal version of this was uh was you know we started with uh with power sellers on eBay which was about 20,000 people. When when we first saw this happening in December of 99 January 2000 right after we launched uh there was a sense that uh that these were all um it was such a small market. It was terrible. We thought these were terrible customers to have. It's just people selling junk on the internet. Why in the world do we want to be going after this market? But um but you you know you there was a way to get a product that was much better for everybody in that market. You could um and we got to something like 25 30% you know market penetration in two or three months and you got some lock in you got brand recognition and you're able to to build

16:09 the business from there. So um so I always think these um these these very small markets are are quite underrated. Uh the Facebook version of this I always give is that uh you know the initial market at Facebook was 10,000 people at Harvard. It went from 0 to 60% market share in 10 days. That was a very auspicious start. Um the way this gets analyzed in business schools is always um that's ridiculous. It's such a small market it can't have any value at all. And so I think the business school analysis of Facebook early on or of uh PayPal early on or of eBay early on is that the markets were perhaps so small as to have uh almost no value. Uh and they they would have had little value had they stayed small but it turned out there were ways to then grow them concentrically and that's what made them

16:56 uh that's what made them so valuable. Um, now I think the opposite version of this is always where you have super big markets and um, and I there's so much so many different things that went wrong with all the clean tech companies in the last decade, but uh, but one one theme that ran through almost all of them was they all started with massive markets and every clean tech PowerPoint presentation that one saw in the years 2005 to 2008, which was sort of the clean tech bubble in in Silicon Valley, started with we're in the energy market. We're in a market that's measured in hundreds of billions or trillions of dollars and um and then you know once you're sort of a a minnow in a vast ocean um that's not a good place to be. That means that you have tons of

17:42 competitors and you don't even know who all the competitors are. And so you want to be, you know, you want to be a one-of-a-kind company where it's the only one in a small ecosystem. You don't want to be the fourth online pet food company. You don't want to be the 10th thin film solar panel company. You don't want to be the hundth restaurant in PaloAlto. Um, you know, restaurant industry is a trillion dollar industry. So, if you do a market size analysis, you'd include restaurants are a fantastic business to go into. And it's often large markets, large existing markets typically mean that you have uh tons of competition, very very hard to uh to differentiate. So the first very counterintuitive intu uh idea is is to go after small markets often markets that are so small

18:27 people don't even notice them. They don't think they make sense. That's where you get a foothold. And then um and then if those markets are able to expand, you can uh scale into a big monopoly business. um you know um a second uh sort of there's sort of several different uh characteristics of these monopoly businesses um that I like to um focus on and there's probably no no sort of single formula to it and I I always think that uh that in technology there's always a sense that you know the history of technology is such that every every moment happens only once and so you know the next Mark Zuckerberg won't build a social network the next uh uh the next Larry Page won't be building a search engine, the next uh Bill Gates won't be building an operating system. And if

19:12 you're copying these people, you're not learning from them. But it's it's and so um there is always um these very unique businesses that are doing something that's not been done before end up um end up having the potential to be a monopoly. If you're, you know, the the the opening the opening line in um Anna Corin is that all happy companies, sorry, all happy families, all happy families are alike. All unhappy families are unhappy in their own special way. And 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 fail to escape the essential sameness that is competition. And so so one one sort of characteristic of a monopoly technology

19:58 company is some sort of proprietary technology. Um, my sort of crazy somewhat arbitrary rule of thumb is you want to have a technology that's an order of magnitude better than the next best thing. So, Amazon had over 10 times as many books. I mean, it's maybe not that high-tech, but you figured out a way to sell 10 times as many books in an efficient online way. You know, PayPal, the alternative for PayPal was using um was using uh uh checks to uh send money on eBay. Took seven to 10 days to clear. PayPal could do it more than 10 times as fast. So you want to have some sort of very uh very powerful improvement in some um on in some order maybe an order of magnitude improvement on some key dimension. Um of course you know if you if you actually come with something

20:43 totally new um it's it's it's just like an infinite improvement. So I would say the the iPhone was the first smartphone that worked. And so that's you know that's like maybe not maybe not infinite but it's sort of definitely an order of magnitude or more of an improvement. So I think uh the the technology is designed to give you a massive delta over over the next the next best thing. I think um I think there often are network effects that can kick in that uh really help. The thing that's very um and these these lead to monopolies over time. The thing that's very tricky about network effects is uh they're often uh they're often very hard to get started. And so um so even though everyone understands how valuable they are, uh there's always this incredibly tricky

