Chris McCann's Personal Blog

This is a post about secret #4 about startups by Peter Thiel. To see all 4 of the secrets start here.

These views and thoughts are all Peter’s and notes are from Blake Master’s. If you find any of these ideas intriguing I suggest reading through the full notes here.

TLDR: The biggest secret is there are many important secrets left. Tweet this.

Secrets answer the question, what important truth do very few people agree with you on? Secrets are the unpopular or unconventional answers to this question.

In a business context, the key question is: what great company is no one starting? If there are many possible answers, it means that there are many great companies that could be created. If there are no good answers, it’s probably a very bad idea to start a company. From this perspective, the question of how many secrets exist in our world is roughly equivalent to how many startups people should start.

Some secrets are small and incremental. Others are very big. Some secrets—gossip, for instance—are just silly.

The purpose of Peter Thiel’s class is to share some secrets about starting a company: Monopolies, Distribution, and Power Laws.

The biggest secret is there are many important secrets left. Everyone used to believe there was many more things to do but now we no longer believe that, its a secret again.

Why do people disbelieve in secrets?
Four primary things have been driving people’s disbelief in secrets.

• First is the pervasive incrementalism in our society. People seem to think that the right way to go about doing things is to proceed one very small step at a time.
• Second is that people are becoming more risk-averse. People today tend to be scared of secrets. They are scared of being wrong. Of course, secrets are supposed to be true. But in practice, what’s true of all secrets is that there is good chance they’re wrong.
• Third is complacency. There’s really no need to believe in secrets today. Law school deans at Harvard and Yale give the same speech to incoming first year students every fall: “You’re set. You got into this elite school. Your worries are over.”
• Finally, some pull towards egalitarianism is driving us away from secrets. We find it increasingly hard to believe that some people have important insight into reality that other people do not.

Twitter’s secret
The story of web 2.0 and the information age has been the story that, on some level, many small secrets can add up and change the world. It’s easy to make fun of things like Twitter. You’re limited to 140 characters. No individual tweet is particularly important. Most are probably kind of useless. But in the aggregate, the platform has proven quite powerful. Social media has, the story goes, played a non-trivial role in great political transformation and even governmental overthrow.

The secret force behind this web 2.0 empowerment is the fact that there are far more secrets that people think. If things are very different in the increasingly transparent world, it just means that they were covered up before. To the extent that things are not transparent, they are secretive. And all these small secrets add up to something very big indeed.

How to find secrets
There is no straightforward formula that can be used to find secrets. You can’t make a list of them so the only thing you can do is develop a good method for finding important secrets.

From this there are two types of secret

• Natural secrets, involving science and the world around us.
• Secrets about people (people won’t tell you or can’t express).

There is something to be said for both approaches. But the importance of human secrets is probably underappreciated. These might be political secrets. Or they might be anthropological or psychological secrets. Here, you just ask the questions and see where they lead. What kinds of things are we allowed to talk about? Are there areas that people can’t look into? What is explicitly forbidden? What is implicitly off-limits or taboo?

On one hand natural secrets are hard but politically safe but human secrets are different, there’s usually much more at stake.

This is a post about secret #3 about startups by Peter Thiel. To see all 4 of the secrets start here.

These views and thoughts are all Peter’s and notes are from Blake Master’s. If you find any of these ideas intriguing I suggest reading through the full notes here.

TLDR: Distribution’s importance is understood least in startups. Tweet this.

Distribution is how you get a product out to consumers. More generally it can refer to how you spread the message about your company.

The distribution secret also has two sides to it. Distribution is much more important than people think. That makes it a business secret. But it’s a human secret too, since the people involved in distribution work very hard to hide what’s going on. Salespeople do best when people do not know they’re dealing with salespeople.

Distribution is the single topic who’s importance people understand least. Even if you have an awesome product you still have to get it out to people.

Distribution isn’t the same for every business
One helpful way to think about distribution is to realize that different kinds of customers have very different acquisition costs. You build and scale your operation based on what kinds of things you’re selling.

