Zero to One: Lessons From Peter Thiel w/Shawn O’Malley (MI383)
Summary
Creative Monopolies: The guest emphasizes investing in monopoly-like businesses that create and capture outsized value versus competing in commoditized markets.
Google (GOOGL): Used as the prime example of a search monopoly with superior economics and network effects, contrasted with low-margin airlines.
Airlines Sub-Industry: Highlighted as structurally competitive with weak pricing power and poor long-term shareholder returns despite delivering societal value.
Apple (AAPL): Cited for the iPhone as a zero-to-one innovation leading to durable ecosystem advantages and effective “monopoly” dynamics.
Amazon (AMZN): Praised for Prime’s value and strategic expansion from a niche (books) to broad retail, illustrating capture of value and scale.
PayPal (PYPL): Detailed as a case study in scaling during the dot-com era, distribution strategy (referral incentives), and survival via strategic decisions.
Contrarian Investing: Encourages independent thinking and avoiding crowd bias, with Nvidia (NVDA) cited as an example where sentiment can cloud judgment.
Globalization vs. Vertical Progress: Notes decades of horizontal progress via globalization and argues for backing true zero-to-one innovations that transform markets.
Transcript
(00:00) the question then is what valuable business exists that nobody is creating and importantly is that business unbuilt because it's not possible to capture no value from it or is there an unbuilt business that would create value for society and lend itself to capturing some of that value too this is a great framework to use for assessing any businesses you're considering to invest in that are in the earlier phases of their life cycle where they're still growing into their addressable market and solidifying their business model (00:28) companies like Netflix and Spotify and to a lesser extent Airbnb and Uber are success stories on this front in econ speak the difference between the Airlines and Google is in being able to capture much of the value that a company creates and that boils down to perfect competition and monopolies hello before we dive into the video be sure to click that subscribe button so you never miss an episode show us some love by giving a thumbs up and sharing your thoughts in the comments your support really means everything to (01:01) us today I'll be going through the book 0 to1 to learn as much as possible from the wildly successful investor Peter teal from PayPal to Facebook and paler Peter teal is the common thread behind some of the most impactful tech companies of the last two decades in 2014 teal moved even more into the public eye after publishing zero to one and doing a number of interviews around the book lach that helped make his ideas more mainstream teal is a complicated person as we all are with nuanced and at times highly contrarian views which are (01:34) almost certainly what have enabled him to pursue such an unconventional path in life and to find success in building some of the planet's most transformational companies his book 0 to one is written in the context of Silicon Valley addressing the next generation of tech Founders it was inspired by a series of talks he gave at Stanford to many of the aspiring entrepreneurs who would make up the next generation of innovators and after one of the students in the audience Blake Masters took detail notes on these lectures and (02:01) connected with teal they agreed to work together to turn them into a book with that let me go ahead and just read you a few sentences from the forward to set the tone for our Deep dive on Peter teal today he begins by saying every moment in business happens only once the next Bill Gates will not build an operating system the next Larry Page or Sergey Brin won't make a search engine and the next Mark Zuckerberg won't create a social network if you're copying these guys you aren't learning from them of course it's easier to copy model than to (02:31) make something new doing what we already know how to do only adds more of something familiar but every time we create something new we go from zero to one The Act of Creation is singular as is the moment of creation the result is something fresh and strange there's almost a religious undertone there to discussing what it means to fundamentally change society with the next big thing while I'd say most people could do pretty well by just copying great entrepreneurs like Mark zerber or Bill Gates I can definitely appreciate (03:02) the point he's making especially in the context of trying to inspire the next generation of entrepreneurs at The Cutting Edge of technology for most aspects of the economy iterating on existing products and systems is a great way to remain competitive and protect profits but I don't think teal is talking to people who are thinking about certain car wash or HVAC businesses it's a message tailored to the most ambitious Among Us those who are hoping to contribute to building a new world in their lifetime so again just keep that in mind as I go (03:32) through the book teal proceeds to warn in the preface that the biggest threat facing Corporate America today is complacency an inability to embrace investing in their own disruptive innovation which is something Clayton Christenson wrote about extensively in his book the innovator SOA could be far worse for the health of the economy than the 2008 financial crisis while profits may continue to grow in the meantime without heavy reinvestment in the next disruptive Innovations American companies would be putting themselves (04:02) increasingly at risk of displacement from abroad where the status quo may be less stagnant as teal puts it today's best practices lead to dead ends the best paths are new and untried in a world of giant administrative bureaucracies both public and private searching for A New Path may seem like hoping for a miracle but technology itself is fundamentally miraculous allowing us to do more with less and American companies will need hundreds of such miracles in the coming years to maintain their leading positions in many (04:33) Industries 0o to one in his words is about building companies that create new things drawing directly from everything teal has learned as a co-founder of PayPal and paler and an investor in hundreds of startups from Facebook to SpaceX yet there is no secret formula for Success the Paradox of teaching entrepreneurship is that no Authority can Define and prescribe how to be Innovative because each Innovation is fundamentally unique one commonality he's found though is that successful entrepreneurs tend to think about business differently than (05:05) everyone else finding value in unexpected places in part that's because they approach business with a first principles perspective rather than referencing templates for existing business models one of my favorite nuggets from the book is actually from chapter one where teal explains that in job interviews he always makes sure to ask one simple question what important truth do very few people agree with you on the question alone is sort of a Peak into how teal approaches the world and the type of people he wants to work with (05:34) and honestly I have to say I'm not sure whether teal would ever want to hire me I don't exactly walk around with any bold ideas that make me a significant contrarian and this question is obviously intended to filter people like that out it is really fun to think about though and for days after I first read that line I couldn't stop thinking about what my answer would be and again I couldn't come up with one that I thought was a very much consequence but maybe you can more power to you if so the question itself is super powerful (06:02) because it cuts through all the normal job interview BS and elegantly extracts what may be the most valuable piece of information about someone if you're a young Elon Musk your answer might have been that the future of automobiles is electric and self-driving or that Humanity must colonize Mars to survive long term or if you're a young Travis kalanick the founder of uber your answer would probably be to say that we have millions of people driving around the country at any given moment and we could better optimize that behavior by (06:28) creating a service that allowed essentially any driver to give another passenger a ride to wherever they wanted to go in a way that was safe and affordable until there was a precedent set for Uber the idea would have definitely seemed crazy cabs and limos were normal but I'm certain that if you had tried to explain Uber to someone in 2006 they would have thought that it could never come to fruition it was almost an unimaginable version of reality to everyone except the original founders of uber and that's the point (06:55) here as an investor and entrepreneur teal uses that question to filter out people with the most mainstream perceptions of what's possible because he can only build something truly different by working with people who don't think like anyone else so yeah I love it not only because it's intellectually hard to answer since you can't pull on the information you've learned in school as that is already widely agreed upon but it also shows whether someone's answer has courage perhaps you do have some valuable variant perceptions of what could or (07:22) should be implemented in society but if you don't have the courage to speak up for it then you're not cut out to manifest that Vision by definition you have to say something something that's likely to be unpopular with the person interviewing you and in a real-time interview it's going to take some guts to really speak your truth and not HED yourself in any way seal continues by saying that the most common answers he gets tend to fall into similar categories there some flavor of saying that America's educational system is (07:47) broken that America itself is actually exceptional or that there is no God these are bad answers the first and second answers may be true but many people also already agree with them and the third statement simply takes one side in a familiar debate in Teal's view a good answer goes like this most people believe in X but the truth is the opposite of X and uncovering that overlooked truth is at the Crux of building a better future the future is of course all future moments yet to come but when we think of the future we (08:19) imagine a world that looks different than what we know today in a sense though if nothing about our reality changes for 100 years then the future is really 100 years away no one can predict the future but teal argues we can know two things it must be different and it must be rooted in today's world he outlines two types of progress which will sound familiar if you read the innovator Sola or listen to my episode on it a few weeks back essentially there's horizontal progress where we continue to improve upon existing (08:48) technology every year Apple comes up with some new updates to its operating system and your phone runs a little faster or has some new features but those are iterative advancements building on an existing product whereas vertical progress is where we go from zero to one creating something entirely different so instead of new software updates or new versions of the iPhone a zero to1 vertical advancement would be going from the flip phone to the first iPhone it's a paradigm changing shift critical progress is harder to imagine (09:17) because it inherently means doing something no one else has ever done or at least succeeding in doing sustainably if you have one typewriter and build 100 you have made horizontal progress if you have one typewriter and build a computer you've made vertical progress I'll probably say this a handful of times throughout the episode but Peter teal has just such an interesting perspective on things the outline I just gave about the difference between horizontal and vertical progress probably isn't mind-blowing to anyone but the way he (09:44) then relates that to a more macro perspective is just super interesting to me He suggests that at the macro level the single word for horizontal progress is globalization where we take things that work somewhere and make them work everywhere you might say that China is the epitome of this there 20-year plan has been essentially to become what the United States is today embracing Technologies from across the 19th 20th and 21st centuries including everything from railroads to air conditioning and artificial intelligence they've skipped (10:13) some of the steps along the way but as they develop They're copying much of the playbook for development from the US and Europe and Technology doesn't just refer to computers and software but at its most foundational level technology is any better way of doing things in the last few hundred years we we've had periods of both horizontal advancements like globalization and vertical advancements where we made big technological leaps as well as periods where neither or just one were occurring Teal's view is that since 1971 we've (10:42) been in a period of Rapid horizontal progress thanks to