21:29 question. Why is it valuable to the first person who's doing something? Um economies of scale, uh if you have something that with very high fixed costs, very low marginal costs, uh that's typically a monopoly like business. And then um then there's this thing uh of of branding uh which is sort of like just uh this idea that gets lodged in people's brains. I I never quite understand how branding works. Uh so I never invest in companies where it's just about branding. But it is I think a real phenomenon that uh that creates uh that creates real value. I think one of the things um and I'm going to come back to this a little bit towards the end, but one of the things that's very striking is that software businesses are often um are for some reason uh very good at some of these

22:14 things. They're especially good at the economies of scale part because the marginal cost of software is zero. And so if you get something that works in software, um it's often significantly better than the existing solution and then you have these tremendous economies of scale and you can scale fairly quickly. So even if the market starts small um you can grow your business quickly enough to uh stay um stay at the same size as the growing market and uh and maintain the sort of monopoly uh power. Now the critical thing about these monopolies is um is it's it's not enough to have a monopoly for just a moment. The critical thing is to have one that lasts over time. Um and so you know in Silicon Valley is always this sort of idea that you want to be the

23:00 first mover. And I I always think it's it's in some ways um the better framing is you want to be the last mover. You want to be the last company in a category. Those are the ones that are really valuable. Microsoft was the last operating system at least for many decades. Uh Google is the last search engine. Facebook will be valuable if it turns out to be the last social networking site. And um and one way to one way to think of this uh last mover uh value is this idea that most of the value in these companies exists far in the future. Um if you do sort of a discounted cash flow analysis of a business, you look at you have sort of all these profit streams. You have a growth rate. the growth rate's much higher than the discount rate and so most of the value exists far in the

23:45 future. I did I did this exercise at PayPal in March of 2001. We had been in business for about 27 months and um and we sort of had you know the growth rate was 100% a year. We were discounting future cash flows by about 30%. And it turned out that about 3/4 of the value of the business as of 2001 came from cash flows in years 2011 and beyond. And um and whenever you do the math on any of these tech companies, you get to an answer that's something like that. So if you are trying to analyze any of the tech companies in Silicon Valley, Airbnb, Twitter, uh Facebook, um any emerging internet companies, all the ones in Y Combinator, um the math tells you that 3/4 80 85% of

24:31 the value is coming from cash flows in years 2024 and beyond. It's very very far in the future. And uh and so one of the things that uh we always overvalue in Silicon Valley is growth rates and we undervalue durability because uh growth is something you can measure in the here and now and you can always track that very precisely. Um the question of whether a company is still going to be around a decade from now that's actually what what dominates the value equation and that sort of is a much more uh qualitative sort of a thing. And so if if we um if we went back to this idea of these characteristics of monopoly uh proprietary technology, network effects, economies of scale, um um you can think of these these characteristics as ones

25:16 that exist at a moment in time where you capture a market and take it over. But you also want to think about are these things going to last over time? And so there's a time dimension to all these characteristics. So network effects often have a great time element where as the network scales, the network effects actually get more robust. And so if you have a network effect business, that's often one that uh um can become a um an a bigger and stronger monopoly over time. Uh proprietary technology is always a little bit of a tricky one. So you want something that's order of magnitude better than uh the state-of-the-art in the world today. And that's how you get people's attention. That's how you initially break through. But then um you don't want to be superseded by somebody else. And so there are all these areas of innovation

26:01 where there was tremendous innovation but no one made any money. So uh you know disc drive manufacturing in the 1980s um you could imp you could do a better dis build a better disc drive than anybody else. You could take over the whole world and two years later someone else would come along and replace yours and in the course of 15 years you got vastly improved disc drives. So it had great benefit to consumers but um it didn't actually help the people who started these companies. And so there's always this uh question about having a huge breakthrough in technology but then also being able to say explain why uh yours will be the last breakthrough uh or at least the last breakthrough for a long time or where you make a breakthrough and then you can keep improving on it at a quick enough pace that no one can ever catch

26:48 up. So if you have a structure of um a structure of the future where there's a lot of innovation and other people will come up with new things in the thing you're working on um that's great for society. It's um it's actually not that good for your business typically. Um and then um economies of scale uh we already talked about. So so I think anyway so I think this last mover thing is is very critical. I'm always tempted, you know, I don't want to overdo the chess analogies, but you know, the first mover in chess is someone who plays white. White is about a one-third of a pawn advantage. So there's a small advantage to uh going first. You want to be the last mover um who who wins the game. And so there's always the Capablanca world champion uh uh chess champion Capablanca line. You must begin by studying the

