Forbes
6/07/2012 @ 12:49PM |55,671 views
Ten Lessons from Peter Thiel's Class On Startups
Guest post written by Stanford Law student Blake Masters.
This spring, legendary Silicon Valley entrepreneur and venture capitalist
_Peter Thiel_ (http://www.forbes.com/profile/peter-thiel/) taught a class
at _Stanford University_
(http://www.forbes.com/colleges/stanford-university/) called Computer Science
183: Startup. Back in March, before the course
had started, Thiel made a _bold declaration:_
(http://www.reuters.com/article/2012/03/12/us-stanford-thiel-idUSBRE82A0EO20120312)
“If I do my job
right, this is the last class you’ll ever have to take.”
He did his job right. It is the last class I’ll ever take.
I’m not dropping out—something Thiel had suggested that more
entrepreneurially-minded young people should consider. But I am graduating from
law
school next week and cofounding _Amicus Labs_ (https://www.amicuslabs.com/) ,
a legal tech company.
I’ve been blogging _my class notes_
(http://blakemasters.tumblr.com/peter-thiels-cs183-startup) for the past 10
weeks. Thiel’s lectures and the
subsequent discussions with guest speakers (a veritable who’s who of Silicon
Valley from LinkedIn CEO _Reid Hoffman_
(http://www.forbes.com/profile/reid-hoffman/) to Netscape cofounder Marc
Andreessen to PayPal co-founder Max
Levchin) made for fascinating study. In some sense, summarizing the material
does it injustice—as Thiel acknowledged, the course itself only scratched
the surface of possible analysis and discussion–but here are 10 of the key
lessons in condensed form.
1. Globalization is not (all there is to) progress.
Technology, to our great detriment, is the forgotten side of the coin.
_Globalization_
(http://blakemasters.tumblr.com/post/20400301508/cs183class1) basically means
copying things that work. “Developing” countries copy
19th century railroads and 20th century plumbing. There is no innovation;
you go from 1 to n. Technology, by contrast, involves doing new things.
True technology companies—_Facebook_
(http://www.forbes.com/companies/facebook/) , Palantir, SpaceX—involve going
from 0 to 1.
People focus too much on the 1 to n of globalization and not enough on
technology. But to be great, you have to do something new and important. All
great companies solved the 0 to 1 problem in unique ways. All failed
companies somehow botched it.
2. It is better to be right than to be contrarian.
But _being contrarian_
(http://blakemasters.tumblr.com/post/20955341708/peter-thiels-cs183-startup-class-3-notes-essay)
is very often a good
heuristic for finding what is right.
There is usually little value to be found where there is unanimity. Value
tends to be hidden. The key question is: What important truth do very few
people agree with you on? The business version of this is: What valuable
company is nobody building? A certain degree of contrarianism is embedded in
these questions. Wrestling with them can lead to important truths.
3. Secrets exist.
People don’t really _believe in secrets_
(http://blakemasters.tumblr.com/post/22866240816/peter-thiels-cs183-startup-class-11-notes-essay)
anymore.
But secrets exist. It’s just a matter of learning how to find them.
_Risk_ (http://www.forbes.com/risk/) aversion and complacency discourage
people from thinking about secrets. Existing conventions are much more
comfortable. But secret truths can be incredibly valuable. Importantly, they
are discoverable; by definition, any answers to the questions in Lesson 2
above are secrets. Perhaps the biggest secret of all is that there are many
more secrets in the world that are waiting to be found. The question of how
many secrets exist in our world is roughly equivalent to how many startups
people should start. From a business perspective, then, there are many great
companies that could still be—indeed, are waiting to be—started.
4. Capitalism and competition are antonyms, not synonyms.
_Capitalism_
(http://blakemasters.tumblr.com/post/21169325300/peter-thiels-cs183-startup-class-4-notes-essay)
is about building wealth. But in
perfect competition, nobody actually makes any money; all economic profits are
competed away.
Competition is overrated. In practice it is quite destructive and should be
avoided wherever possible. Much better than fighting for scraps in
existing markets is to create and own new ones. Sometimes you have to fight.
When
you do, you should win. But conflict tends to be romanticized, and people
tend to get sucked in. It is worthwhile to think about how to run away from
the fighting and build a monopoly business instead.
5. People lie.
We are biased to think that things are as they appear. Very often, that’s
_not true._
(http://blakemasters.tumblr.com/post/22405055017/peter-thiels-cs183-startup-class-9-notes-essay)
Everybody thinks that advertising works on
other people, not on them. But that cannot actually be true for everybody.
Sales is all around us, all the time. And it tends to work best when it is
hidden.
Sometimes people lie to themselves. Sometimes they lie to others. “This
product sells itself” is most likely a sales pitch; “This product is so
mediocre that it takes great salespeople to sell it” doesn’t have the same
ring
to it.