On one extreme you have inexpensive products such as steak knives where sales are a couple of dollars each. The other extreme your selling to governments or huge companies and sales are $1M-$50M each. As the unit value of each sale goes up, there is necessarily a shift towards more people-intensive processes. Your approach to these kinds of sales must be to utilize salespeople and business development people, who are basically just fancy salespeople who do three martini lunches and work on complex deals.

The truth is that selling things—whether we’re talking about advertising, mass marketing, cookie-cutter sales, or complex sales—is not a purely rational enterprise. It is not just about perfect information sharing, where you simply provide prospective customers with all the relevant information that they then use to make dispassionate, rational decisions. There is much stranger stuff at work here.

To succeed, every business has to have a powerful, effective way to distribute its product. Great distribution can give you a terminal monopoly, even if your product is undifferentiated. The converse is that product differentiation itself doesn’t get you anywhere.

Understanding the critical importance of distribution is only half the battle; a company’s ideal distribution effort depends on many specific things that are unique to its business. Just like every great tech company has a good, unique product, they’ve all found unique and extremely effective distribution angles too.

Different distribution models

• Complex Sales – Deal sizes of $1M-$500M+ per deal – Examples are SpaceX and Palantir. At this scale is relationship intensive and its important the CEO is upper management is involved in all of the sales.
• Large sales – Deal Sizes of $10K-$100K per deal – Examples are Yammer and ZocDoc. Need to have a more cookie cutter sales process that scales and build out a sales team.
• Missing middle sales – There is a large zone in the middle where there’s no good distribution channel to reach customers. If you get the distribution right in this category you may have a terminal monopoly business. Example is inuit which sells tax software. Now they they are the standard, its probably impossible to displace.
• Marketing/Advertising – Low cost consumer items – Examples Coke, Downey, Zynga, etc – Find a differentiated way to target your customer demographic online. Examples would be Zynga who built their distribution off of Facebook and Google’s ad networks.
• Viral Marketing – Create strong network effects that get every 1 customer to pull in more than 1 additional customer. PayPal got their first 100,000′s of customers through referral programs and viral growth.

Note: The hard part of viral marketing is marketing people can’t do viral marketing. You don’t just build a product and then choose viral marketing. There is no viral marketing add-on. But viral marketing requires that the product’s core use case must be inherently viral.

Usually only one distribution model wins
Power law strikes again – you probably won’t have a bunch of equally good distribution strategies. 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.

This is a post about secret #2 about startups by Peter Thiel. To see all 4 of the secrets start here.

These views and thoughts are all Peter’s and notes are from Blake Master’s. If you find any of these ideas intriguing I suggest reading through the full notes here.

TLDR: Massive inequality exists. Tweet this.

This is the second secret. A power law distribution curve (or more generally called a power law) is one where a small sample produces the majority of the effect or put in easier way to grasp one in where 20% of the actions produce 80% of the results (Pareto’s principle).

In one sense it’s a secret about finance, Startup outcomes are not evenly distributed; they follow a power law distribution. But in another sense it’s a very human secret. People are uncomfortable talking about inequality, so they either ignore it or rationalize it away. It is psychologically difficult for investors to admit that their best investment is worth more than the rest of their portfolio companies combined. So they ignore or hide that fact, and it becomes a secret.

Here is how this secret manifests itself in venture capital investing.

How VC’s think
The most important concept to understand for technology investors is exponential power. As Einstein says the most powerful force in the universe is compound interest.

Because of the power law distribution, Venture Capital investor returns are incredibly skewed. In practice VC’s only make money if your best company investment ends up being worth more than your whole fund.

The two conclusions this brings up for investors are:
 

• Every investment has to have the potential of being worth more than the whole fund.
• It’s better to be very concentrated in a few investments as opposed to being diversified.

 
Real example of power law
The 100th employee at Google did much better than the average venture-backed CEO did in the last decade. The distribution is worth thinking hard about.

The power law distribution simply means you have to think hard about a given company is going to fall on the curve.

Power law applies to everything
Understanding exponents and power law distributions isn’t just about understanding VC. There are important personal applications too.