27:34 endgame. And and I do think that's um why I wouldn't say that's the only thing you should study. I think this uh the sort of perspective of asking these questions, why will this still be the leading company 10, 15, 20 years from now is a uh is a really critical one to to try to think through. Let me um let me sort of uh I want to sort of go in two slightly other directions with this monopoly versus competition idea. And I think um so I think this is the the central idea in my mind for for business for starting business for thinking about them and u and there are some some very um interesting perspectives I think it gives on the whole you know on the whole history of innovation in technology and science because um you know we've we've

28:19 lived through um we've lived through u you know 250 300 years of incredible technological progress in you know many many different domains uh you know steam engine to railways to telephones refrigeration household appliances, um you know the computer revolution, aviation, all sorts of different areas of technological innovation and then there's sort of analogous thing that one can say about science where uh we've lived through centuries of of enormous amounts of innovation in in in science as well and um and the the thing that I think um people always miss when they think about these things is um is that

29:04 um because X and Y are independent variables um some of these things can be extremely valuable innovations but the people who invent them who come up with them do not get rewarded for this and uh and certainly if you go back to um you need to create X dollars in value you capture Y% of X I would suggest that the history of science has generally been one where Y is 0% % across the board. The scientists never make any money. Um they're always deluded into thinking that they live in a just universe that will reward them for their work and for their inventions. And this is probably the fundamental delusion that uh that scientists tend to suffer from in our in our society. Um and and even in technology there are sort of many different areas of technology where um

29:52 where there were great innovations that created tremendous value for society but uh but people uh did not uh did not actually capture uh that much of the of the value. And so I think there is this sort of whole uh history of um science and technology that can be told from the perspective of how much value was actually captured and um and certainly there are entire sectors where people didn't capture anything. So you you're the smartest physicist of the 20th century. You come up with special relativity. You come up with general relativity. You don't get to be a billionaire. You don't even get to be a millionaire. Um it just it just somehow doesn't work that way. Um the railroads incredibly valuable. Most of them just

30:37 went bankrupt because it was too much competition. Um Wright brothers um you fly the first plane, you don't make any money. And so I think there is sort of a structure to these industries that's uh that's very important. Um and I think the uh the thing that's actually rare are the success cases. most the so it's actually when you really think about the history in this in this 250ear sweep um it's unus why y is almost always 0% it's always zero in science it's almost always in in technology and so it's very rare where people made money you know the early uh the late uh 18th early 19th century the first industrial revolution was the textile mills you had the steam engine you sort of automated things and you had these relentless improvements that people improved efficiency of textile factories of manufacturing

31:22 generally at clip of 5 to 7% every year, year after year, decade after decade. You had 60 70 years of tremendous improvement from 1780 to 1850. Um, but even in 1850, most of the wealth in Britain was still held by the landed aristocracy. Uh, the workers didn't, you know, the workers didn't make that much. The capitalists didn't make that much either. It was all competed away. There were hundreds of people running textile factories. it was an industry that just uh um the structure of the competition prevented people uh from from making any money. Um and so I think there are in my mind there are probably are only two broad categories in the entire history of the last 250 years where people have actually uh come up with new things and

32:08 made money doing so. Um, one is uh these sort of vertically integrated complex monopolies which people uh did build in the second industrial revolution at the end of the 19th and start of the 20th century. And so this was like Ford, it was the vertically integrated oil companies like Standard Oil. Um, and what these uh vertically integrated monopolies uh typically required was this very complex coordination. You got a lot of pieces to fit together in just the right way. Uh when you assembled it, you had a a tremendous advantage. This is actually uh done surprisingly little today. And so I think this is sort of a business form that um when people can pull it off is very valuable. It's typically fairly capital intensive. Uh we live sort of in a in a in a culture where it's very hard to get people to

32:55 buy into anything that's uh super complicated and takes very long to build. Uh but I you know when I sort of think about my colleague Elon Musk from PayPal success with Tesla and SpaceX uh I think the key to these companies was the complex vertically integrated monopoly structure they had. So if you sort of look at Tesla or SpaceX if you ask you know was there sort of a single breakthrough? I mean they certainly innovated on a lot of dimensions. I don't think there was a single 10x breakthrough, you know, in battery storage or, you know, they may be working on some things on rocketry, but they hadn't there was no sort of single massive breakthrough, but was really impressive was integrating all these pieces together and um and doing it in a way that was more vertically integrated