globalization but our vertical progress has been relatively limited and mostly confined to information technology in the last 50 years our biggest technological breakthroughs have been so confined to the digital realm that when most people think of Technology they only think the internet and computers we've gotten better at enabling computers to do things but we haven't made nearly the same technological progress in other areas the commercial flight today is (11:10) much the same as it was in 1990 and we still rely on the same railroads we used over 100 years ago cars are more efficient and luxurious now but they're not profoundly different than they were in the 1960s before the internet Revolution our biggest technological advances were in the physical world things like steam engines air conditioning refrigerators automobiles airplanes and antibiotics these were huge advancements in the physical technology realm and you could argue that besides a lot of progress in the (11:38) digital realm we haven't really made any other revolutionary zero to1 advances and Technology since then again I'm not saying I fully agree with that but you know that is Peter Teal's take here SpaceX made some headlines not long ago for its breakthrough in rocketry by Landing its Starship rocket for the first time but even so that's not going to change how we live our lives anytime soon and the Counterpoint is is that we made it to the moon in 1969 and haven't been back since so I could probably play devil's advocate here but I do (12:06) appreciate where teal is coming from in my lifetime most of the big changes have been confined to digital Technologies if all of our smartphones disappeared tomorrow the world would not look hugely different than it did 20 years ago while it really might have been unrecognizable for someone to time travel from 1930 to 1950 seal makes another interesting point that even the language we use implies some technological history that we've already accomplished everything there is to accomplish the term developed countries suggests that some (12:35) countries have reached the Pinnacle of advancement while developing countries have progress yet to make yet if India were to have the same standard of living and consumption per capita as America the outcome would be environmental Devastation with current Technologies we cannot afford for the entire world to have a developed standard of living because the resource and energy costs are too high that alone tells us that there's so much progress left to make and developing technologies that will continue to make it possible to do more (13:02) with less in Teal's view the challenge for the next generation of entrepreneurs is to fulfill the dreams of our parents to figuratively speaking build a world of flying cars and colonies in the moon like so many in 1960 imagined that 2020 might look like instead he thinks we've been distracted by screens and smartphones where virtual progress makes us forget that the physical world around us is surprisingly stuck in time it's up to us then to build a future that is more prosperous and peaceful than any ever known before teal says quote any (13:34) great company is a conspiracy to change the world so that's some inspiring stuff and he continues to make points that are for lack of a better way to say it just really unique ways to think about things for example teal talks about how vertical progress is often driven by small groups of passionate devotees Bound by the same vision while working and start contrast to larger more bureaucratic organizations and as a result is definition of a startup is that it's the largest group of people you can convince to build a better (14:04) future but paradoxically to actually be able to get things done a startup must remain small 0o to one is less a manual or record of information and more a way of thinking because that is in Teal's words what a startup has to do question commonly held ideas and rethink business from scratch this is clearly a huge contrast from talking about boring businesses and hitting Compounders or the Warren Buffett approach to investing but at a minimum I think 0 to1 is important to read because it's in many ways a guiding book for the next wave of (14:36) innovators in Silicon Valley in elsewhere trying to change the world and as a long-term investor I want to know what these innovators think not necessarily so I can be a venture capitalist but to better understand the world I'm investing in around me I'm not exactly hoping to be like Peter teal and find the next Marcus Zuckerberg to invest in while they're still in college but I do want to know how the Mark Zuckerberg's and Peter teals of the world approach innovation and investing especially because companies like meta (15:02) and PayPal are no longer startups and are in fact some of the biggest businesses in our economy turning back to the book and to's question on what you see differently about the world from everyone else it helps to consider what things everyone agrees about so you can look behind that reality for a contrarian truth only in hindsight do the distorted and flawed beliefs of the past look obviously wrong in the 1990s for example with the internet Revolution and full action it was common to disregard traditional metrics of (15:28) profitability as to pedestrian in favor of new metrics like page clicks on your website the thinking being that the internet was going to be so big if you could have a leading website it didn't matter whether you made money today because you would inevitably be rich dozens of companies launched with no formal business plan Beyond simply hoping to build a popular website that they didn't yet know how to monetize when we become consumed by these illusions at a society-wide level a bubble sets in and only pops once it (15:57) becomes clear to enough people that the current set of widely held beliefs are not sustainable at the onset of thec bubble companies like Yahoo and Amazon listed publicly for the first time and promptly quadrupled in value while fed chairman Alan greenspin warned against IR rational exuberance in markets to Market participants at the time it was far less clear that their optimism about the digital age was unfounded the do bubble was in Teal's words 18 months of mania from 1998 to 2000 it was a Silicon Valley Gold Rush with so many people (16:30) suddenly becoming millionaires irrational optimism quickly turned rational T writes quote everywhere I looked people were starting and flipping companies with alarming casualness one person told teal they were already planning their IPO from their living room before having even Incorporated the company and they didn't find that weird at all the thing about bubbles is that they're intoxicating greed excitement and Indie all conspired together to disarm even the most staunch professionals I can't speak to what it (16:59) was like during the com bubble but I know in 2020 and 2021 we can all remember something similar suddenly everyone was day trading stocks buying obscured crypto tokens and seemingly getting massively Rich all along the way I did things with my money that I would not otherwise do I didn't do anything too unhinged but still I know plenty of people who did and I completely understand how they were getting caught up in that hype from Teal's perspective he says that the dotom bubble was a period he knew couldn't last so he was (17:26) trying to raise as much money from investors as he could to support PayPal before the music stopped PayPal needed at least 1 million users to be economically viable and after other marketing efforts had fallen short this team had the idea to pay people $10 to sign up and another $10 for every referral they earned that tactic worked and PayPal adoption surged this was clearly a costly way to grow though and it became all the more important for PayPal to cash in on the internet hype while they could PayPal managed to (17:55) survive as we all know but when the bubble did pop teal believes it changed the world the promise of bold new technologies was set aside in favor of globalization and anyone who had goals measured in years were sneered at in favor of more practical quarterly targets the world regained its sanity but lost its conviction in building a radically better future and the entrepreneurs who stuck with Silicon Valley learn lessons from this time that still shape their thinking today firstly many learn to focus on incremental (18:24) improvements Grand Visions are what stoked the bubble and anyone making grandio promise about tomorrow were deemed not trustworthy relatedly maintaining a lean staff that can be flexible became prized planning for the future was seen as arrogant and inflexible and thus the survivors of the dotom bubble prioritized flexibility while treating entrepreneurship as nothing more than agnostic experimentation on top of this in Teal's opinion many Doom era entrepreneurs decided that it was better to try and improve upon what existing competitors (18:55) were doing rather than building whole new markets starting with satisfying an existing customer was seen as preferable to creating new types of customers with unproven preferences and lastly the post.com generation of Founders came to focus on product not distribution there was so much wasteful advertising during the Doom bubble that afterwards silicon value leaders wanted products to almost entirely speak for themselves they wanted viral growth instead of paid marketing and while these thinkings have been ingrained into startups for over (19:26) two decades teal argues that the opposite conclusions are true in many cases more competition in existing markets is what destroys profits which is why it's ideal for new entrepreneurs to weighed into uncharted waters a bad plan for building the future is better than no plan and sales matters just as much as product he writes that the market high of 2000 was obviously a peak of insanity but less obviously it was also a peak of clarity people looked far into the future saw how much valuable new technology we'd need to get there (19:58) safely and judge themselves capable of creating it teal adds that we still need that technology and we may even need some 1999 style huus to help us get there in his words quote to build the next generation of companies we must abandon the dogmas fostered after the crash ask yourself how much of what you know about business is shaped by mistaken reactions to past mistakes this book is just so enjoyable to read because it's filled with lines like that that just make you stop and really think it resonates with me because someone who (20:29) took a bunch of econ classes in college I can appreciate more than most that economics is very much a soft science there is no universal law of gravity in economics and nothing about economic systems is as simple as it looks on paper much of what we know about economics broadly is extrapolated from past crashes and economic boom and bus periods there are few facts we know to be universally true what we might have thought was the cause of one crisis ended up not being an issue during another time period with vastly (20:58) different circumstances every product company economy an era of economic history is unique in its own way and the more you come to appreciate that the more you wonder how much we take for granted as true while being applicable decades ago but not fitting with the current version of reality anyway the point of reading is to help you think and I could hardly make it through the first few chapters without constantly hitting pause on the audible to take notes so Peter teal made me think in a way that a lot of books don't here's (21:26) another great quote from teal reflecting on the bubble the most contrarian thing of all is not to oppose the crowd but to think for yourself that reminds me a lot of Joel greenblat and a number of other value investors have talked about before and that is they want to read the news as little as possible so they cannot possibly be biased by the crowd they want to reach investing conclusions completely on their own or at least fully formulate their thoughts before getting input from others the tendency not to stray too far from the crowd is (21:57) pretty hardwired into our brain so everyone is talking about how Nvidia is such a great stock and all the news outlets can't stop talking about its promising future of course you're going to be biased in favor of Nvidia when you sit down to do evaluation of it but you can never look at the company with unvarnished eyes again and completely block out the undercurrent of positive sentiment favoring it and that's sort of a corrupting Factor preventing you from truly thinking for yourself so when I hear the quote from Peter teal it just (22:25) makes perfect sense to me being contrarian isn't to be bearish on Nvidia when everyone else is bullish it's to be so good at tuning out the noise that you don't even know that everyone is wildly bullish which enables you to come to your own unbiased conclusion Buy Low sell High Buy Low sell high it's a simple concept but not necessarily an easy concept right now High interest