Many things, such as key life decisions or starting businesses, also result in similar distributions.

This secret plays a very important part for all of Peter Thiel’s other secrets and views as a whole.
 

This is a post about secret #1 about startups by Peter Thiel. To see all 4 of the secrets start here.

These views and thoughts are all Peter’s and notes are from Blake Master’s. If you find any of these ideas intriguing I suggest reading through the full notes here.

TLDR: Capitalism and competition are antonyms (opposites of each other). Tweet this.

This is the first secret and most people would disagree with it. People generally believe that the differences between firms are pretty small. They miss the big monopoly secret because they don’t see through the human secrets behind it. Monopolists pretend that they’re not monopolists (“Don’t regulate us!”) and non-monopolists pretend that they are (“We are so big and important!”). Things only tend to look similar on the surface.

Usual Story
The usual story is capitalism and perfect competition are synonyms. No one is a monopoly and firms compete and profits are competed away. This however is a strange belief.

Capitalism is about the accumulation of capital whereas perfect competition is one where you can’t make profit. From this frame using capitalism and perfect competition as being interchangeable is a strange belief.

Why is competition favored?
Favoring competition seems justified because it’s deep-rooted within our culture. Competition is believed to build character, we learn from it, and it prepares us for the future. For example getting into medical school is extremely competitive but once you get in you get to be a well paid doctor afterwards.

Competition isn’t bad but too often in the race to compete, we learn to confuse what is hard with what is valuable. The intensity of competition becomes a proxy for value. And to the extent value it’s not there, you’re competing just for the sake of competition.

One problem with fierce competition is that it’s demoralizing. Top high school students who arrive at elite universities quickly find out that the competitive bar has been raised. But instead of questioning the existence of the bar, they tend to try to compete their way higher. That is costly.

Competition taught unquestioningly is dangerous because it leads to pointless competition.

Perfect competition vs. monopolies
Under the economic idea of supply and demand you get two options at the market equilibrium: perfect competition and monopolies.

Under perfect competition supply and demand is perfectly met so no firms in industry make profit. If there were profits to be made news firms would enter the market and take profits away. It’s just not new entrants but all firms in the industry don’t make a profit in perfect competition.

Under a monopoly a single firm (or few) own the market and are they are the only ones that produces the product for that market. Most economists spend a great deal of time studying perfect competition but very few look at monopolies seriously.

Perfect competition is fine when you don’t want to turn a profit but to the extent one wants to make money you should be quite skeptical about perfect competition.

Monopolies aren’t just an exception
Monopolies aren’t just a strange exception and we should consider monopolies as a valid alternative to the perfect market paradigm.

Monopolies tend to be viewed as bad because competition is assumed to be good. More competition = more perfect marketplace = more progress. If more competition equates to more progress then the opposite of that must be true. This is why the view that monopolies are bad are accepted as a given and why this view is worth questioning.

The bias towards perfect competition (its implicit in the word “perfect”) may be because its easiest to model. Economics is all about modeling the world to make it easier to deal with. Perfect competition is one of those variables that doesn’t change and is easier to model in a mathematical equation.

The two criticisms of perfect competition are people involved in a business might actually want to make a profit & things within the market are constantly changing which doesn’t lead to an equilibrium.

The good and bad of monopolies
Before getting into the good of monopolies lets talk about the bad aspects of Monopolies.

1. Monopolies tend to produce lower output and charge higher process than firms in competitive markets do.
2. Monopolies tend to be price setters not price takers.
3. Monopolies price discriminate since monopolists may capture more value by charing different groups different prices.
4. Monopolies stifles innovation since it earns profits whether it innovates or not.

The innovation argument can also be a good thing too. If the monopoly creates something better than the next best thing it can charge higher than its cost of product giving them reward for creating the new thing.

Since monopolies last longer than other firms (within perfect competition) it can conduct a more long term view on value.

