Two of Theil’s most powerful ideas — secrets and monopoly-seeking — came together for me this morning in a conversation with a local entrepreneur. This post is a quick recap of what I was trying to say in that conversation (I’m still not sure if it made sense to the entrepreneur I was meeting with, so hopefully it comes out better the second time).
Every day I’m reminded that entrepreneurs tend to see the world from the bottom up, while investors tend to view it from the top down.
In practice, this means that entrepreneurs — out of sheer necessity — often act in ways that are short-term optimal but long term sub-optimal for their business. For example, if they currently have a small number of customers and have found customer acquisition difficult (which it *always* is), they may focus too much energy on wringing more money from those few customers, while starving their longer-term growth prospects.
Thiel’s “monopoly” thesis — probably the best and most honest summary of the software VC mindset I’ve ever come across — goes like this:
“There are three steps to creating a truly valuable tech company. First, you want to find, create, or discover a new market. Second, you monopolize that market. Then you figure out how to expand that monopoly over time.”
Put another way, the goal for startup founders shouldn’t be to build an incrementally “better” competitor in an established market, but to invent and dominate an entirely new category of opportunity. This may sound straightforward, but it’s mind-bendingly hard in practice, which is why there are so few billion-dollar-plus outcomes for all the thousands of startups founded each year.
Getting closer to this ideal is where the idea of “secrets” comes in. Here’s Thiel again:
“How many secrets are there in the world? Recall that, reframed 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.”
I review 1,000+ seed-stage deals a year and continue to be amazed at the number of entrepreneurs who choose to focus on incremental approaches to “obvious” markets — typically clustered around high-passion categories like music, photos, restaurants/nightlife, social networking, etc. — instead of picking harder but less obvious, and therefore more valuable, fights.
You can’t achieve a monopoly by creating a competitor to an existing service — new monopolies have to be invented from scratch.
The collapse of the innovation cost curve (thanks to open source and cloud), combined with a global explosion in connected users (driven largely by growth in mobile connections) has created conditions of near-perfect competition for software innovation:
Every obvious idea already exists, in multiples.
The design / UX community would like you to believe that they have the solution to perfect competition — that great design can lift one competitor above all the others and put them at the head of the power law distribution. Unfortunately, that idea is a fantasy created by backsolving from a handful of beautiful anecdotes (e.g., Instagram, AirBnB) whose success was powered as much by clever distribution hacks as by gorgeous design.
The ONLY reliable way to create lasting value in software is to do something really fucking hard, and to do it so fast and so well that no one can catch you no matter how much they spend.
So what does all this have to do with Big Greed vs. Little Greed?
In my meeting this morning, the entrepreneur described a secret — or a least a potential secret — that he had discovered about his market. He was wondering how to attach that secret to his existing business model, which exists within a very crowded and noisy marketspace.
In the short-term, it’s clear that his secret would make his business a stronger competitor in that crowded market, but my challenge to him was to think about how his secret could be the foundation of an entirely different business, one that serves his market in an entirely different way.
Secrets — real secrets — are extremely rare, and the one I learned about today may not ultimately live up to its early promise. But the “big greed” of successful founders and their venture investors is to find real secrets and use them to create and dominate big chunks of the economy, not the “little greed” of competing for attention and revenue in an existing market.
If you’re going to play, play to win.