rates have crushed the real estate market prices are falling and properties are available at a discount which means fundrise believes now is the time to (22:59) expand the fundrise flagship funds billion dooll real estate portfolio you can add the fundrise flagship fund to your portfolio in minutes by visiting fundrise.com Millennial that's fnd d r i.com Millennial carefully consider the investment objectives risks charges and expenses of the fundrise flagship fund before investing this and other information can be found in the funds prospectus at fundrise. (23:27) com Flagship this is a advertisement another point I found compelling is when he talks about how it's one thing to go your own way and be contrarian and even build a business that creates a lot of value for society but it's critical to capture some of that value you create the first example of this that comes to mind is that during the pandemic it seemed like there were so many Grocery and food delivery companies popping up that they were all undercutting each other with various special discounts and promotions I was (23:57) getting a ton of value because because in most cases I was paying virtually nothing to have my dinner or groceries delivered and that was valuable because it saved me time and limited my exposure to catching Co yet even if I was paying a fee these delivery businesses were certainly not earning a profit off of me it was a race to the bottom in many ways and consumers like me were the winners for at least a period of Time Value was being created for society and most of these businesses were capturing none of it whether you're an employee manager or (24:25) investor that's just a bad spot to be in a more common example is also with Airlines we are all undoubtedly better off for being able to fly anywhere almost anytime we want to thanks to major commercial airlines yet as businesses they have been terrible Investments huge fixed costs little economies of scale and government bailouts have all led to more shareholder value in Airline stocks being destroyed than has ever been created that's actually something Buffett has talked about a couple of times over the years airlines are the (24:54) quintessential businesses that create enormous value and reap very little reward for doing so they serve millions of passengers and create hundreds of billions of dollars of value in each year but in 2012 when the average airfare was $178 Airlines only made 38 cents per passenger trick so whether you're building a startup or investing in a recently ipoed tech company you want to think about creating value but also sustainably capturing it on the flip side Google is a huge business that creates many billions if not trillions (25:25) of dollars for the value for society and the company itself has a multi-trillion dollar valuation because they're so good at capturing a large chunk of that Google's profit margins over the past decade have been at various points almost 100 times higher than the airline Industries the question then is what valuable business exists that nobody is creating and importantly is that business unbuilt because it's not possible to capture no value from it or is there an unbuilt business that would create value for society and lends (25:53) itself to capturing some of that value too this is a great framework to use for assessing any businesses you're considering to invest in that are in the earlier phases of their life cycle where they're still growing into their adjustable market and solidifying their business model companies like Netflix and Spotify and to a lesser extent Airbnb and Uber are success stories on this front while companies like Twitter Snapchat and Etsy are former Tech Darlings that gain popularity would never really crack the code on a (26:21) sustainably profitable business model reflecting how much value they created Reddit was listed in 2024 and is a newcomer amongst publicly traded social media companies and while the platform creates value for millions of users it remains to be seen if they can successfully capture a meaningful chunk of that value in econ speak the difference between the Airlines and Google is in being able to capture much of the value that a company creat and that boils down to perfect competition and monopolies Airline seats are (26:50) fungible credit card points and other loyalty programs try to push you to favor one Airline over another but realistically speaking if you have two airlines offer to take take you to your destination you're going to make your choice mostly based on price departure time and whether there are any connecting flights whether you're choosing Delta or United is typically an afterthought Beyond those primary considerations so airlines are very much not monopolies competition is fearsome and it's structurally difficult to (27:17) differentiate from each other which means they largely end up competing on price or convenience and as a shareholder in airline companies that is not really a very good position to be in that lack of different differentiation and intense competition makes large profitable years the exception to the rule for most Airlines While others chronically bleed money Google on the other hand has a search Monopoly that as of the time Peter teal wrote this book had no credible competitors only the rise of AI chat Bots have been able to (27:47) challenge this Monopoly but still it remains to be seen to what extent that is really a threat they were and still are the primary gatekeeper to a hugely valuable service that loyalty Network effects and product superiority all combined to give Google a massive advantage over competitors enabling it to routinely dominate the search engine Market while capturing the associated user data and using that to build a Marketplace for advertisers despite what is taught in econ classes monopolies are good at least from the perspective of (28:18) shareholders and business Founders Google is an infinitely more attractive company to invest in than any airlin and while Google loves to deny that they have a monopoly that un itself is a tell that they do see most companies are trying to overstate their competitive position to investors management wants to brag about their employees and products to investors and so they end up pitching them on how great their company is which is almost always an exaggeration or at best wishful thinking yet true monopolies like Google are (28:47) quietly raking in billions in profits while trying to understate the quality of their business they know that they have a massive competitive advantage and they want to keep it that way meaning they don't want to do anything that will further tip off Regulators to come in and break up their company in the way that companies like at& and Microsoft have been broken up in the past it's such an interesting way to think about things but again I think teal is right the truly rare exceedingly powerful monopolies are more incentivized to (29:15) paint a picture of how they are constantly under competitive threats which if you listen to earnings calls from any of the big tech companies that's exactly what you'll hear them say and there's definitely some truth to that since they aren't going out of their way to tell everyone that they have Monopoly businesses the elephant in the room is in how you define Monopoly while Google has something like 90% control over the global search Market rather than telling you that Google's management wants to paint a picture of (29:42) Information Technology more broadly where Google looks much more like a small fish in a big pond conversely in Teal's view many startups make the Fatal flaw of underestimating competition by defining the market they compete into narrowly to make themselves seem like more of a leader than they are for for example a restaurant that makes British food in Palo Alto may call themselves a market leader in British food in the area and may even claim to have a monopo that the real Market they're competing in isn't just for British food it's (30:10) against all types of restaurants in paloalto suddenly through that lens it becomes much clearer that the restaurant isn't anything close to Monopoly and is instead a small fish in a very big pond knowing who and what you are competing against then is critical and on both ends of the spectrum monopolies and companies with no competitive advantages may be trying to deceive you and how they Define their set of competitors for any company I invest in I make a point of clearly trying to Define its market and competitors so I can know if it's (30:40) closer to a Google in search or closer to a British restaurant in Palo Alto as a contrarian indicator to what extent a company's management understates or overstates how much competition they face can reveal whether they're truly a monopoly hoping to Plate Regulators or if there a wannabe Monopoly trying to impress investors and when I call Google a monopoly just know that I'm not talking about a monopoly in the sense that you might have learned about in school those types of monopolies have gained their advantages by illegally bullying and (31:09) undercutting their competitors or by being protected by Regulators as some utilities are Google for the most part is a monopoly for none of those reasons instead they're a monopoly because of their operational excellence and product quality they're by far the best at what they do and as a result they have effectively no competition no one can offer a close substitute as Peter teal outlines in the book Google is a classic case of going from zero to one and the company has won so big that they haven't seriously competed on search since the (31:42) early 2000s and if you want to build a lasting business with profits like Google or invest in those types of companies don't go out and build an undifferentiated commodity like business where profits are likely to be competed away go build or find monopolies to invest in specifically the good kind of monopolies ones that have no competitors because they're so Innovative or operationally effective teal offers another pretty compelling anecdote here to deliver the message where he describes how him and his colleagues (32:10) would frequently have their pick of restaurants to get lunch at and PayPal's early days ironically though some of these restaurants employed more people than PayPal did while PayPal was worth several orders of magnitude more than their businesses combined the point being opening another restaurant is to step into a fiercely competitive Realm one where there is a hard limit on how much value you can create as you've surely picked up on by now teal has unorthodox views on the world which is what has drawn so many people to follow (32:39) his every move especially since he has a successful track record underpinning his musings his views on competition broadly are no less unorthodox than his take on monopolies teal argues that yes monopolies do by definition inflict some cost on society by extracting higher profits from consumers but that is still again not necessarily a bad thing instead a monopoly status in business means to teal that a company has the flexibility to focus on building things that customers truly want things they may not even realize they want too if (33:11) monopolies existed in a static world as they do in Academia then they would just be toll road companies who make the world worse off by imposing frictional costs but the world isn't static and monopolies like Apple and Google must respond dynamically to what's happening around them that leaves them constantly innovating and the more of a monopoly they are the more they can focus on that Innovation while the rest of Silicon Valley was undercutting each other on improving existing products Apple stepped in and designed the iPhone and (33:40) while Apple has something of a monopoly on smartphones today in the US few people are really unhappy about it most people I know are more than satisfied with their ecosystem of Apple products and Apple's ability to identify and build a zero to1 product that people actually wanted has brought them Decades of Monopoly status and in Teal's view again that is not necessarily A Bad Thing teal sees competition as more of a human construct than a natural byproduct of the business World in fact he describes how capitalism and competition (34:12) are in a sense antithetical in economics capitalism refers to the accumulation of capital whereas competition refers to the erosion of profits I'd say that at a minimum he sees most competition as laziness and wasted efforts because so much comp comption is premised on taking what someone else is already doing and doing it slightly differently and pragmatically speaking that ends up being better for almost no one where Square had a zero to1 invention in building a card reader that could plug into Mobile phones for processing (34:42) payments all the other companies like intu and even PayPal that built slightly differently shaped card readers that serve the same purpose were not a productive allocation of time and resources you could probably say the same thing for large language models