I spent 4 hours reading through Blake Master’s notes from Peter Thiel’s startup class.
First, HUGE thanks to Blake for writing such detailed and thoughtful notes. After reading them, I *almost* felt like I was in the class, and I learned a TON in a short period of time.
In the spirit of being more mindful about what I consume & learn, here are some of my biggest takeaways:
1. True innovation is going from 0 to 1, not 1 to n. Google’s search technology was a 0 to 1 problem. They had to create something completely new, with relatively few precedents or comparables. The numerous Groupon clones are solving 1 to n problems, since the core product innovation has been accomplished.
Maybe we focus so much on going from 1 to n because that’s easier to do. There’s little doubt that going from 0 to 1 is qualitatively different, and almost always harder, than copying something n times. And even trying to achieve vertical, 0 to 1 progress presents the challenge of exceptionalism; any founder or inventor doing something new must wonder: am I sane? Or am I crazy?
Anyone on a mission tends to want to go from 0 to 1. You can only do that if you’re surrounded by others to want to go from 0 to 1.
2. Great companies create meaningful value that lasts, and they (ideally) capture a lot of that value.
Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create.
Consider great tech companies. Most have one decisive advantage—such as economies of scale or uniquely low production costs—that make them at least monopoly-esque in some important way. A drug company, for instance, might secure patent protection for a certain drug, thus enabling it to charge more than its costs of production. The really valuable businesses are monopoly businesses. They are the last movers who create value that can be sustained over time instead of being eroded away by competitive forces.
3. Start with a small, or new, market; dominate it; then expand to adjacent markets and grow larger over time
First, you want to find, create, or discover a new market. Second, you monopolize that market. Then you figure out how to expand that monopoly over time.
Markets that are too big are bad for all the reasons discussed above; it’s hard to get a handle on them and they are usually too competitive to make money.
The best kind of business is thus one where you can tell a compelling story about the future. The stories will all be different, but they take the same form: find a small target market, become the best in the world at serving it, take over immediately adjacent markets, widen the aperture of what you’re doing, and capture more and more. Once the operation is quite large, some combination of network effects, technology, scale advantages, or even brand should make it very hard for others to follow. That is the recipe for building valuable businesses.
4. Founders, and founding moments, are crucial to a company’s long-term success
The insight that foundings are crucial is what is behind the Founders Fund name. Founders and founding moments are very important in determining what comes next for a given business. If you focus on the founding and get it right, you have a chance. If you don’t, you’ll be lucky at best, and probably not even that.
The ideal is the combination of high trust people with a structure that provides a high degree of alignment. People trust each other and together create a good culture. But there’s good structure to it, too. People are rowing in the same direction, and not by accident.
5. Power law dynamics and exponential things are more common, and more powerful, than we think. For VCs to make money, a single investment must return the fund. Remember this when you’re pitching!!
If you look at Founders Fund’s 2005 fund, the best investment ended up being worth about as much as all the rest combined. And the investment in the second best company was about as valuable as number three through the rest. This same dynamic generally held true throughout the fund. This is the power law distribution in practice. To a first approximation, a VC portfolio will only make money if your best company investment ends up being worth more than your whole fund.
Despite being rooted in middle school math, exponential thinking is hard. We live in a world where we normally don’t experience anything exponentially. Our general life experience is pretty linear. We vastly underestimate exponential things. If you backtest Founders Fund’s portfolios, one heuristic that’s worked shockingly well is that you should always exercise your pro rata participation rights whenever a smart VC was leading a portfolio company’s up round. Conversely, the test showed that you should never increase your investment on a flat or down round.
6. Distribution is vastly underestimated among startup success factors. Build it and they will not come. CLV > CAC
But for whatever reason, people do not get distribution. They tend to overlook it. It is the single topic whose importance people understand least. Even if you have an incredibly fantastic product, you still have to get it out to people. The engineering bias blinds people to this simple fact. The conventional thinking is that great products sell themselves; if you have great product, it will inevitably reach consumers. But nothing is further from the truth.
It is very likely that one channel is optimal. Most businesses actually get zero distribution channels to work. Poor distribution—not product—is the number one cause of failure. If you can get even a single distribution channel to work, you have great business. If you try for several but don’t nail one, you’re finished.
Distribution isn’t just about getting your product to users. It’s also about selling your company to employees and investors. The familiar anti-distribution theory is: the product is so good it sells itself. That, again, is simply wrong.
7. What’s your secret?
What important truth do very few people agree with you on?
What great company is no one starting?
The focus should be on the secrets that matter: the big secrets that are true.
8. Are you a pessimist or optimist? Do you view the world as determinate or indeterminate? SUCH a powerful framework…
If you believe that the future is fundamentally indeterminate, you would stress diversification. This is true whether you’re optimistic or pessimistic. And indeed, chasing optionality seems to be what most everybody does. People go to junior high and then high school. They do all sorts of activities and join lots of clubs along the way. They basically spend 10 years building a diverse resume. They are preparing for a completely unknowable future. Whatever winds up happening, the diversely prepared can find something in their resume to build on.
In a strange way, China falls squarely in the determinate pessimistic quadrant. It is the opposite of the U.S.’s optimistic indeterminacy.
But the indeterminate future is somehow one in which probability and statistics are the dominant modality for making sense of the world. Bell curves and random walks define what the future is going to look like. The standard pedagogical argument is that high schools should get rid of calculus and replace it with statistics, which is really important and actually useful. There has been a powerful shift toward the idea that statistical ways of thinking are going to drive the future.
9. Great people throughout history have been both extreme insiders and extreme outsiders. Things go great (ie, you’re the King) until they don’t (ie, you get killed). Some analogues with startup founders
The dynamic might work like this. People start out being different. They are nurtured to develop their already somewhat extreme traits. Those traits become more important, and they learn to exaggerate them. Others perceive that inflated importance and exaggerate in turn. The founders thus end up being even more different than they were before. And we cycle and repeat.
And we’ll end with a powerful excerpt from Abe Lincoln:
The question then is, Can that gratification be found in supporting and maintaining an edifice that has been erected by others? Most certainly it cannot. Many great and good men, sufficiently qualified for any task they should undertake, may ever be found whose ambition would aspire to nothing beyond a seat in Congress, a gubernatorial or a presidential chair; but such belong not to the family of the lion or the tribe of the eagle. What! think you these places would satisfy an Alexander, a Caesar, or a Napoleon? Never! Towering genius disdains a beaten path. It seeks regions hitherto unexplored. It sees no distinction in adding story to story upon the monuments of fame erected to the memory of others. It denies that it is glory enough to serve under any chief. It scorns to tread in the footsteps of any predecessor, however illustrious. It thirsts and burns for distinction; and if possible, it will have it, whether at the expense of emancipating slaves or enslaving freemen. Is it unreasonable, then, to expect that some man possessed of the loftiest genius, coupled with ambition sufficient to push it to its utmost stretch, will at some time spring up among us?
Hope you enjoyed these snippets. Read the full notes on Blake’s site.
