Peter Thiel's 3 critical decisions for startups

At DEMO Fall 2014, legendary investor Peter Thiel told entrepreneurs to resist convention in founding a business.

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Few people don’t know who Peter Thiel is. His Silicon Valley reputation as the first investor in Facebook echoes from the startup world to cocktail parties. He’s also known as the don of the PayPal mafia that includes Elon Musk and Reid Hoffman, who went on to found companies such as Tesla, Space X, and LinkedIn.

But most don’t know his unconventional views on starting a successful business. Often self-critical for postponing his entrepreneurial career while achieving degrees in philosophy and law from Stanford, one could easily argue that the German-born Thiel’s unique perspective is the product of culture and intellect fired in the crucible of startups. Speaking at last week’s DEMO Conference in San Jose, Thiel discussed what he sees as the most critical decisions entrepreneurs need to make when deciding how to launch a company.

What great company is no one building?

Entrepreneurs need to pick an unconventional business idea, Thiel says. His disdain for entrepreneurs copying businesses couldn't be clearer. Entrepreneurs who copy past product successes, such as Microsoft’s operating system, Google’s search, or Facebook’s social network, fail to learn the startup lessons from their founders, Gates, Page, and Zuckerberg.

Thiel values ideas that produce disagreement in which the entrepreneur has strong beliefs, because diverging with convention makes a company unique. That’s no easy pill to swallow for entrepreneurs in need of money who have seen other venture capitalists fund businesses that simply copy other successful ideas.

Great companies are monopolies

Another counterintuitive decision that Thiel charges entrepreneurs to make is to find a monopoly and dominate it quickly. Monopolies don’t need to be big businesses at the start, but some, like Google’s search, can become massive. For emphasis, Thiel said, "capitalism and competition are antonyms; a capitalist accumulates capital. A world of perfect competition is a world where all the capital is competed away."

An entrepreneur’s decision to incrementally copy and compete or to build a monopoly determines whether the business will accumulate capital, become valuable, and reward the founders and inventors.

Thiel’s monopolies start small and take over their markets quickly, such as Facebook and PayPal. Facebook begun at Harvard won 60% social network market share at the school in 10 days. PayPal targeted the top 20,000 eBay power users who needed fast payment processing tools, taking 30% of the market in three months.

Breaking with venture capital convention, Thiel wants entrepreneurs to go after small markets. The clean tech company failures of the last decade, for example, presented big red flags for Thiel because at the beginning of every PowerPoint presentation the first slide represented the energy market measure in hundreds of billions or trillions of dollars.

"If you are a tiny minnow in a vast ocean, you have no idea how much competition there is," Thiel said. "And you have to beat the other 90 thin-film solar panel companies, and if you have to beat the other 90 solar panel companies then you have to beat wind [turbines], then all sorts of other energy sources. Then you have to beat the fracking that comes out of left field and the Chinese manufacturer that comes out of left field. You just end up with competition everywhere."

Competition is for losers

To Thiel, it doesn’t really matter if a monopoly with a great core idea is well or badly managed. Executing perfectly in a highly competitive market still leads to a marginal business. More harmful than competing capital away, the entrepreneur setting out to compete misses asking the right questions that will give rise to a monopoly.

"Competition has the effect of making us better at that which we are competing on, but it always comes with this price of losing sight as to whether the things we are doing are important, valuable, meaningful,  whether they are unique - whether if we didn’t do them, they wouldn’t happen," Thiel said. "Therefore, they can build these monopolies."

Uniqueness is critical to get Thiel’s attention, and definitely to get his money. It is the product of deciding to create the great company that no one else is building. These decisions can’t be left for later. He quotes his own Thiel’s law – "a company messed up at its foundation can never be fixed."

Thiel’s life experience makes him more unique than his ideas. During his talk at DEMO, the Peter Thiel formed from entrepreneurship was the star. But the critical thinker who studied the philosopher Immanuel Kant and the compelling debater who studied law certainly played supporting roles.

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Copyright © 2014 IDG Communications, Inc.