and chat Bots today too jat gbt was of course a zero to1 Innovation but now every big tech company is trying to build their own chatbot and a lot of that effort is just redundant so again teal makes a point that made me question many of my preconceptions about (35:09) competition and monopolies we take competition for granted as a good thing but there are plenty of instances especially in the 21st century where monopolies are not parasites but actually Innovative firms creating value for society with Amazon I'm very happy with their dominant positioning $140 a year for Prime which me access to their streaming platform Thursday night football and free delivery on almost any product you can imagine Plus discounts at Whole Foods and a whole bunch of other services is just incredibly (35:37) valuable and nothing like the monopolies of the 19th and 20th centuries from Teal's perspective creative monopolies like apple Amazon and Google born from Innovation earn their periods of excess profits as a reward for building zero to1 inventions that give Society what it really wants or didn't know it wanted to him competition means a struggle for survival little differentiation between products and no lasting profits while creative monopolies create differentiated products don't struggle to survive and can enjoy the Bountiful (36:07) profits they created by Distributing them across their employee base and shareholders he questions why at all then we accept Relentless competition as a natural byproduct of capitalism and free markets he calls competition an ideology the ideology that pervades our thinking in sports we celebrate competition for the sake of competition and in school we forc children to compete on arbitrarily defined metrics of knowledge and on whether they can sit still and focus all day despite the fact that this comes unnaturally to a segment (36:38) of the population while business is often compared to war teal says that competition specifically is what resembles War allegedly necessary supposedly Valiant and ultimately destructive while teal battled with Elon Musk during the.com bubble as teal oversaw PayPal and musk LED an almost identical company called x. (36:58) com they nearly ran each other into the ground before deciding to compete no longer and instead merge the credits that decision and the humility it took to set both of their egos aside as what saved both companies and enabled the merge business to survive the bubbles burst and remain today in terms of what it actually looks like to build a creative Monopoly teal says that a creative Monopoly must have a product that is at least 10 times better than the closest substitute it's not an exact science to calculate this but you can appreciate what he means (37:27) with with some examples PayPal's digital money transfer services were 10 times better than using checkbooks iPhones were a considerable upgrade from flip phones and blackberries with thousands of books early Amazon was an order of magnitude better than any bookstore and Google was Far faster and easier to use than any other search engine same with Netflix Netflix's service was easily 10 times better than Blockbusters and in Teal's view Renewable Energy Technologies haven't gained more mainstream acceptance because in most cases they're nowhere (37:59) near being a 10 times Improvement unless a product is overwhelmingly Superior inertia will win out a product that is a 20% Improvement hypothetically in a lab setting hardly justifies the time effort and money that may be necessary to switch over and implement this new technology and the Nuance here is that creative monopolies looking to build 10 times better technology don't try and chase their entire possible target market from day one in fact he says most mbas have trouble identif if Ying the next 0o to1 companies because they're (38:30) often born out of niches that hardly even look like legitimate business opportunities the challenge that clean energy companies have had is that they're beginning from the point of trying to solve a giant Global problem rather than focusing on building Monopoly over a specific Niche Amazon didn't start out on day one try to be a retailer of everything it started as a bookstore mastered its Supply chains and organizational infrastructure and scaled into other product lines one by one same with eBay it started out as an auction (38:58) system for hobbyists perfected that Niche and Grew From There Facebook started as a social network just for students at Harvard and dominated that Niche if someone draws up a hundred billion dollar target market and says their goal is to capture 1% of that market that is a red flag to teal most likely they're diving head first into an industry that's more competitive than they realize instead he tells Founders and investors to look for businesses that dominate their Niche and how much value they can create and then have the (39:27) opportunity to to expand from there I'll also add that teal takes great offense at the idea that successful serial entrepreneurs are products of luck he tells the reader that you are not a human lottery ticket and while conventional wisdom in the last century has come to suggest that the world is always improving and progressing that indefinite optimism breeds complacency to him the Western world has lost its affinity for long-term planning and ambitious goals just a few years the US built the Golden Gate Bridge constructed (39:55) tens of thousands of miles of inter State highways built the first atom bomb and landed on the moon such accomplishments seem like a relic of the past though and even the most mundane construction projects in places like New York and Boston can take a decade to finish as a society our inclination toward intelligent design has faded and been swept away by a more abstract optimism that the world will keep improving as it always has in recent memory while very few tangible plans to build that better future exist teal (40:25) argues that startups are the Pinnacle of intention intelligent design in a world of indefinite optimism where most are just waiting for Progress to happen and continue on inexplicably around them Founders have full control over the organization they're building and the dream they're chasing Steve Jobs did not build Apple into what it is today with minimum viable products and quarterly goals instead he had the conviction to imagine a better future and then begin planning how to build it today you can always point to luck but with a sample (40:55) size of one and no ability to re want time and run different simulations there's no way to know for sure whether a company like apple was an inevitable outcome of Steve Jobs's vision and work ethic or whether its presence today stems from a series of past lucky breaks it is definitely sort of an intellectual debate with no answer but so many billionaires point to luck as playing a big part of their success which is certainly true in some ways but that isn't enough to justify writing off their skills and vision either in Teal's (41:23) opinion what made someone like Steve Jobs so special is that rather than being practical about running a business and building up cash while waiting for the right opportunity to come which would be a form of indefinite optimism as seal calls it jobs attacked luck by making strategic plans for distant products that few of his competitors had the conviction and discipline to look so far into the future to imagine and then began patiently planning for how to construct them another principle from the book I want to mention today that (41:50) you're probably familiar with to some extent is the Paro principle this is a power law showing how the world is not normally in equally distributed dating back to paro's Observation that 20% of the noble families in Italy owned 80% of the land which to him was just as natural as the fact that 20% of the pea plants and his yard produced the vast majority of peas you'll definitely be familiar with this if you ever read the Black Swan by Nim TB but teal makes the case for how so much of life around us mirrors the Paro principle inventure (42:22) Capital the entire industry is built around that one rule the vast majority of companies and adventure funds portfolio will fail while just one or two big Winners will generate all of the returns over a 7 to 10 year period in Teal's Founders fund he saw that exact same dynamic in action Facebook earned more for the fund than all the other Investments combined and paler their second biggest winning investment generated more returns than all the other positions combined besides Facebook rather than trying to cast as (42:52) wide of a net as possible and hoping to reel in one of these big Winners teal views this says all the more reason to be extremely intentional a good venture capitalist investor doesn't invest small amounts in as many possible companies as they can and hope to win by playing a numbers game they intentionally invest meaningful amounts in companies that they seriously believe at least have the potential of being the next Facebook or paler and with a portfolio like that you're just far likelier to find success 0o to one is a special book one that I'd (43:24) ardently recommend any listener of this podcast to read few people are as idiosyncratic thinkers as teal and I think there's just so much to learn from him he is truly embraced being a contrarian by thinking for himself throughout this episode I've tilted some of the book's takeaways to be relevant to investors but there's so much more in it that's relevant to those in the weeds of building businesses from how to distribute Equity among the founding team to the right size of your board what his experience at PayPal taught him (43:52) about culture and hiring well why people who care too much about employment perks are probably not invested in your culture and why teal never works with part- Tim or outside Consultants besides accountants and lawyers to wrap things up today I want to share one more passage from a book that is more inspirational than practical teal writes the Ancients saw all of history as a never ending alternation between prosperity and Rowan only recently have people dared to hope that we might permanently Escape Misfortune and it's (44:22) still possible to wonder whether the stability we take for granted will last however we usually supress our doubts conventional wisdom seems to assume instead that the whole world will converge toward a plateau of development similar to the life of the richest countries today in this scenario the future will look a lot like the present he adds that the hardest to imagine future is the one where we embark on an accelerating takeoff toward a better reality the results of such a breakthrough could take any number of (44:50) forms but any one of them would be so different from the present that they defy description the essential first step forward to this better future is to think for yourself that's all for today but before I let you go one last say if you're going to Omaha in May of 2025 for the birkshire haway shareholder meeting I want to hear from you the investors podcast network is hosting events that Friday and Saturday night and I'd love to meet you there if you're interested in learning more and hanging out at the investors podcast sponsored events just (45:19) email me for more information at Sean theinverseside investors podcast.com I'll see you again next week hey guys this is your Millennial investing host Shan Ali when I first started learning as a value investor I had no idea what direction to go in there's just so much to try and wrap your head around but it's never too late to get smarter about Stock Investing from the ground up after spending years interviewing and studying the best stock investors as a company at the investors podcast Network I've worked to distill (45:55) those learnings into a simple course for you you why did I do that so I can help you master the principles of excellent lifelong investing I was a fan of the investors podcast for years before I joined the team and I always wanted a course that broke down the most important insights from a decade of interviews with leading investors the course is great for both beginners and pros from studying what the Legends actually do to small practical ways to build your wealth over time I'll take you through 10 different sections (46:24) covering the basics of what a stock actually is and how stock markets work to strategies to optimize your retirement savings picking great companies what to look for in ETFs how much you should invest and how to monitor your Investments plus so much more by the time you're done you'll be ready to invest in the stock market learning plenty of tricks from the pros along the way to access the course and begin learning how to invest like the Legends just visit the investors podcast. (46:51) com slet started with stocks that's the investors podcast.com slet started with stocks and for a limited time you can use code mi15 for a 15% discount at checkout that's mi15 when checking out aspiring companies are biased toward breaking into a market and because they have comparatively nothing to lose they're willing to risk it all with disruptive Innovations established companies though have everything to lose and across all their value networks people's decisions are biased toward focusing on what has generated success (47:23) so far in catering to existing customers needs value networks are a subtler way to describe organizations it's less that incumbent companies explicitly value the wrong things and more that they are implicitly biased toward preserving and augmenting the status quo not trying to flip everything upside down with disruptive innovation