33:41 than most of their competitors. So Tesla, you also integrated the car distributors so they wouldn't uh steal all the money as has happened with the rest of the car industry in the US or SpaceX. um you basically uh pulled in all the subcontractors um uh where most of the large uh aerospace companies have single source subcontractors that are able to sort of charge uh monopoly profits and make it very hard for the integrated aerospace companies to make money. Um and so uh vertical integration I think is sort of a a very underexplored modality of of technological progress that people uh would uh would do well to look at more. And then I think there is there is something about software itself that's very very powerful. Um software has these incredible economies of scale

34:27 these low marginal costs and there is something about the world of bits as opposed to the world of atoms where you can often get very fast adoption and and the fast adoption is critical to capturing and taking over markets because even if you have a small market if the adoption rate is too slow there'll be enough time for other people to enter that market and compete with you. Whereas if you have a small to midsize market and have a fast adoption rate, you can uh take over this market. And so and so I think this is one of the reasons Silicon Valley has done so well and why software has been this phenomenal industry. And what I what I would suggest uh what I want to leave you with is there are sort of these different rationalizations people give for why certain things work and why certain things don't work. And I think

35:12 these rationalizations always obscure this question of um creating X dollars in value and capturing Y% of X. So the science rationalization we're always told is that the scientists aren't interested in making money. They're doing it for charitable reasons and that you're not a good scientist if you're motivated by money. And I'm not even saying people should always be motivated by money or something like this. But I I think we should we should be a little bit more critical of this as a rationalization. We should ask is this a rationalization um uh to obscure the fact that y equals 0% and the scientists are operating in this uh in this sort of world where all the uh all the innovation is effectively competed away and they can't capture any of it directly. And then the uh the software

35:57 distortion that often happens is because people are making such vast fortunes in software we infer that this is the most valuable thing um in the world being done full stop. And so if people at Twitter make uh billions of dollars, it must be that Twitter is worth far more than anything Einstein did. Um and um and uh and what that sort of rationalization tends to obscure is again that X and Y are independent variables and there are these businesses where you capture a lot of X and there others where you don't. And so uh and so I do think um I do think the history of innovation has been this uh this history where uh the the the the microeconomics the structure of these industries has mattered a tremendous amount. And when um and um and and and there is sort of

36:43 this this story where some people have made vast fortunes because they were in industries with the right structure and other people uh made uh nothing at all because um because they were in these sort of very competitive things. And we shouldn't just rationalize that way. I think it's worth understanding this better. And then finally, let me come back to this this uh this sort of overarching theme for this talk. This competition is for losers idea which um is always this provocative way to to title things because we always think of the losers as the people who are not good at competing. We think of the losers as the people who are um slow on the sports on the track team in high school or who do a little bit less well on the standardized tests um and don't get into the right schools. And so we

37:29 always think of losers as people who can't compete. Um, and I want us to really rethink and and revalue this and consider whether it's possible that competition itself um is off that we we we're sort of it's not just the case that we don't understand this monopoly competition dichotomy intellectually. So I've sort of been talking about why why you wouldn't understand it intellectually because um people lie about it. It's distorted. We have all these uh the history of innovation rationalizes what's happened in all these very very strange ways. But I think it's more than just an intellectual blind spot. I think it's also a psychological blind spot where we find ourselves, you know, very very attracted to competition in in one form or another. Um, we find it reassuring if other people do things. The word ape

38:14 already in the time of Shakespeare meant both primate and imitate. Uh, and there is something about human nature that's deeply mimedic, imitative, apeike, sheeplike, lemmingike, herdlike. Um and it's this very very problematic uh thing that uh we need to always think through and and try to overcome and and there is always this question about um competition um as as a form of validation where we we go for things that lots of other people are going for and um it's not that there is wisdom in crowds. It's not when lots of people are trying to do something that that's proof of uh it being valuable. I think it's when lots of people are trying to do something that is often um that is often proof of insanity. There 20,000 people a year who move to Los Angeles to become movie stars. About 20 of them make it.

