12 success tips for startups – from Peter Thiel, founder of PayPal

16th Dec 2014
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PayPal founder Peter Thiel offers 12 useful tips for entrepreneurs based on his own experience in startups and investing. Aptly called ‘From Zero to One,’ his 210-page book makes for a quick and useful read, with lots of case profiles gathered along his Silicon Valley journey.


Zero

He describes his book as an “exercise in thinking,” and not a manual for starting up. “Every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation,” he begins. He charts two kinds of progress: linear (eg. globalisation) and non-linear (technology jumps).

“A startup is the largest group of people you can convince of a plan to build a different future,” Thiel defines. A startup sits at the sweet spot between a lone genius and a large bureaucratic organisation – size allows it to execute on ideas and smallness helps with agility.

Thiel sets the context for startups by describing lessons learned from the booms and busts of the DotCom era and cleantech. Be bold, plan well, focus on sales as much as products, blend small steps with big vision, and become so good in your field that you have a sustainable monopolistic lead over the competition. Create long-term value for customers – but also extract value for your firm. Don’t just focus on the rules of the game – change the very board on which you are playing. These are expanded upon in the book’s 14 chapters. (See also my pick of Top 10 Books for Entrepreneurs from 2013 and 2012.)

1. Breakthrough innovation or incremental improvement: where do you want to play

Aspiring entrepreneurs should study growth cycles of industries they pick. Online software products can scale exponentially fast and on the global map, while many service sectors scale linearly (eg. consulting, yoga training). Some sectors are in decline (print newspapers), others have relatively short lifespans (restaurants, nightclubs) or are dependent on consumer whims (movie industry, gaming). Some sectors will thrive and endure if they ride long-term trends in tech, demography and environment (eg. rise of digital products like smartphones especially among youth; global warming). Regulation affects the activities and scope of sectors such as biotech, but not as much in software.

“Numbers alone won’t tell you the answer, instead you must think critically about the qualitative nature of your business,” Thiel advises. This helps think of business opportunities a decade or more into the future. Do you want to be in a scaleable industry, or do you want to be in a linear sector with many competitors?

2. Build valuable proprietary technology

“Proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage,” says Thiel; otherwise it will give only short-term incremental advantage. Google search, Paypal’s online payment, Amazon’s inventory size and Apple’s design are good examples here.

3. Think big

Lean and agile approaches to entrepreneurship are a methodology, not a goal – they can take you to a local maximum and not the global maximum, says Thiel. Having a big vision and plan helps deal with industry positioning. For example, Facebook turned down the $1 billion acquisition offer from Yahoo because Mark Zuckerberg could really see where his company could go, and Yahoo did not. Steve Jobs developed a long term vision for Apple with a pipeline of products for years to come.

4. Start small and leverage network effects

Networks unleash powerful viral effects. But success requires starting with small networks and then scaling them. “An entrepreneur can’t benefit from macro-level insight unless his own plans begin at the micro-scale,” advises Thiel.

Facebook began as a network for Harvard students, then all students and eventually anyone in the world. Don’t start with technology which works only at scale, it should grow with scale. Ideally, the potential for scale should be in the original design itself, eg. Twitter.

Amazon began with only books, added similar products like CDs, and then scaled all the way. PayPal began with Palm Pilot users and eBay PowerSellers, and then kickstarted a virtuous cycle by paying early customers to sign up and get referral fees.

5. Understand the Power Law of venture capital

Many startups launch and scale thanks to angel and venture capital. But many investors choose a “spray and pray” approach with diverse portfolios instead of realising that exponentially growing companies need extra attention and resources. Thiel’s Founders Fund focuses on only five to seven companies that can become multi-billion dollar firms. After all, venture-backed firms created 11% of all jobs in the U.S., with revenues accounting for 21% of its GDP; the dozen largest tech firms are all venture-backed, Thiel says.

6. Identify secrets – and go after them

Thiel identifies two kinds of secrets: secrets of nature, and secrets about people. “The best entrepreneur knows this: every great business is built on a secret that’s hidden from the outside world,” he says. This calls for steady investment in innovation. HP had a good decade of innovation in the 1990s, but has now lost steam.

7. Foundations: strike the balance between ownership, possession and control

“As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation,” Thiel explains. There should be clarity and formal documentation on ownership (equity, vesting), possession (operational authority) and control (board of directors). The trick is in finding the right balance in pay (cash, perks, equity) as well as size and composition of the board of directors.