Zero to One: Lessons From Peter Thiel w/Shawn O’Malley (MI383)
Summary
Transcript
(00:00) the question then is what valuable business exists that nobody is creating and importantly is that business unbuilt because it's not possible to capture no value from it or is there an unbuilt business that would create value for society and lend itself to capturing some of that value too this is a great framework to use for assessing any businesses you're considering to invest in that are in the earlier phases of their life cycle where they're still growing into their addressable market and solidifying their business model (00:28) companies like Netflix and Spotify and to a lesser extent Airbnb and Uber are success stories on this front in econ speak the difference between the Airlines and Google is in being able to capture much of the value that a company creates and that boils down to perfect competition and monopolies hello before we dive into the video be sure to click that subscribe button so you never miss an episode show us some love by giving a thumbs up and sharing your thoughts in the comments your support really means everything to (01:01) us today I'll be going through the book 0 to1 to learn as much as possible from the wildly successful investor Peter teal from PayPal to Facebook and paler Peter teal is the common thread behind some of the most impactful tech companies of the last two decades in 2014 teal moved even more into the public eye after publishing zero to one and doing a number of interviews around the book lach that helped make his ideas more mainstream teal is a complicated person as we all are with nuanced and at times highly contrarian views which are (01:34) almost certainly what have enabled him to pursue such an unconventional path in life and to find success in building some of the planet's most transformational companies his book 0 to one is written in the context of Silicon Valley addressing the next generation of tech Founders it was inspired by a series of talks he gave at Stanford to many of the aspiring entrepreneurs who would make up the next generation of innovators and after one of the students in the audience Blake Masters took detail notes on these lectures and (02:01) connected with teal they agreed to work together to turn them into a book with that let me go ahead and just read you a few sentences from the forward to set the tone for our Deep dive on Peter teal today he begins by saying every moment in business happens only once the next Bill Gates will not build an operating system the next Larry Page or Sergey Brin won't make a search engine and the next Mark Zuckerberg won't create a social network if you're copying these guys you aren't learning from them of course it's easier to copy model than to (02:31) make something new doing what we already know how to do only adds more of something familiar but every time we create something new we go from zero to one The Act of Creation is singular as is the moment of creation the result is something fresh and strange there's almost a religious undertone there to discussing what it means to fundamentally change society with the next big thing while I'd say most people could do pretty well by just copying great entrepreneurs like Mark zerber or Bill Gates I can definitely appreciate (03:02) the point he's making especially in the context of trying to inspire the next generation of entrepreneurs at The Cutting Edge of technology for most aspects of the economy iterating on existing products and systems is a great way to remain competitive and protect profits but I don't think teal is talking to people who are thinking about certain car wash or HVAC businesses it's a message tailored to the most ambitious Among Us those who are hoping to contribute to building a new world in their lifetime so again just keep that in mind as I go (03:32) through the book teal proceeds to warn in the preface that the biggest threat facing Corporate America today is complacency an inability to embrace investing in their own disruptive innovation which is something Clayton Christenson wrote about extensively in his book the innovator SOA could be far worse for the health of the economy than the 2008 financial crisis while profits may continue to grow in the meantime without heavy reinvestment in the next disruptive Innovations American companies would be putting themselves (04:02) increasingly at risk of displacement from abroad where the status quo may be less stagnant as teal puts it today's best practices lead to dead ends the best paths are new and untried in a world of giant administrative bureaucracies both public and private searching for A New Path may seem like hoping for a miracle but technology itself is fundamentally miraculous allowing us to do more with less and American companies will need hundreds of such miracles in the coming years to maintain their leading positions in many (04:33) Industries 0o to one in his words is about building companies that create new things drawing directly from everything teal has learned as a co-founder of PayPal and paler and an investor in hundreds of startups from Facebook to SpaceX yet there is no secret formula for Success the Paradox of teaching entrepreneurship is that no Authority can Define and prescribe how to be Innovative because each Innovation is fundamentally unique one commonality he's found though is that successful entrepreneurs tend to think about business differently than (05:05) everyone else finding value in unexpected places in part that's because they approach business with a first principles perspective rather than referencing templates for existing business models one of my favorite nuggets from the book is actually from chapter one where teal explains that in job interviews he always makes sure to ask one simple question what important truth do very few people agree with you on the question alone is sort of a Peak into how teal approaches the world and the type of people he wants to work with (05:34) and honestly I have to say I'm not sure whether teal would ever want to hire me I don't exactly walk around with any bold ideas that make me a significant contrarian and this question is obviously intended to filter people like that out it is really fun to think about though and for days after I first read that line I couldn't stop thinking about what my answer would be and again I couldn't come up with one that I thought was a very much consequence but maybe you can more power to you if so the question itself is super powerful (06:02) because it cuts through all the normal job interview BS and elegantly extracts what may be the most valuable piece of information about someone if you're a young Elon Musk your answer might have been that the future of automobiles is electric and self-driving or that Humanity must colonize Mars to survive long term or if you're a young Travis kalanick the founder of uber your answer would probably be to say that we have millions of people driving around the country at any given moment and we could better optimize that behavior by (06:28) creating a service that allowed essentially any driver to give another passenger a ride to wherever they wanted to go in a way that was safe and affordable until there was a precedent set for Uber the idea would have definitely seemed crazy cabs and limos were normal but I'm certain that if you had tried to explain Uber to someone in 2006 they would have thought that it could never come to fruition it was almost an unimaginable version of reality to everyone except the original founders of uber and that's the point (06:55) here as an investor and entrepreneur teal uses that question to filter out people with the most mainstream perceptions of what's possible because he can only build something truly different by working with people who don't think like anyone else so yeah I love it not only because it's intellectually hard to answer since you can't pull on the information you've learned in school as that is already widely agreed upon but it also shows whether someone's answer has courage perhaps you do have some valuable variant perceptions of what could or (07:22) should be implemented in society but if you don't have the courage to speak up for it then you're not cut out to manifest that Vision by definition you have to say something something that's likely to be unpopular with the person interviewing you and in a real-time interview it's going to take some guts to really speak your truth and not HED yourself in any way seal continues by saying that the most common answers he gets tend to fall into similar categories there some flavor of saying that America's educational system is (07:47) broken that America itself is actually exceptional or that there is no God these are bad answers the first and second answers may be true but many people also already agree with them and the third statement simply takes one side in a familiar debate in Teal's view a good answer goes like this most people believe in X but the truth is the opposite of X and uncovering that overlooked truth is at the Crux of building a better future the future is of course all future moments yet to come but when we think of the future we (08:19) imagine a world that looks different than what we know today in a sense though if nothing about our reality changes for 100 years then the future is really 100 years away no one can predict the future but teal argues we can know two things it must be different and it must be rooted in today's world he outlines two types of progress which will sound familiar if you read the innovator Sola or listen to my episode on it a few weeks back essentially there's horizontal progress where we continue to improve upon existing (08:48) technology every year Apple comes up with some new updates to its operating system and your phone runs a little faster or has some new features but those are iterative advancements building on an existing product whereas vertical progress is where we go from zero to one creating something entirely different so instead of new software updates or new versions of the iPhone a zero to1 vertical advancement would be going from the flip phone to the first iPhone it's a paradigm changing shift critical progress is harder to imagine (09:17) because it inherently means doing something no one else has ever done or at least succeeding in doing sustainably if you have one typewriter and build 100 you have made horizontal progress if you have one typewriter and build a computer you've made vertical progress I'll probably say this a handful of times throughout the episode but Peter teal has just such an interesting perspective on things the outline I just gave about the difference between horizontal and vertical progress probably isn't mind-blowing to anyone but the way he (09:44) then relates that to a more macro perspective is just super interesting to me He suggests that at the macro level the single word for horizontal progress is globalization where we take things that work somewhere and make them work everywhere you might say that China is the epitome of this there 20-year plan has been essentially to become what the United States is today embracing Technologies from across the 19th 20th and 21st centuries including everything from railroads to air conditioning and artificial intelligence they've skipped (10:13) some of the steps along the way but as they develop They're copying much of the playbook for development from the US and Europe and Technology doesn't just refer to computers and software but at its most foundational level technology is any better way of doing things in the last few hundred years we we've had periods of both horizontal advancements like globalization and vertical advancements where we made big technological leaps as well as periods where neither or just one were occurring Teal's view is that since 1971 we've (10:42) been in a period of Rapid horizontal progress thanks to globalization but our vertical progress has been relatively limited and mostly confined to information technology in the last 50 years our biggest technological breakthroughs have been so confined to the digital realm that when most people think of Technology they only think the internet and computers we've gotten better at enabling computers to do things but we haven't made nearly the same technological progress in other areas the commercial flight today is (11:10) much the same as it was in 1990 and we still rely on the same railroads we used over 100 years ago cars are more efficient and luxurious now but