If monopolies exist why don’t we see them?
Even if the world isn’t a perfect competition and monopolies do exist we wouldn’t know about them because:

1. Companies don’t want to say they are monopolies for fear of the DOJ
2. Monopolies insist they are in bigger markets than they area (we’re not the monopoly you’re looking for)
3. Lies about market share. Is google in the search engine market or advertising market or a tech company? Depending on what you compare it against its market share is drastically different.

How a company can own a market
If monopolies do exist a new startup should set out to own an entire market. For a company to do this it has to have some combination of brand, scale cost advantages, network affects, or proprietary technology.

Of those brand is hardest to understand and identify in advance but if you build a brand you build a monopoly. Scale advantages, network effects, and proprietary technology are more easily understood.

1. Scale advantages work best when their are high fixed costs and low marginal costs. Think about Amazon.
2. Network effects locks people into their particular business. Think about the IPod and iTunes.
3. Proprietary technology is technology, for whatever reason, no one can use besides yourself. Think about a new drug.

The archetypal monopoly story
The best business is one where you can tell a compelling story about the future which leads to a monopoly. All of the great companies have a similar archetypal story that follows something like this:

1. Find a small target market
2. Become the best in the world at it
3. Take over adjacent markets
4. Widen the aperture of what the companies doing
5. Capture more and more of the market.
6. Once the operation is quite large some combination of network effects, technology, scale advantages, and brand should make it very hard for others to follow.

Value of high growth monopolies
Valuations for high growth companies are different than valuations of businesses in decline because at first most of them loose money and most of the value exist far into the future. This is counterintuitive because most people, even ones working in startups, think you have to create value right off the bat. The focus is on the next month, quarters, or less frequently years. For startups this is too short of a timeline.

Paypal and Linkedin are good examples where much of the value is expected to be gained in 2020 and beyond.

This is why valuations driven by multiples and comparables tend to not work as well with high growth companies. They are too heavily based on the standards and conventions that exist at that time and not take into account the future value. In startups so much value is placed on having first mover advantage but the danger is you simply aren’t going to be around to success. More important is to be durable and last a long time.

Business is like chess where you have to study the endgame before anything else.

Over the weekend I read all of Blake Masters‘ notes on Peter Thiel’s CS183 Startup class at Stanford University.

For everyone who doesn’t know, Peter Thiel was one of the founders of PayPal, he’s the Don of the PayPal Mafia, first investor in Facebook, founder of the Founders Fund, founder of Clarium Capital, investor in SpaceX, Tesla, Palantir, Linkedin, and many more.

The full notes were completely mind-blowing to say the least. I wrote this post as a synthesis of all of Peter’s class notes, mainly to help myself process all of the information in there. If you find any of these ideas intriguing I suggest reading through the full notes here.

The big purpose of Peter Thiel’s class was to share some of his secrets about starting companies.

His four big overarching secrets are:
 

1. Capitalism and competition are antonyms.
2. The power law distribution curve
3. The importance of distribution
4. The most important secret is many important secrets are still undiscovered.

 
I honestly tried to synthesize all of his major ideas into a one page post but there were way too many good ideas to limit such a thing. So instead I broke up his ideas into his main 4 secrets above and synthesized each secret into 1 post of his main ideas for each secret.

Take your time reading these and leave some comments below if you want to discuss any of these ideas.
 

TLDR: Networking is about helping other people. Tweet this.

I get pitched a lot on “business networking” apps and ideas and I always have an adverse and skeptical reaction to them.

I was never really good at putting why into words why I felt this way but my friend Jonathan Nelson who runs Hackers and Founders said it perfectly:
 

I get pitched this idea [event/business networking apps] every 2 or 3 months because of our events, and I’m very adverse to using this type of product at our events.

Why? In my opinion, people who are great at networking don’t go into an event trying to find X, Y or Z. People who are phenomenal at networking go to events with the attitude that they want to help others who are of similar interest. Adam Rifkin got a full page in Fortune magazine last year for being Fortune’s most networked. His attitude is to be as helpful as he possibly can be. And, then occasionally, he asks for a favor in return.

“Find interesting people” apps tend to invert that process and make it, “What can you do for me” centered rather than “You’re awesome. I’d love to help you in whatever way I can”.

