A startup must have good answers to seven questions

November 5, 2014

All happy companies are different because they found something unique that gives them a vision and a monopoly of sorts;  all unhappy companies are alike because they’ve failed to escape the essential sameness of competition.”

So says Peter Thiel – business subversive, founder of PayPal, first outside investor in Facebook, one of Silicon Valley’s leading investors, thinkers, and, since finding himself portrayed in the movie The Social Network, celebrities.

In the interview clip below, Mr. Thiel also says that we have “a very powerful but very narrow cone of progress around the world of bits, not so much in the world of atoms.”

The entire Uncommon Knowledge interview – which discusses competition in business, the value of monopolies, and the battle between humans and computers – can be found here.

Explosions of Creativity, a review of Peter Thiel’s Zero to One – Notes on Startups, or How to Build the Future a book based on “careful” notes taken by a student during a course on innovation Thiel taught at Stanford in 2012.

One suspects that the course was more a seminar bull session than a rigorous academic analysis (not that there’s anything wrong with that!) and it does not escape the genre, set forth in the subtitle, of “Notes.” The result is a loose collection of aphorisms and bits of wisdom, not a sustained inquiry.  Nor does the book probe deeply into Thiel’s own experience. There are occasional references to PayPal, but the bloody details of entrepreneuring in one of the most cutthroat eras of business history are omitted…

To Thiel, the only valuable ideas are those that most other people disagree with, and the initial point for successful entrepreneurs must be: “What valuable company is nobody building?” He thinks the dot-com crash taught the wrong lessons: It convinced Silicon Valley to eschew grand visions, avoid plans in favor of opportunistic flexibility, focus on improving on existing products already offered by competitors, and avoid products that need intensive sales efforts.

All of these ideas are wrong. A great startup must have a vision and a plan, it must avoid competition, and it should recognize that if a better mousetrap falls in a forest and no one knows about it, it might as well not exist.

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To have a shot at success, a startup must have good answers to seven questions: Engineering — can you create a breakthrough, not just incremental improvements? He uses the figure that technical improvements must be ten times as good as incumbents to succeed. Timing — is now right? Monopoly — are you starting with a big share of a small market? People — do you have the right team? Distribution — can you deliver the product? Durability — is your market position defensible over time? The secret — have you identified a unique opportunity that others do not see?

The goal is market power, usually based on combinations of technical superiority, network effects, scale economies, and branding.

These are not earth-shaking insights, but it is useful to be reminded of them, because they are regularly ignored. Thiel notes the problem with the wave of green tech that swept over Silicon Valley in the Aughts: The companies lacked good answers not just to one or two of these questions; they had bad answers for all seven.

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