39:00 Um I think the Olympics are a little bit better because you have a you know um you can sort of figure out pretty quickly whether you're good or not. So it's there's a little bit less of a dead weight loss to society. um you know um um you know you're you're the sort of educational experience at a place uh the the pre-stanford educational experience um there's always sort of a non-competitive characterization where I think most of the people in this room had machine guns and they were competing with people with bows and arrows so um it wasn't exactly a parallel competition when you were in junior high school and high school um there's always a question does the tournament make sense as you keep going and this is uh and so um there is always this question if people go on to grad school or post uh post-doal educations does the intensity of the competition really make sense? There's the uh the you know classic uh

39:47 Henry Kissinger line that uh um describing his fellow faculty at at Harvard that the uh um the battles were so ferocious because the stakes were so small describing sort of academia and um and and you sort of think on one level this is a description of insanity you know why would people fight like crazy when the stakes are so small but it's also I think simply a function of the logic of the situation when it's imp really hard to differentiate yourself from other people when the differences are when the objective differences really are small, then uh you have to uh compete ferociously to maintain uh a difference of one sort uh or another um that's often more imaginary than real. There's always sort of the personal uh version of this that I I tell where um you know I was sort of hyper

40:33 hyperttracted. I you know my eighth grade junior high school yearbook one of my friends wrote in you know I know you'll get into Stanford in four years as as a sophomore. sort of went into going to Stanford four years later uh at the end of high school. Uh went to Stanford Law School. Uh you know, ended up um at a big law firm in uh New York uh where from the outside everybody wanted to get in, on the inside everybody wanted to leave. Um and and you had um and it was this very strange dynamic where after I uh sort of realized this was maybe not the best idea. Um, and I left after seven months and three days. You know, one of the people down the hall from me, uh, told me, um, it's really reassuring to see you leave, Peter. I had no idea that it was possible to escape from Alcatraz, which of course all you had to do was go out the front door and not come back.

41:19 But, um, but so much of people's identities got wrapped up in um, in winning uh, these competitions that they somehow lost sight of what was important, what was valuable. Uh, you know, competition does make you better at whatever it is that you're competing on because when you're competing, you're um comparing yourself with the people around you. You're figuring out how do I beat the people next to me? How do I do somewhat better at whatever it is they're doing? And you will get better at that thing. I'm not I'm not questioning that. I'm not denying that. But um but it often comes at this tremendous price that uh you stop asking some bigger questions about what's truly important and truly valuable. And so I would I would say that uh don't always go through the tiny little door that everyone's trying to rush through. Maybe go around the corner and go through the

42:05 vast gate that no one's taking. Thank you very much. I guess it's time for you to take a few questions or question. >> Oh yeah. Uh people want to take I'll take a few questions since we have a few minutes time. Yeah. Go ahead. Um, since as you mentioned earlier, often monopolies and over competition often look similar because of the narratives people tell or the narratives we tell ourselves. Do you have any ways to easily uh determine the difference when you're looking at an idea or evaluating your own idea? >> Well, I I'd say the question I'm I always try to focus on is what is the actual market? So, not what's the narrative of the market because you can always tell a fictional story about a market that's much bigger or much smaller, but what is the what is the

42:52 real objective market? So, it's always Yeah. You always try to figure it out and you realize people have incentives to powerfully distort these things. >> Yeah. >> So which of the aspects of monopolies that you mentioned would you say that software companies like Google or Excel? >> Um well they have uh they have network effects with the the ad network. They had proprietary technology that gave them the initial lead because they had the the page rank algorithm which was uh sort of an order of magnitude better than any other search search engine. you have economies of scale uh because of the need to store you know all these different uh sites and at this point you have brands so Google has all four maybe maybe the proprietary technology is somewhat weaker at this point but definitely it had all four and maybe three and a half out of four now

43:37 >> how does this apply to Palanteer and second what's >> the second is what >> what's with the iPhone >> oh this is that's that's a that's a sort of a set of companies that are doing different copycat payment systems on on mobile phones or square, there's PayPal, there sort of they have their just they just have sort of different shapes. That's how they differentiate themselves. One is a triangle, one is a square. Um and so, you know, um maybe at some point the apes will run out of shapes or something like that. But um but I think um no, Palanteer, we we started with a focus on on um the um intelligence community, which is small submarket. um you had a proprietary technology that used a very very different approach um uh where it was focused on the human um computer uh synthesis rather than the uh uh sub