Also, I’m a huge believer in synchronicity and happenstance. The brownian motion at seemingly random networking events is actually a very complex ecosystem that works really well.

 
This is the basics. If you want to get deeper here is Jonathan’s philosophical stance on why this is so, which contains much wisdom in here:
 

Why?

Metcalfe’s law: the value of a (computer) network is equal to the number of the nodes in the network squared.

Holds true for people’s personal connections and networked relationships as well.

When a person goes into an event looking for 1 or 2 specific things, they aren’t increasing their network, they are routing a single request. They are looking for one specific thing at that event. In web terms, they are looking for a single URL.

That makes them a client in the system, and not a server.

Growing a personal business network requires making as many quality connections in that network as possible, and then routing as many requests as possible. Essentially, uber-networkers want to be the Domain Name System servers for other people’s requests. They want to know where all the URLs are stored, so when someone comes in looking for one specific URL, they can route that request quickly and efficiently.

Knowing where other people’s URLs or requests are stored connects you to as many other networks as possible, and makes the value of your own network exponentially more valuable.

Building the database of what other people’s specialties and interests are takes time and concerted effort, but this is what true networking looks like.

 
If you’re interested in this kind of networking check out StartupDigest Brain Trust or leave a comment below.
 

I get this question a lot, from people I know and don’t know.

From people I don’t know at all, sorry I can’t help.

From people I do know well and would vouch for, here’s what I send people:

First I suggest reading this http://www.danshapiro.com/blog/2011/09/dont-ask-for-introductions-to-investors/

And then come up with a list of all your competitors and companies in your space generally and find out who invested in those companies through CrunchBase or AngelList. Investors tend to have a market based view on things and investors who have invested in your space are more likely to be interested in what you are doing.

If there is anyone on the list you come up with that I know well enough, happy to do intro’s.

TLDR: The best things in life don’t come to you. Tweet this.

Here is my personal perspective on how to get a speaking gig or demo opportunity for you or your startup at an event. As for qualifications I’ve personally had the privilege of speaking at Stanford University, the United Nations, for Global Entrepreneurship Week in Dubai, NYU, University de National in Colombia, many other places.

This post is purposely mis-titled for a reason. There is a general perception that conference or event organizers will go out and find you and find what you are working on and ask you to come speak or pitch at their event.

The honest truth is most likely this will never happen to you unless you are Jack Dorsey, Mark Zuckerberg, or another famous entrepreneur. If you’re just starting off and haven’t had a lot of speaking exposure before its going to take a lot of personal work.

Here is a better approach:

1. Find a few events you are personally excited about using StartupDigest, Meetup, Eventbrite, or other event calendars.
2. Reach out to the organizer directly, preferably a quarter, before the event is going to take place.
3. Personally explain why you are excited about their event from all the rest and ask if they have any speaking/demo opportunities that are still available.
4. Don’t be afraid to say you haven’t had a lot of speaking experience before.
5. If all the speaking spots have already been booked still go to the event itself, meet the organizer in person, and try to get a spot for the event event.
6. Rinse and repeat, that’s it.

Shortcuts
Here are some shortcuts to short circuit the above process, but use them wisely.

• Friend Recommendation – If a previous speaker recommends you to speak, you have an easier chance of getting a speaking spot.
• Reciprocity – If you significantly help out the organization behind the event (in a genuine way), you have an easier chance of getting a speaking spot.
• Chain Reaction – If you’ve previously spoken at other quality events, you have an easier chance of getting a speaking spot.
• Authority – If you’re running a “hot startup” or one that reaches a large audience base, you have an easier chance of getting a speaking spot.

If you have any other tips on getting a speaking engagement feel free to leave them in the comments below.
 

TLDR: Startups are unimaginably difficult. Tweet this.

Right now joining or starting a startup is the sexy thing to do, but don’t get fooled by the hype.

It’s so easy to get swept up in the great stories and lives of people like Mark Zuckerberg, Jack Dorsey, and Elon Musk & how successful their respective companies are. It’s tempting to sit in your bed at night dreaming of leaving your high paying banking or corporate job and heading west to Silicon Valley, leaving the cubicle farm to make a difference and change the world.