People tend to overlook the importance of sales and distribution. But
getting distribution right is absolutely crucial; most companies fail because
of
distribution problems, not technology problems. And to understand
distribution, one must understand the theatre that is sales.
6. Much of life is a power law.
The default assumption is that things are normally distributed. Sometimes
that’s true. But _very often it is not_
(http://blakemasters.tumblr.com/post/21869934240/peter-thiels-cs183-startup-class-7-notes-essay)
. Very often
things follow a power-law distribution. This can be counterintuitive and
uncomfortable to think about.
Startup outcomes are one example. They tend to be very bimodal. Some
companies succeed wildly. Most fail and go to zero. Accordingly, portfolio
approaches and hedging tend to fail. Finding the company that falls on the
right
tail of the distribution is absolutely crucial. Venture capitalists who don’
t realize this lose money. Entrepreneurs or employees who don’t realize
this end up doing the wrong things.
7. A bad plan is better than no plan. A good plan is even better.
Today, people _have resigned to indeterminacy_
(http://blakemasters.tumblr.com/post/23435743973/peter-thiels-cs183-startup-class-13-notes-essay)
Thinking about the future—let alone forming beliefs about it—is seen as crazy.
The future, people seem to believe, is essentially random.
It didn’t always used to be this way. In centuries and decades past, chance
was seen as something to dominate. People could forge their own luck.
Calculation reigned supreme. People had grand visions.
We have since shifted to a more probabilistic, statistical perspective.
Indeterminacy abounds. Young people take a portfolio approach to their
resumes, adding new lines each year but never taking a meaningful swing at
something big. But playing it safe has serious costs (and, apart from those,
it
may not be as safe as it is perceived to be). To be great, you must take a
swing at something. You must have a plan. Not planning for the future is,
quite literally, resigning your fate to chance.
8. Foundations matter.
Thiel’s Law: A startup messed up at its foundation cannot be fixed.
_Beginnings are special_
(http://blakemasters.tumblr.com/post/21742864570/peter-thiels-cs183-startup-class-6-notes-essay)
. They are qualitatively
different than what comes after. You can change things at the founding that you
’re forever stuck with afterward.
Getting your foundations right isn’t sufficient for success, but it is
certainly necessary. Founding mistakes will amplify and destroy companies from
within. Companies usually fail when some internal conflict blows up. From
the outside, it may appear that external competitive forces were the cause.
But very often, mismanagement or a founding mistake is the true culprit.
Founders must think carefully about keeping people’s motivations and
incentives aligned. Otherwise, a startup is essentially doomed from the start.
[
Killing motivation is another major factor ; when motivation is destroyed
then there cannot be any kind of worthwhile result. --BR comment ]
9. Founders are different.
(http://blogs-images.forbes.com/ryanmac/files/2012/06/founder-distribution.jpg)
Most traits are probably normally distributed. Most people are average.
Founders are not. Founders’ traits seem to have an inverse normal distribution
to them. Founders are at the extremes on both ends: they are extreme
insiders and extreme outsiders, disagreeable and charismatic, infamous and
famous.
Whether the inverse distribution is fact, fiction, or some combination of
both, it seems to map well onto most founder figures, from Steve Jobs to
Lady Gaga. And this is nothing new; Achilles was strong and perfect, except
for his flaw that made him weak. Howard Hughes was on track to go down as
the greatest entrepreneur of the 20th century, yet he suffered a bizarre
30-year fall from grace.
Unpacking exactly how or why founders are different is difficult. But
different they are. That is as dangerous for them as it is empowering. People
victimize founders. A founder’s primary task is, in some sense, to
perpetually extend the founding moment and thereby indefinitely delay his
execution.
10. Find a frontier and go for it.
I’ll quote from my notes on Thiel’s final lecture:
There is something importantly singular about each new thing. There is a
mini singularity whenever you start a company or make a key life decision. In
a very real sense, the life of every person is a singularity.
The obvious question is what you should do with your singularity. The
obvious answer, unfortunately, has been to follow the well-trodden path. You
are constantly encouraged to play it safe and be conventional. The future, we
are told, is just probabilities and statistics. You are a statistic.
But the obvious answer is wrong. That is selling yourself short. There are
still many large white spaces on the map of human knowledge. You can go
discover them. So do it. Get out there and fill in the blank spaces. Every
single moment is a possibility to go to these new places and explore them.
There is perhaps no specific time that is necessarily right to start your
company or start your life. But some times and some moments seem more
auspicious than others. Now is such a moment. If we don’t take charge and
usher
in the future—if you don’t take charge of your life—there is the sense
that no one else will.
--
Centroids: The Center of the Radical Centrist Community
<[email protected]>
Google Group: http://groups.google.com/group/RadicalCentrism
Radical Centrism website and blog: http://RadicalCentrism.org