44:24 substitution which I think is the dominant paradigm. So there's a whole set of things I would say on the on the market approach and the and the proprietary technology. Uh yes. >> Um we have design thinking methodology and uh lean uh startup thinking um which is used to mitigate risk by not creating things that people don't want. But how do young innovators uh have inspiration to create complex systems that last through time? Can you repeat the question? >> Yeah. So the question is um what I think about lean startups uh um iterative thinking where you get uh feedback from people versus uh complexity that may not work. So I I am personally quite skeptical of all the uh lean startup methodology. I think the the the really great companies um did something that

45:10 was sort of somewhat more of a quantum improvement that really differentiated them from everybody else. Um they did they typically did not do massive you know customer surveys. The people who ran these companies uh sometimes not always suffered from mild forms of asberers. So they were not actually that influenced, not that easily deterred by what other people thought or told them to do. Um, so I I do think we're we're way too focused on um iteration as a modality and not enough on trying to um have um you know um a virtual ESP link with the public and figuring it out ourselves. Um I I would say that uh let me see. Um I I would say that uh the um I I'm not quite the risk question I think is always a very tricky one because there are um you know there

45:58 there it's it's not it's often I think it's often the case that you don't have enough time to really mitigate risks. If you if you're going to take enough time to figure out what people want um you often will have missed the boat by then. Um and um and then of course there's always the risk of of doing something that's uh that's not that uh significant or meaningful. So you know you you could say a track in um in law school is a lowrisk track from one perspective. It may still be a very high-risisk track in the sense that maybe you not um have a high risk of not doing something meaningful with your life. So we have to think about risk in these uh in these very complicated way. I think risk is sort of this very uh complicated concept. Yes. talk about the last move advantage but then doesn't that imply that there's already competition to

46:44 begin with chess piece on the chess board >> um yeah so there's always this uh terminology thing so I would I would say that uh there are uh there are categories in which people sort of are bundled together I would say the monopoly businesses were in in effect they they really were a big first mover in some sense you could say you could say Google was not the first search engine there were other search engines before but on one dimension they were dramatically better than everybody else. So they were the first one with page rank with with sort of a automated approach. Um Facebook was not the first uh social networking site. My friend Reed Hoffman started one in 1997. They called it social net. So they already had the name social networking uh in the name of their company 7 years before Facebook. Uh their idea was that it was

47:31 going to be this virtual cyberspace where I'd be a dog and you'd be a cat and we'd have all these different rules about how we'd interact with each other in this virtual alternate reality. Facebook was the first one to get real identity. So it was so I'd say I hope Facebook will be the last social networking site. It was the first one in a very important dimension. People often would not think of it as the first because they'd sort of lump all these things together. >> How about one more question? >> Okay, one more question. Let's take one here. >> Uh if you're theoretically someone who uh worked at Goldman Sachs out of college and left at 6 months and is now studying computer science at Stanford, uh how would you recommend rethinking uh sort of that competitive Um, you know, I don't I don't have a I don't have a great um I'm not great at

48:18 the psychotherapy stuff, so I don't I don't quite know how to I don't quite know how to uh how to solve this. That there are these um you know, there are these very odd studies they've done on people who go to um business school. There's one they've done at Harvard Business School where um it's sort of the anti-Aser um personality where you have people who are super extroverted uh generally have low convictions uh few ideas and you have sort of a hot house environment. You put all these people in for two years and at the end of it uh they systematically end up the largest cohort systematically ends up doing the wrong thing. They try to catch the last wave you know uh 1989 everyone at Harvard tried to work for Mike Milin. It was one or two years before he went to jail for all the junk bond stuff. They were never interested in Silicon Valley or tech except for 992000 when they timed the

49:03 dotcom bubble peaking perfectly. Um they did uh and then you know 05 to07 was housing uh private equity stuff like this. So so I do think um I do think this uh tendency for us to see competition as validation is um is very deep. um I don't think there's some any sort of easy psychological formula to uh to avoid it. So I don't I don't quite know how to uh what sort of therapy to to recommend. But um but my my my first my first starting point which is only like it's maybe 10% of the way is to never underestimate how big a problem it is. We always think this is something that afflicts other people. So it's easy for me to point to people in business schools or people at Harvard or people on Wall Street. I think it actually does afflict all of us to a very profound

49:49 degree. We always think of advertising as things that work on other people. How who are all these stupid people who fall for all those ads on TV? They obviously work to some extent and they work uh to a disturbing extent on all of us and it's something we we all should work to overcome. >> Thank you very much.