All of this startup activity is awesome and necessary for our economy but before you make the decision you should do a serious gut check and fully understand if this is the life you want to live.

Because the harsh reality is startups are unimaginably hard.

On the surface level startups involves more responsibility, less pay, and more sacrifices, but this is just the beginning down the rabbit hole. It’s very hard to articulate how being in a startup is really like without firsthand experience, but I hope to illuminate a glimpse into this reality.

Here are a few representative examples:
 

• Twitter – Twitter originally began its life as Odeo in July 2005 as a platform for podcasting. They raised money, hired 14 people, but the product was going completely sideways. After much hardship they decided to throw out a couple of side projects, one of them being Twttr (Twitter, originally didn’t have any vowels in their name) in July 2006. Their initial launch didn’t get great reviews and even then it took a few years after this for Twitter to get any real traction.

 

• OMGPOP – Began it’s life as I’minlikewithyou in 2006 as a flirting application, then changed to a multiplayer social gaming network (at that point they changed their name to OMGPOP), hired a professional CEO in the middle of that, raised $17M, launched 35 separate games of which none ever got real traction and they were planning on running out of money and shutting down in May 2012. This is when they created their “overnight success” iPhone game Draw Something which was bought by Zynga for $180M.

 

• SpaceX – They are an orbital rocket company which took the complete opposite of the “lean startup approach”. They crashed their first 3 rockets, blew through $120M, Elon Musk the founder was practically bankrupt, and all this happened before their first successful rocket launch.

 

• Foursquare – The idea of Foursquare started in 1999 when Dennis Crowley, the founder, started Dodgeball one of the first social/location based applications. After basically being completely broke, collecting unemployment checks and teaching kids how to snowboard for $8/hr, they officially incorporated Dodgeball in 2004. Long story short they were bought by Google, then shut down by Google, and the same idea was turned into today’s successful Foursquare after 12+ years.

 

• Rovio (Angry Birds) – Started in 2003 after the founders participated in a gaming hackathon. They developed and launched 51 separate games before Angry Birds which was created in December 2009. The “overnight success” of Angry Birds took 8 years and $42M

 
During these long stretches of unsuccessful launches and failures, its easy to feel depressed.

Personally there were moments in StartupDigest‘s history where my co-founder and I literally couldn’t afford for rent the next month and things just weren’t working. This was all happening after leaving the steady career path, putting my heart and soul into the company, and having other people on payroll who depended on us living. Layer on top of this normal personal stresses, relationships stresses, and things can get overwhelming.

This is the reality of running a startup. Most people (who aren’t insane) could never withstand the psychological and social pressures associated with a startup. The personal sacrifice is almost unbearable. This is why people say “start a company you are passionate about” because a passion for the problem you are solving is literally the only thing that will keep you alive. It’s that undying-will that you can change the world and belief that you will personally make it happen.

This is why most startups fail. Don’t be fooled by the hype. Do a startup because you care about it not because it’s the cool thing to do.

If you’re already in a startup and feeling overwhelmed I highly recommend watching “Running the Sahara” to help put things in perspective. Also here are some personal tips that have helped me through the hard times:
 

• Keep moving – Even if its just a little bit everyday. Accomplishing small goals and keeping momentum is one of the most important things to staying alive.
• Expect the unexpected – It’s impossible to know everything that will happen in advance.
• Ignorance is bliss – If you knew all the hardships ahead beforehand it would be incredibly hard to ever start.
• Pushing personal limits – Your own personal limits are the only thing stopping you not your competition, lack of money, lack of market share, etc.
• The experience is the journey itself – It’s not about the end (acquisition, IPO, etc) but the everyday moments that make startups what they are.

 
End notes: 

• Being an early employee helps alleviate much of this initial stress, being a late employee alleviates a lot of these stresses. Although ultimately these stresses are always present
• There are very rare counter-examples of startups who do well from the beginning but that’s incredibly rare and most likely not going to happen to you.

 
Hacker news discussion here.