In 2012 venture capitalist Peter Thiel taught a course in his alma matter Stanford about startup, entrepreneurship, and business in general. And among his many students, one in particular, Blake Masters, took very detailed and diligent notes where it then being copied, shared, and became wildly popular among the students.
This book is the polished edition of that concise notes. And it is one of the best business books I’ve ever read.
Thiel’s lessons begin with a simple message: Dominate a small niche and scale up from there. As he explains, “[t]he perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.”
Because, it is easier to dominate a small market than a large market already filled with competing companies. Thiel gave the exaggerated example of the cure for baldness or a drug to safely eliminate the need for sleep, to make the point across. But the message is clear: if we build something valuable that never existed before, the increase in value is theoretically limitless.
However, he also throw some cold water over the common believe that great products sell themselves, as plenty of potentially great inventions were born and died without much fanfare. Thiel commented, “[i]f you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.”
And thus he emphasizes the importance of branding, network effects, utilization of technology, etc, including choosing our market carefully and expanding deliberately within it. Chapter 11 on sales, marketing, and advertising covers this in great detail.
Alternatively, if we cannot come up with something revolutionary, as a start up we can instead radically improve an existing solution. As Thiel remarked, “PayPal, for instance, made buying and selling on eBay at least 10 times better. Instead of mailing a check that would take 7 to 10 days to arrive, PayPal let buyers pay as soon as an auction ended. Sellers received their proceeds right away, and unlike with a check, they knew the funds were good.”
And this book is filled with tactics and examples for these kinds of improvement insights. For example, Thiel mentions about the metrics that he use to set the limits for effective distribution: “The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC). In general, the higher the price of your product, the more you have to spend to make a sale—and the more it makes sense to spend it.”
The book then step forward to the next progress in a start up: the importance of careful scaling and expansion. Thiel says that there are 2 forms of progress, vertical and horizontal. Vertical progress means doing completely new things (like what Richard Branson have done multiple times from records to airlines to beverages etc), while horizontal progress involves copying things that work, which is a more natural progression. As Thiel commented “[t]he most successful ecompanies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.”
The best example for this horizontal progression is Amazon, where they showed how it can be masterfully done, from books to CDs to pretty much everything today. Here’s Thiel again: “Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books. There were millions of books to catalog, but they all had roughly the same shape, they were easy to ship, and some of the most rarely sold books—those least profitable for any retail store to keep in stock—also drew the most enthusiastic customers.”
Moreover, in the book Thiel also writes about his experience as an investor looking at businesses from the outside perspective, with special mention of the pareto principle, where roughly 20% of successful investments (or start-up attempts) will outperform the 80% of flops and still leave us with a net gain, sometimes even a big one. He provides a compelling argument using many examples to show the principle at work, which is nothing short of an epiphany for me. The message from him is again simple: in the end it’s about the batting average, not the once (or few) in a lifetime home runs. And this also applies in many other walks of life.
I could really go on and on about the wide range of topics in this dense book, which also teaches us about disruptions, luck, definite and indefinite views of the future. It tells us about when to fight with all we got, when to step back, or when to merge (if you can’t beat them, join them). And ultimately, it provides us with the day-to-day framework to efficiently run a business, which was the main reason why my entrepreneur friend highly recommended this book to me in the first place.