they're not profoundly different than they were in the 1960s before the internet Revolution our biggest technological advances were in the physical world things like steam engines air conditioning refrigerators automobiles airplanes and antibiotics these were huge advancements in the physical technology realm and you could argue that besides a lot of progress in the (11:38) digital realm we haven't really made any other revolutionary zero to1 advances and Technology since then again I'm not saying I fully agree with that but you know that is Peter Teal's take here SpaceX made some headlines not long ago for its breakthrough in rocketry by Landing its Starship rocket for the first time but even so that's not going to change how we live our lives anytime soon and the Counterpoint is is that we made it to the moon in 1969 and haven't been back since so I could probably play devil's advocate here but I do (12:06) appreciate where teal is coming from in my lifetime most of the big changes have been confined to digital Technologies if all of our smartphones disappeared tomorrow the world would not look hugely different than it did 20 years ago while it really might have been unrecognizable for someone to time travel from 1930 to 1950 seal makes another interesting point that even the language we use implies some technological history that we've already accomplished everything there is to accomplish the term developed countries suggests that some (12:35) countries have reached the Pinnacle of advancement while developing countries have progress yet to make yet if India were to have the same standard of living and consumption per capita as America the outcome would be environmental Devastation with current Technologies we cannot afford for the entire world to have a developed standard of living because the resource and energy costs are too high that alone tells us that there's so much progress left to make and developing technologies that will continue to make it possible to do more (13:02) with less in Teal's view the challenge for the next generation of entrepreneurs is to fulfill the dreams of our parents to figuratively speaking build a world of flying cars and colonies in the moon like so many in 1960 imagined that 2020 might look like instead he thinks we've been distracted by screens and smartphones where virtual progress makes us forget that the physical world around us is surprisingly stuck in time it's up to us then to build a future that is more prosperous and peaceful than any ever known before teal says quote any (13:34) great company is a conspiracy to change the world so that's some inspiring stuff and he continues to make points that are for lack of a better way to say it just really unique ways to think about things for example teal talks about how vertical progress is often driven by small groups of passionate devotees Bound by the same vision while working and start contrast to larger more bureaucratic organizations and as a result is definition of a startup is that it's the largest group of people you can convince to build a better (14:04) future but paradoxically to actually be able to get things done a startup must remain small 0o to one is less a manual or record of information and more a way of thinking because that is in Teal's words what a startup has to do question commonly held ideas and rethink business from scratch this is clearly a huge contrast from talking about boring businesses and hitting Compounders or the Warren Buffett approach to investing but at a minimum I think 0 to1 is important to read because it's in many ways a guiding book for the next wave of (14:36) innovators in Silicon Valley in elsewhere trying to change the world and as a long-term investor I want to know what these innovators think not necessarily so I can be a venture capitalist but to better understand the world I'm investing in around me I'm not exactly hoping to be like Peter teal and find the next Marcus Zuckerberg to invest in while they're still in college but I do want to know how the Mark Zuckerberg's and Peter teals of the world approach innovation and investing especially because companies like meta (15:02) and PayPal are no longer startups and are in fact some of the biggest businesses in our economy turning back to the book and to's question on what you see differently about the world from everyone else it helps to consider what things everyone agrees about so you can look behind that reality for a contrarian truth only in hindsight do the distorted and flawed beliefs of the past look obviously wrong in the 1990s for example with the internet Revolution and full action it was common to disregard traditional metrics of (15:28) profitability as to pedestrian in favor of new metrics like page clicks on your website the thinking being that the internet was going to be so big if you could have a leading website it didn't matter whether you made money today because you would inevitably be rich dozens of companies launched with no formal business plan Beyond simply hoping to build a popular website that they didn't yet know how to monetize when we become consumed by these illusions at a society-wide level a bubble sets in and only pops once it (15:57) becomes clear to enough people that the current set of widely held beliefs are not sustainable at the onset of thec bubble companies like Yahoo and Amazon listed publicly for the first time and promptly quadrupled in value while fed chairman Alan greenspin warned against IR rational exuberance in markets to Market participants at the time it was far less clear that their optimism about the digital age was unfounded the do bubble was in Teal's words 18 months of mania from 1998 to 2000 it was a Silicon Valley Gold Rush with so many people (16:30) suddenly becoming millionaires irrational optimism quickly turned rational T writes quote everywhere I looked people were starting and flipping companies with alarming casualness one person told teal they were already planning their IPO from their living room before having even Incorporated the company and they didn't find that weird at all the thing about bubbles is that they're intoxicating greed excitement and Indie all conspired together to disarm even the most staunch professionals I can't speak to what it (16:59) was like during the com bubble but I know in 2020 and 2021 we can all remember something similar suddenly everyone was day trading stocks buying obscured crypto tokens and seemingly getting massively Rich all along the way I did things with my money that I would not otherwise do I didn't do anything too unhinged but still I know plenty of people who did and I completely understand how they were getting caught up in that hype from Teal's perspective he says that the dotom bubble was a period he knew couldn't last so he was (17:26) trying to raise as much money from investors as he could to support PayPal before the music stopped PayPal needed at least 1 million users to be economically viable and after other marketing efforts had fallen short this team had the idea to pay people $10 to sign up and another $10 for every referral they earned that tactic worked and PayPal adoption surged this was clearly a costly way to grow though and it became all the more important for PayPal to cash in on the internet hype while they could PayPal managed to (17:55) survive as we all know but when the bubble did pop teal believes it changed the world the promise of bold new technologies was set aside in favor of globalization and anyone who had goals measured in years were sneered at in favor of more practical quarterly targets the world regained its sanity but lost its conviction in building a radically better future and the entrepreneurs who stuck with Silicon Valley learn lessons from this time that still shape their thinking today firstly many learn to focus on incremental (18:24) improvements Grand Visions are what stoked the bubble and anyone making grandio promise about tomorrow were deemed not trustworthy relatedly maintaining a lean staff that can be flexible became prized planning for the future was seen as arrogant and inflexible and thus the survivors of the dotom bubble prioritized flexibility while treating entrepreneurship as nothing more than agnostic experimentation on top of this in Teal's opinion many Doom era entrepreneurs decided that it was better to try and improve upon what existing competitors (18:55) were doing rather than building whole new markets starting with satisfying an existing customer was seen as preferable to creating new types of customers with unproven preferences and lastly the post.com generation of Founders came to focus on product not distribution there was so much wasteful advertising during the Doom bubble that afterwards silicon value leaders wanted products to almost entirely speak for themselves they wanted viral growth instead of paid marketing and while these thinkings have been ingrained into startups for over (19:26) two decades teal argues that the opposite conclusions are true in many cases more competition in existing markets is what destroys profits which is why it's ideal for new entrepreneurs to weighed into uncharted waters a bad plan for building the future is better than no plan and sales matters just as much as product he writes that the market high of 2000 was obviously a peak of insanity but less obviously it was also a peak of clarity people looked far into the future saw how much valuable new technology we'd need to get there (19:58) safely and judge themselves capable of creating it teal adds that we still need that technology and we may even need some 1999 style huus to help us get there in his words quote to build the next generation of companies we must abandon the dogmas fostered after the crash ask yourself how much of what you know about business is shaped by mistaken reactions to past mistakes this book is just so enjoyable to read because it's filled with lines like that that just make you stop and really think it resonates with me because someone who (20:29) took a bunch of econ classes in college I can appreciate more than most that economics is very much a soft science there is no universal law of gravity in economics and nothing about economic systems is as simple as it looks on paper much of what we know about economics broadly is extrapolated from past crashes and economic boom and bus periods there are few facts we know to be universally true what we might have thought was the cause of one crisis ended up not being an issue during another time period with vastly (20:58) different circumstances every product company economy an era of economic history is unique in its own way and the more you come to appreciate that the more you wonder how much we take for granted as true while being applicable decades ago but not fitting with the current version of reality anyway the point of reading is to help you think and I could hardly make it through the first few chapters without constantly hitting pause on the audible to take notes so Peter teal made me think in a way that a lot of books don't here's (21:26) another great quote from teal reflecting on the bubble the most contrarian thing of all is not to oppose the crowd but to think for yourself that reminds me a lot of Joel greenblat and a number of other value investors have talked about before and that is they want to read the news as little as possible so they cannot possibly be biased by the crowd they want to reach investing conclusions completely on their own or at least fully formulate their thoughts before getting input from others the tendency not to stray too far from the crowd is (21:57) pretty hardwired into our brain so everyone is talking about how Nvidia is such a great stock and all the news outlets can't stop talking about its promising future of course you're going to be biased in favor of Nvidia when you sit down to do evaluation of it but you can never look at the company with unvarnished eyes again and completely block out the undercurrent of positive sentiment favoring it and that's sort of a corrupting Factor preventing you from truly thinking for yourself so when I hear the quote from Peter teal it just (22:25) makes perfect sense to me being contrarian isn't to be bearish on Nvidia when everyone else is bullish it's to be so good at tuning out the noise that you don't even know that everyone is wildly bullish which enables you to come to your own unbiased conclusion Buy Low sell High Buy Low sell high it's a simple concept but not necessarily an easy concept right now High interest rates have crushed the real estate market prices are falling and properties are available at a discount which means fundrise believes now is the time to (22:59) expand the fundrise flagship funds billion dooll real estate portfolio you can add the fundrise flagship fund to your portfolio in minutes by visiting fundrise.com Millennial that's fnd d r i.com Millennial carefully consider the investment objectives risks charges and expenses of the fundrise flagship fund before investing this and other information can be found in the funds prospectus at fundrise. (23:27) com Flagship this is a advertisement another