(Note: much of the content in this article is a summation of a Podcast on 11/8/17 from Masters of Scale)
Context of interview
On the November 8, 2017 episode of Masters of Scale with Reid Hoffman, Reid interviews investor and PayPal cofounder Peter Thiel on a variety of issues revolving around the success of ambitious ideas and the philosophy behind engaging in competition or leaving it. If you’re familiar with Thiel, you know his ideas are often a little unorthodox. In this case, as Hoffman agrees, Thiel is very accurate. Everything he advises is well-founded in robust experience as well as intuitive.
The urge of competing and avoiding it
Peter is a competitive guy. Even as a child, he wanted to race everyone and yet also be apart from them entirely. He was a champion chess player, achieved highly on standardized assessments, and eventually elevated himself into a prestigious law school. He realized inasmuch as you are good at the subject of your competition, especially on a high level, you also refrain from asking whether the activity is worth doing in the first place.
He began feeling trapped. An illustrious law firm is a place everyone on the outside wants to be in, while everyone inside wants out of. As he says, the excessive effort and winning put him in a prison of his own making. Ultimately, he cared little for how he compared with his peers. In fact, one of his most famous quotes is “Competition is for losers.” As you only slightly (relatively, perhaps) improve your income, you’re selling your soul. Thiel was looking for a preferable economic and moral tradeoff.
Winning in a losing game
Eventually, Thiel made his way into co-founding PayPal. One of the central concerns from the beginning was avoiding competition. More specifically, how can we compete and avoid competition as a result? Inevitably, competing will render you a winner in a losing game. Instead of beating competitors along their own lines, invent a new game and master it. This is equally valid for an individual as much as a business. This is how he arrived in online payments.
Back in 1998, everyone was looking to buy online, but no one knew how to pay. As such, Peter saw an opportunity for PayPal to become the internet’s cash registers. eBay was gaining a lot of momentum and PayPal was an enticing way of selling all manner of things. Although their inventory wasn’t initially the kind of product you necessarily wanted to associate with your burgeoning brand, it’s an invaluable lesson in the kind of consumers you want in the earliest stages.
Innovators and early adopters are critical
As was mentioned in an earlier article on the technology adoption cycle, the earliest adopters––innovators––are essential. They get the conversation moving on a new idea and, while they may be nothing like what you expected, they’re of inestimable importance. eBay was an effective way of testing out PayPal as many members were both buyers and sellers, so the money exchanged in either direction ended up remaining in the system.
After only a few months of introduction, around 30% of eBay users were using PayPal, about which eBay was none too happy. eBay felt that PayPal was siphoning off a measure of its business, even as PayPal was obviously improving the overall user experience. Initially, Thiel believed PayPal would be in a lot of trouble if eBay ever figured out how to create or even operate a cash register for themselves. eBay even bought a rival service, Billpoint, and integrated it directly.
Monopolies are a fact of life...
One way you can protect yourself is by creating or investing in an area of intense usage where consumers place a lot of value in whatever you’re doing. A little competition is acceptable as long as your consumers are intensely attached to your product or service. Some companies are highly competitive, like a given restaurant, for example, but rarely make any money. On the other hand, you have a company that succeeds immensely as it is, in fact, a monopoly.
Peter claims monopolies exist in our society, often hiding in plain sight. These, by definition, do very well. You may have thought our government regulates monopolies from existence, but it’s only partly true. Monopolies are, instead, camouflaged as competitors: Coke and Pepsi appear locked in a heated rivalry. In truth, they’re differentiated as brands and consumers regularly prefer one over the other and insist they’re not interchangeable. They are not competing in a typical way.
...Even as they claim otherwise
These companies may allude to immense competition, but are really playing up the illusion––disguising their monopolizing. A patent is a kind of monopoly sponsored by our government. Another avenue of monopoly is chasing a goal so original, no one else even attempts to follow you. SpaceX is a great example of this philosophy, and virtually no one is interested in competing with Elon Musk as he brings us to Mars. The knowledge of his separation motivates Musk to push harder.
Escape velocity and scaling
This brings us to one of the most fascinating concepts discussed in the podcast. Peter discusses the need for a startup to achieve escape velocity from competitors before it is truly successful. In the beginning, you need to scale really fast, but the benefit is the distance from a black hole of competition. If you begin competitively, like Amazon––now a retail monopoly-- you may find less competition as you accelerate more and more.
So how are you ever certain you’ve achieved escape velocity? How does one achieve escape velocity in the first place? Thiel says X Factor is watching for exponential growth. PayPal began with 24 users and grew at 7% a day. Those numbers, in a few years, would place them well beyond competitors’ reaches. As Einstein said (allegedly), “Compound interest is the most powerful force in the universe.” This is why investors will pour money into a startup: the early stages often require incredible financing in order to take advantage of compound growth and achieve escape velocity.
Believing in compound growth
A lot of these investors are in Silicon Valley, where they have seen compound growth and believe in it. With Facebook, for example, Peter did his homework and was primed to invest in a service displaying unbelievable user engagement. Do you remember Ask Jeeves––now Ask.com? Google outspent it and now it’s in another stratosphere. With PayPal, they decided to incentivize scaling by offering consumers a $10 cash reward for referring a new user.
Peter didn’t love the idea of giving away free money, but he also realized the importance of scaling immediately or else losing ground when someone else arrived there beforehand. He much preferred scaling adequately and then figuring out whether their business model was functional rather than hypothesizing on the functionality of the business model before being at adequate scale for a physical demonstration.
Escape velocity is relative; competition is, too
Finally, escape velocity is never a fixed speed. This is why Hoffman and Thiel decided to sell PayPal to eBay, although they always question the decision. They knew they would be hard-pressed to improve their non-eBay business by over 100% a year to meaningfully diversify. They also knew your escape velocity is always relative to your competitors, the fastest of whom is how you know when to hit the gas. Who knows whether eBay would have dumped them or found its own way.
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Justin is a writing intern for AbilitySEO with a passion for words and a love of both consuming and creating content. He studied philosophy and, outside of marketing, enjoys volunteering and pop culture. Contact him at email@example.com