Peter Thiel joined James Altucher to talk about startups, the PayPal mafia, and his book Zero to One. James tells Thiel that the book “blew my mind” in part because of the angle that Thiel approaches the aspect of creation.
“One of the critical things in starting businesses is the need to do something new, fresh, strange. This is the Zero to One ethos.” – Peter Thiel
This means you don’t want to be the 100th online pet food company or the 5,000th restaurant in San Francisco because those are incredibly crowded places to be. And if it’s a crowded place, it’s a place with competition and placed of competition don’t offer much capitalism. Thiel calls competition and capitalism antonyms because a business can’t accumulate capital while it competes. Instead Thiel suggests that we look at new things that haven’t been discovered yet. For example, “we’ve been in a world where there’s innovation in bits but not atoms” he tells James. “If you think of a cell as a computer that could be programmed” he goes on, you can begin to think about new areas of development.
This sort of out-of-the-box thinking is hard though because we’re humans. “Imitation is very endemic to the human condition” Thiel tells James and he mentions that there’s probably a reason that there is a non-insignificant number of Silicon Valley entrepreneurs who have Aspergers.
Thiel also advocates that people develop a contrarian mindset, that they zig when other zag. He gives the example in the book that most people think more good minds will make better decisions, but sometimes that’s not the case.
“If you look at a company with a large board, don’t think, ‘Look how many great people are committed this organization. It must be extremely well run.’ Actually, a huge board will exercise no effective oversight at all.” – Peter Thiel
Thiel hasn’t always thought this way. He tells James he had a quarter-life crises when he was working at New York law firm but quit after less than a year there. “From the outside everyone wanted to get in” Thiel says, “but from the insides people wanted to get out.” He left and in 1998 co-founded PayPal. “The lesson at PayPal was that you can build a great company, but it’s hard. It is not easy. It is not impossible.” Thiel tells James, “I think when people come out of super successful companies like a Google or a Microsoft, they’ve often experienced business as too easy.” Some discomfort can be a good thing for us. Mirny Kinrys (episode #48) told James that this exists in the world of dating too, calling it “pretty boy syndrome. ”You know, when you are pretty when you’re younger, you never really have to think about having a personality because things just came to you really easily.” Kevin Kelly (episode #96) told James the same thing, but about money rather than looks, “The lack of money is often an asset because it forces you to innovate. People with money will try to buy a solution, but because you don’t have money, you are forced to invent a solution.”
PayPal was in part successful because of the pre-history, most notably, the number of early employees that built bombs. Not malicious bombs, but experimental ones. PayPal was like the Lost Boys of Peter Pan arriving in London, only they’re really smart and want to do something their way – a better way. To Thiel this mattered a lot because the pre-history people have together is important. In Zero to One he writes, “everyone at your company should be different in the same way.” You want it to be like an ecosystem, closer to cult than consultant.
There were all people Thiel wanted to spend time with and James Manos (episode #39) told James much the same thing, arguing that if you’re going to spend 8, 10, 12 hours a day with these people and collaborate to create something – you should enjoy their company.
Toward the middle of the interview James asks about Facebook and Thiel says that the company fit a profile he likes, companies undervalued because they are underused by the investor class. Facebook was to investors like microbrews were to wine collectors – quaint and irrelevant. It fit the Zero to One ethos, something new. But! You say. Weren’t there other social networks. Yes, Thiel says, but Facebook was the first one tied to your real identity. It was so much better than anything else out there, it had major stage one rockets.
Let’s make this analogy more fitting and call them “Falcon Heavy Stage One Rockets” like the SpaceX team does (Thiel invested in them). Just like a spacecraft needs stage one rockets to escape gravity, our ideas need stage one capabilities to be successful. James terms this 10X thinking, saying that things need to be ten-times better than what currently exists. There’s a good reason for this analogy, we are bad at thinking the validity of something once we get in that thing. Stephen Dubner (episode #20) calls this ‘Go Fever’ in honor of NASA, an organization that can’t reel in a new project when maybe it should be.
As Daniel Kahneman found out, we are quite bad at predicting how our group will fare, even if we have a pair of world famous psychologists who study this kind of thing in our group. As it goes, Kahneman and his partner, Amos Tversky began to develop a new curriculum for judgement and decision making to be taught in high school. How hard could this be? One day while working on the project, Kahneman thought he should test out the group’s judgement and decision making as it related to their task at hand, creating the curriculum. He told everyone to estimate how long they thought the project would take and the estimates were “narrowly centered around two years.” Okay, this still sounds good. But (and you knew there was a but coming), Kahneman was doing research about decision making and our biases towards it. He wondered, was his own group biased as to how well they worked?
He turned to a senior member of the group and asked how long these sorts of projects usually took, “I cannot think of any group that finished in less than seven years” the man said. Seven? And about 40% fail. And their group was slightly below average when it came to overall skills and resources. This planning fallacy means that we tend to be most excited at the start, think of things in rosy terms, and overestimate how much we can do and underestimate the work to be done. If though, we think in 10X terms, then we can escape some of that. Creating a project that is 10X better means that we’ll only begin things that can sustain us through those challenges.