point I found compelling is when he talks about how it's one thing to go your own way and be contrarian and even build a business that creates a lot of value for society but it's critical to capture some of that value you create the first example of this that comes to mind is that during the pandemic it seemed like there were so many Grocery and food delivery companies popping up that they were all undercutting each other with various special discounts and promotions I was (23:57) getting a ton of value because because in most cases I was paying virtually nothing to have my dinner or groceries delivered and that was valuable because it saved me time and limited my exposure to catching Co yet even if I was paying a fee these delivery businesses were certainly not earning a profit off of me it was a race to the bottom in many ways and consumers like me were the winners for at least a period of Time Value was being created for society and most of these businesses were capturing none of it whether you're an employee manager or (24:25) investor that's just a bad spot to be in a more common example is also with Airlines we are all undoubtedly better off for being able to fly anywhere almost anytime we want to thanks to major commercial airlines yet as businesses they have been terrible Investments huge fixed costs little economies of scale and government bailouts have all led to more shareholder value in Airline stocks being destroyed than has ever been created that's actually something Buffett has talked about a couple of times over the years airlines are the (24:54) quintessential businesses that create enormous value and reap very little reward for doing so they serve millions of passengers and create hundreds of billions of dollars of value in each year but in 2012 when the average airfare was $178 Airlines only made 38 cents per passenger trick so whether you're building a startup or investing in a recently ipoed tech company you want to think about creating value but also sustainably capturing it on the flip side Google is a huge business that creates many billions if not trillions (25:25) of dollars for the value for society and the company itself has a multi-trillion dollar valuation because they're so good at capturing a large chunk of that Google's profit margins over the past decade have been at various points almost 100 times higher than the airline Industries the question then is what valuable business exists that nobody is creating and importantly is that business unbuilt because it's not possible to capture no value from it or is there an unbuilt business that would create value for society and lends (25:53) itself to capturing some of that value too this is a great framework to use for assessing any businesses you're considering to invest in that are in the earlier phases of their life cycle where they're still growing into their adjustable market and solidifying their business model companies like Netflix and Spotify and to a lesser extent Airbnb and Uber are success stories on this front while companies like Twitter Snapchat and Etsy are former Tech Darlings that gain popularity would never really crack the code on a (26:21) sustainably profitable business model reflecting how much value they created Reddit was listed in 2024 and is a newcomer amongst publicly traded social media companies and while the platform creates value for millions of users it remains to be seen if they can successfully capture a meaningful chunk of that value in econ speak the difference between the Airlines and Google is in being able to capture much of the value that a company creat and that boils down to perfect competition and monopolies Airline seats are (26:50) fungible credit card points and other loyalty programs try to push you to favor one Airline over another but realistically speaking if you have two airlines offer to take take you to your destination you're going to make your choice mostly based on price departure time and whether there are any connecting flights whether you're choosing Delta or United is typically an afterthought Beyond those primary considerations so airlines are very much not monopolies competition is fearsome and it's structurally difficult to (27:17) differentiate from each other which means they largely end up competing on price or convenience and as a shareholder in airline companies that is not really a very good position to be in that lack of different differentiation and intense competition makes large profitable years the exception to the rule for most Airlines While others chronically bleed money Google on the other hand has a search Monopoly that as of the time Peter teal wrote this book had no credible competitors only the rise of AI chat Bots have been able to (27:47) challenge this Monopoly but still it remains to be seen to what extent that is really a threat they were and still are the primary gatekeeper to a hugely valuable service that loyalty Network effects and product superiority all combined to give Google a massive advantage over competitors enabling it to routinely dominate the search engine Market while capturing the associated user data and using that to build a Marketplace for advertisers despite what is taught in econ classes monopolies are good at least from the perspective of (28:18) shareholders and business Founders Google is an infinitely more attractive company to invest in than any airlin and while Google loves to deny that they have a monopoly that un itself is a tell that they do see most companies are trying to overstate their competitive position to investors management wants to brag about their employees and products to investors and so they end up pitching them on how great their company is which is almost always an exaggeration or at best wishful thinking yet true monopolies like Google are (28:47) quietly raking in billions in profits while trying to understate the quality of their business they know that they have a massive competitive advantage and they want to keep it that way meaning they don't want to do anything that will further tip off Regulators to come in and break up their company in the way that companies like at& and Microsoft have been broken up in the past it's such an interesting way to think about things but again I think teal is right the truly rare exceedingly powerful monopolies are more incentivized to (29:15) paint a picture of how they are constantly under competitive threats which if you listen to earnings calls from any of the big tech companies that's exactly what you'll hear them say and there's definitely some truth to that since they aren't going out of their way to tell everyone that they have Monopoly businesses the elephant in the room is in how you define Monopoly while Google has something like 90% control over the global search Market rather than telling you that Google's management wants to paint a picture of (29:42) Information Technology more broadly where Google looks much more like a small fish in a big pond conversely in Teal's view many startups make the Fatal flaw of underestimating competition by defining the market they compete into narrowly to make themselves seem like more of a leader than they are for for example a restaurant that makes British food in Palo Alto may call themselves a market leader in British food in the area and may even claim to have a monopo that the real Market they're competing in isn't just for British food it's (30:10) against all types of restaurants in paloalto suddenly through that lens it becomes much clearer that the restaurant isn't anything close to Monopoly and is instead a small fish in a very big pond knowing who and what you are competing against then is critical and on both ends of the spectrum monopolies and companies with no competitive advantages may be trying to deceive you and how they Define their set of competitors for any company I invest in I make a point of clearly trying to Define its market and competitors so I can know if it's (30:40) closer to a Google in search or closer to a British restaurant in Palo Alto as a contrarian indicator to what extent a company's management understates or overstates how much competition they face can reveal whether they're truly a monopoly hoping to Plate Regulators or if there a wannabe Monopoly trying to impress investors and when I call Google a monopoly just know that I'm not talking about a monopoly in the sense that you might have learned about in school those types of monopolies have gained their advantages by illegally bullying and (31:09) undercutting their competitors or by being protected by Regulators as some utilities are Google for the most part is a monopoly for none of those reasons instead they're a monopoly because of their operational excellence and product quality they're by far the best at what they do and as a result they have effectively no competition no one can offer a close substitute as Peter teal outlines in the book Google is a classic case of going from zero to one and the company has won so big that they haven't seriously competed on search since the (31:42) early 2000s and if you want to build a lasting business with profits like Google or invest in those types of companies don't go out and build an undifferentiated commodity like business where profits are likely to be competed away go build or find monopolies to invest in specifically the good kind of monopolies ones that have no competitors because they're so Innovative or operationally effective teal offers another pretty compelling anecdote here to deliver the message where he describes how him and his colleagues (32:10) would frequently have their pick of restaurants to get lunch at and PayPal's early days ironically though some of these restaurants employed more people than PayPal did while PayPal was worth several orders of magnitude more than their businesses combined the point being opening another restaurant is to step into a fiercely competitive Realm one where there is a hard limit on how much value you can create as you've surely picked up on by now teal has unorthodox views on the world which is what has drawn so many people to follow (32:39) his every move especially since he has a successful track record underpinning his musings his views on competition broadly are no less unorthodox than his take on monopolies teal argues that yes monopolies do by definition inflict some cost on society by extracting higher profits from consumers but that is still again not necessarily a bad thing instead a monopoly status in business means to teal that a company has the flexibility to focus on building things that customers truly want things they may not even realize they want too if (33:11) monopolies existed in a static world as they do in Academia then they would just be toll road companies who make the world worse off by imposing frictional costs but the world isn't static and monopolies like Apple and Google must respond dynamically to what's happening around them that leaves them constantly innovating and the more of a monopoly they are the more they can focus on that Innovation while the rest of Silicon Valley was undercutting each other on improving existing products Apple stepped in and designed the iPhone and (33:40) while Apple has something of a monopoly on smartphones today in the US few people are really unhappy about it most people I know are more than satisfied with their ecosystem of Apple products and Apple's ability to identify and build a zero to1 product that people actually wanted has brought them Decades of Monopoly status and in Teal's view again that is not necessarily A Bad Thing teal sees competition as more of a human construct than a natural byproduct of the business World in fact he describes how capitalism and competition (34:12) are in a sense antithetical in economics capitalism refers to the accumulation of capital whereas competition refers to the erosion of profits I'd say that at a minimum he sees most competition as laziness and wasted efforts because so much comp comption is premised on taking what someone else is already doing and doing it slightly differently and pragmatically speaking that ends up being better for almost no one where Square had a zero to1 invention in building a card reader that could plug into Mobile phones for processing (34:42) payments all the other companies like intu and even PayPal that built slightly differently shaped card readers that serve the same purpose were not a productive allocation of time and resources you could probably say the same thing for large language models and chat Bots today too jat gbt was of course a zero to1 Innovation but now every big tech company is trying to build their own chatbot and a lot of that effort is just redundant so again teal makes a point that made me question many of my preconceptions about (35:09) competition and monopolies we take competition for granted as a good thing but there are plenty of instances especially in the 21st century where monopolies are not parasites but actually Innovative firms creating value for society with Amazon I'm very happy with their dominant positioning $140 a year for Prime which me access to their