8. Build a solid culture

“A startup is a team of people on a mission, and a good culture is just what that looks like on the inside,” says Thiel. In the long run, the balance between creativity and best practices should ensure that the startup innovates, reaps the benefits of innovation effectively and continues to innovate. A culture of excitement is what creates a company that endures – not just pay and perks.

Beyond professionalism, PayPal had such strong ties between its founders inside and outside the workplace that they supported each other’s ventures even after the company was sold. Among the ‘PayPal Mafia,’ Elon Musk founded SpaceX and Tesla Motors; Reid Hoffman founded LinkedIn; David Sacks founded Yammer; Steve Chen, Chad Hurley and Javed Karim founded YouTube; and Thiel himself went on to found Palantir.

9. Master marketing and sales

Many techies do not have a deep enough understanding of the dynamics and inter-connects of marketing, advertising, sales and distribution, which vary in B2C and B2B sectors. Some of these activities are about creating impressions and attachment among users, others are about cultivating long-term relationships. B2B sales are complex and require ‘rainmakers,’ whereas ‘megaphone’ strategies like TV ads may be better for B2C products. “Selling your company to the media is a necessary part of selling it to everyone else,” Thiel advises, this calls for a clear public relations strategy.

10. Create a powerful brand

Apple is a good example of successful branding via sleek design, branded stores, catchy ads and trademark keynotes and launches. But no technology company can be built on branding alone, cautions Thiel.

11. Think beyond ‘Dumb Data’ – use computers as tools

It has become very fashionable to talk about Big Data and analytics automation, but Thiel says computers should be seen as tools which complement rather than substitute human effort. PayPal overcame its challenges in dealing with payment fraud by creating a “man machine symbiosis” between algorithms and financial experts. Thiel’s current startup Palantir also uses a human-computer hybrid to blend digital intelligence tools with trained analysts. LinkedIn does not try to replace recruiters with technology, but gives them valuable profiling tools.

12. Understand the Founder’s Paradox

There are always raging debates about when it is good to have a company led by the original founder or to bring in a professional manager. Many founders, interestingly, do not neatly fall into the Bell Curve distribution of personality types – they may exhibit both extremes in themselves at different times, eg. charismatic as well as disagreeable, insider and outsider. Good examples here are Richard Branson, Steve Jobs and Sean Parker. Society should become accepting of the unusual traits of founders, but at the same founders should not expect hero worship. “The single greatest danger for a founder is to become so certain of his own myth that he loses his mind,” cautions Thiel.

Thiel distills these principles in action by applying them to the cleantech boom and bust, and the few surviving success stories. Companies must not neglect even one of the seven key questions about Technology, Timing, Monopoly, Team, Distribution, Durability and Secret.

Elon Musk’s Tesla has great products (even used by Mercedes), its timing to get government grants was perfect (during the cleantech boom and before the bust), it has monopoly in some segments (electric sports cars and luxury sedans), it has a crack team (like ‘Special Forces’ as compared to regular army), it controls its own distribution for better customer connect, its brand is durable, and the company has ‘secret’ insights such as fashion awareness of its customers (eg. Leonardo diCaprio).

Winning is better than losing, but everybody loses when the war isn’t worth fighting,” Thiel adds, citing examples like the legendary clashes between Larry Ellison (Oracle) and Tom Siebel (Siebel Systems). “If you can’t beat a rival, it may be better to merge,” Thiel says, citing the Paypal merger with Elon Musk’s X.com.

In the long run, Thiel sketches visions of indefinite pessimism (eg. in Europe’s economy), definite pessimism (eg. China knowing that its economic growth has demographic constraints), definite optimism (eg. U.S. in early 20th century) and indefinite optimism (eg. wealthy Baby Boomers in Silicon Valley).

Beginnings are special. They are qualitatively different from all that comes afterward,” says Thiel. “Our task today is to find singular ways to create the new things that will make the future not just different but better – to go from 0 to 1 and not just 1 to n,” he concludes.

About the author:

Peter Thiel is an entrepreneur and investor. He started PayPal and Palantir Technologies, and invested in hundreds of startups including Facebook, LinkedIn and Yelp. He is a partner at Founders Fund, a Silicon Valley venture capital firm that has funded companies like SpaceX and Airbnb. He also started the Thiel Fellowship and leads the Thiel Foundation.

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