Facebook didn’t have this problem because Zuckerberg had built a good set of stage one ideas but had more to come. Thiel tells James of the story of the board meeting to discuss Yahoo!’s $1B offer. “I really don’t know what I’d do with the money. I’d probably start another social networking site, but I kind of like the one I have.” Thiel recounts Zuckerberg as saying. Sam Shank (episode #78) mentions the same thing in his interview with James, saying that he would turn down the money too because he likes what he’s got.
Another thing in Facebook’s favor was that it satisfied Thiel’s Monopoly Rules. Going back to his competition and capitalism dichotomy, you want a monopoly. Thiel writes, “All happy companies are different: each on earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”
PayPal started small by focusing on eBay power-sellers, Amazon focused on books, Facebook was only at Harvard. Thiel tells James that “if you just have one of these you can have a great business.”
James chimes in with a good name for this rule, the “Chinese refrigerator rule.”
The pair briefly talk about Uber, which Thiel says may be overvalued for the same reason Facebook was undervalued – “the investor class is likely to overvalue Uber.” But that’s not to say that because it’s current valuation (as of this draft in March of 2015) $41B is wrong.
The situation with Uber is tricky because it’s a place in the Land of Small Numbers. When we travel from place to place there, we can’t be sure of the local rules until we arrive and spend some time there. We factor in ideas like, tech startups sometimes go bust, and didn’t I hear a negative news story about Uber. Then we look at relative anchors. Tesla is valued at $26B, and Michelin $17B. Does Uber seem that valuable? What if we compare a different set of market caps, like Facebook at $263B? We factor all this in, but almost none of it matters. Uber depends on these anchors as much as a family in Chicago depends on business Miami. Both are companies/cities but their relation is almost none. Thiel cautions us to not think Uber is overvalued because it’s worth more than other companies but because it’s overvalued because of what it’s future potential really is.
The next fifteen minutes of the interview dive into Thiel’s specific thoughts on a handful of ideas.
- He thinks there’s still a hangover from the 1990’s technology bubble.
- He likes investing in venture capital because it’s not cash or credit.
- Regulatory headwinds are not something you should underestimate.
- Moore’s Law is real (except when it isn’t*).
- Opaque companies are better because they might have a good secret.
And here we jump right back into a rich idea – secrets. In the book Thiel writes, “every great business is built around a secret that’s hidden from the outside.” But being open to finding secrets is hard now.
In Thunderstruck, Erik Larson writes about the Society for Psychical Research. Established in 1882, the group aimed:
“to bring scientific scrutiny to ghosts, séances, telepathy, and other paranormal events, or as the society stated in each issue of its Journal, “to examine without prejudice or prepossession and in a scientific spirit, those faculties of man, real or supposed, which appear to be inexplicable on any generally recognized hypothesis.” The society’s constitution stated that membership did not imply belief in “physical forces other than those recognized by Physical Science.” That the SPR had a Committee on Haunted Houses deterred no one. Its membership expanded quickly to include sixty university dons and some of the brightest lights of the era, among them John Ruskin, H. G. Wells, William E. Gladstone, Samuel Clemens (better known as Mark Twain), and the Rev. C. L. Dodgson (with the equally prominent pen name Lewis Carroll). The roster also listed Arthur Balfour, a future prime minister of England, and William James, a pioneer in psychology, who by the summer of 1894 had been named the society’s president.”
And Thiel tells James that finding secretes is a self fulling prophecy, “if you believe there are secrets to find, then you will work at them and be someone who finds them.” You have to be open to finding them, look for them, and – as Dr. Atul Gawande said in his 2005 commencement speech to Harvard Medical School students – “count something.”
“No matter what you ultimately do in medicine— whether you go into purely clinical practice or work in research or business and never touch a patient again—a doctor should be a scientist in his or her world…It doesn’t really matter what you count. You don’t need a research grant. The only requirement is that what you count should be interesting to you…If you count something interesting to you, I tell you: you will find something interesting.”
What you need, Thiel suggests, is something measurable, with a close frontier, and not too conventional. Ask yourself if many people are looking at a single area and not another.
The interview concludes with Thiel telling James that “anything interdisciplinary in our society is quite underrated” and that education pushes us towards “arcane specializations.” But the good part to all this is that “it’s always possible to do something new in our society.”
Thanks for reading. One of those new things is joining our book club. We’re reading So Good They Can’t Ignore You and you can sign up here. The book is about dispelling the myth to follow your passion and instead suggests you “build rare and valuable skills” so that you can find a job with “rare and valuable” features. It’s a good book, a free club, and it starts in April of 2015. If you stumbled onto this post well after than, you can buy that information here.
If I quipped wrongly, quickly edited, or quietly overlooked something, please let me know. @mikedariano.
*Kevin Kelly talked to Tim Ferriss about this idea and had some interesting ideas about what if the things we take for granted as being true, won’t be. Included it that group was Moore’s Law.