streaming platform Thursday night football and free delivery on almost any product you can imagine Plus discounts at Whole Foods and a whole bunch of other services is just incredibly (35:37) valuable and nothing like the monopolies of the 19th and 20th centuries from Teal's perspective creative monopolies like apple Amazon and Google born from Innovation earn their periods of excess profits as a reward for building zero to1 inventions that give Society what it really wants or didn't know it wanted to him competition means a struggle for survival little differentiation between products and no lasting profits while creative monopolies create differentiated products don't struggle to survive and can enjoy the Bountiful (36:07) profits they created by Distributing them across their employee base and shareholders he questions why at all then we accept Relentless competition as a natural byproduct of capitalism and free markets he calls competition an ideology the ideology that pervades our thinking in sports we celebrate competition for the sake of competition and in school we forc children to compete on arbitrarily defined metrics of knowledge and on whether they can sit still and focus all day despite the fact that this comes unnaturally to a segment (36:38) of the population while business is often compared to war teal says that competition specifically is what resembles War allegedly necessary supposedly Valiant and ultimately destructive while teal battled with Elon Musk during the.com bubble as teal oversaw PayPal and musk LED an almost identical company called x. (36:58) com they nearly ran each other into the ground before deciding to compete no longer and instead merge the credits that decision and the humility it took to set both of their egos aside as what saved both companies and enabled the merge business to survive the bubbles burst and remain today in terms of what it actually looks like to build a creative Monopoly teal says that a creative Monopoly must have a product that is at least 10 times better than the closest substitute it's not an exact science to calculate this but you can appreciate what he means (37:27) with with some examples PayPal's digital money transfer services were 10 times better than using checkbooks iPhones were a considerable upgrade from flip phones and blackberries with thousands of books early Amazon was an order of magnitude better than any bookstore and Google was Far faster and easier to use than any other search engine same with Netflix Netflix's service was easily 10 times better than Blockbusters and in Teal's view Renewable Energy Technologies haven't gained more mainstream acceptance because in most cases they're nowhere (37:59) near being a 10 times Improvement unless a product is overwhelmingly Superior inertia will win out a product that is a 20% Improvement hypothetically in a lab setting hardly justifies the time effort and money that may be necessary to switch over and implement this new technology and the Nuance here is that creative monopolies looking to build 10 times better technology don't try and chase their entire possible target market from day one in fact he says most mbas have trouble identif if Ying the next 0o to1 companies because they're (38:30) often born out of niches that hardly even look like legitimate business opportunities the challenge that clean energy companies have had is that they're beginning from the point of trying to solve a giant Global problem rather than focusing on building Monopoly over a specific Niche Amazon didn't start out on day one try to be a retailer of everything it started as a bookstore mastered its Supply chains and organizational infrastructure and scaled into other product lines one by one same with eBay it started out as an auction (38:58) system for hobbyists perfected that Niche and Grew From There Facebook started as a social network just for students at Harvard and dominated that Niche if someone draws up a hundred billion dollar target market and says their goal is to capture 1% of that market that is a red flag to teal most likely they're diving head first into an industry that's more competitive than they realize instead he tells Founders and investors to look for businesses that dominate their Niche and how much value they can create and then have the (39:27) opportunity to to expand from there I'll also add that teal takes great offense at the idea that successful serial entrepreneurs are products of luck he tells the reader that you are not a human lottery ticket and while conventional wisdom in the last century has come to suggest that the world is always improving and progressing that indefinite optimism breeds complacency to him the Western world has lost its affinity for long-term planning and ambitious goals just a few years the US built the Golden Gate Bridge constructed (39:55) tens of thousands of miles of inter State highways built the first atom bomb and landed on the moon such accomplishments seem like a relic of the past though and even the most mundane construction projects in places like New York and Boston can take a decade to finish as a society our inclination toward intelligent design has faded and been swept away by a more abstract optimism that the world will keep improving as it always has in recent memory while very few tangible plans to build that better future exist teal (40:25) argues that startups are the Pinnacle of intention intelligent design in a world of indefinite optimism where most are just waiting for Progress to happen and continue on inexplicably around them Founders have full control over the organization they're building and the dream they're chasing Steve Jobs did not build Apple into what it is today with minimum viable products and quarterly goals instead he had the conviction to imagine a better future and then begin planning how to build it today you can always point to luck but with a sample (40:55) size of one and no ability to re want time and run different simulations there's no way to know for sure whether a company like apple was an inevitable outcome of Steve Jobs's vision and work ethic or whether its presence today stems from a series of past lucky breaks it is definitely sort of an intellectual debate with no answer but so many billionaires point to luck as playing a big part of their success which is certainly true in some ways but that isn't enough to justify writing off their skills and vision either in Teal's (41:23) opinion what made someone like Steve Jobs so special is that rather than being practical about running a business and building up cash while waiting for the right opportunity to come which would be a form of indefinite optimism as seal calls it jobs attacked luck by making strategic plans for distant products that few of his competitors had the conviction and discipline to look so far into the future to imagine and then began patiently planning for how to construct them another principle from the book I want to mention today that (41:50) you're probably familiar with to some extent is the Paro principle this is a power law showing how the world is not normally in equally distributed dating back to paro's Observation that 20% of the noble families in Italy owned 80% of the land which to him was just as natural as the fact that 20% of the pea plants and his yard produced the vast majority of peas you'll definitely be familiar with this if you ever read the Black Swan by Nim TB but teal makes the case for how so much of life around us mirrors the Paro principle inventure (42:22) Capital the entire industry is built around that one rule the vast majority of companies and adventure funds portfolio will fail while just one or two big Winners will generate all of the returns over a 7 to 10 year period in Teal's Founders fund he saw that exact same dynamic in action Facebook earned more for the fund than all the other Investments combined and paler their second biggest winning investment generated more returns than all the other positions combined besides Facebook rather than trying to cast as (42:52) wide of a net as possible and hoping to reel in one of these big Winners teal views this says all the more reason to be extremely intentional a good venture capitalist investor doesn't invest small amounts in as many possible companies as they can and hope to win by playing a numbers game they intentionally invest meaningful amounts in companies that they seriously believe at least have the potential of being the next Facebook or paler and with a portfolio like that you're just far likelier to find success 0o to one is a special book one that I'd (43:24) ardently recommend any listener of this podcast to read few people are as idiosyncratic thinkers as teal and I think there's just so much to learn from him he is truly embraced being a contrarian by thinking for himself throughout this episode I've tilted some of the book's takeaways to be relevant to investors but there's so much more in it that's relevant to those in the weeds of building businesses from how to distribute Equity among the founding team to the right size of your board what his experience at PayPal taught him (43:52) about culture and hiring well why people who care too much about employment perks are probably not invested in your culture and why teal never works with part- Tim or outside Consultants besides accountants and lawyers to wrap things up today I want to share one more passage from a book that is more inspirational than practical teal writes the Ancients saw all of history as a never ending alternation between prosperity and Rowan only recently have people dared to hope that we might permanently Escape Misfortune and it's (44:22) still possible to wonder whether the stability we take for granted will last however we usually supress our doubts conventional wisdom seems to assume instead that the whole world will converge toward a plateau of development similar to the life of the richest countries today in this scenario the future will look a lot like the present he adds that the hardest to imagine future is the one where we embark on an accelerating takeoff toward a better reality the results of such a breakthrough could take any number of (44:50) forms but any one of them would be so different from the present that they defy description the essential first step forward to this better future is to think for yourself that's all for today but before I let you go one last say if you're going to Omaha in May of 2025 for the birkshire haway shareholder meeting I want to hear from you the investors podcast network is hosting events that Friday and Saturday night and I'd love to meet you there if you're interested in learning more and hanging out at the investors podcast sponsored events just (45:19) email me for more information at Sean theinverseside investors podcast.com I'll see you again next week hey guys this is your Millennial investing host Shan Ali when I first started learning as a value investor I had no idea what direction to go in there's just so much to try and wrap your head around but it's never too late to get smarter about Stock Investing from the ground up after spending years interviewing and studying the best stock investors as a company at the investors podcast Network I've worked to distill (45:55) those learnings into a simple course for you you why did I do that so I can help you master the principles of excellent lifelong investing I was a fan of the investors podcast for years before I joined the team and I always wanted a course that broke down the most important insights from a decade of interviews with leading investors the course is great for both beginners and pros from studying what the Legends actually do to small practical ways to build your wealth over time I'll take you through 10 different sections (46:24) covering the basics of what a stock actually is and how stock markets work to strategies to optimize your retirement savings picking great companies what to look for in ETFs how much you should invest and how to monitor your Investments plus so much more by the time you're done you'll be ready to invest in the stock market learning plenty of tricks from the pros along the way to access the course and begin learning how to invest like the Legends just visit the investors podcast. (46:51) com slet started with stocks that's the investors podcast.com slet started with stocks and for a limited time you can use code mi15 for a 15% discount at checkout that's mi15 when checking out aspiring companies are biased toward breaking into a market and because they have comparatively nothing to lose they're willing to risk it all with disruptive Innovations established companies though have everything to lose and across all their value networks people's decisions are biased toward focusing on what has generated success (47:23) so far in catering to existing customers needs value networks are a subtler way to describe organizations it's less that incumbent companies explicitly value the wrong things and more that they are implicitly biased toward preserving and augmenting the status quo not trying to flip everything upside down with disruptive innovation