Business Impact

The Contrarian’s Guide to Changing the World

Investor Peter Thiel has inspiring advice for wanna-be entrepreneurs, but he is unrealistic about where technology really comes from.

Is the technology investor Peter Thiel brilliant, or is he just strange? He is nothing if not industrious. Since he cofounded PayPal, in 1998, Thiel has had a hand in some of the most important and unexpected tech companies of our era. His success has made him an oracular presence in Silicon Valley.

Thiel’s contrarianism is notorious, and he appears to delight in saying or doing the unexpected, even at the risk of ridicule. Each year, his nonprofit gives a handful of college students $100,000 to drop out of school and pursue a risky startup. He has declared himself to be not only against taxes but against “the ideology of the inevitability of death.” And when the Seasteading Institute—a utopian group intent on building floating cities so as to escape the intrusions of government—sought funding a few years ago, Thiel ponied up half a million dollars.

If one wanted to emulate Peter Thiel’s success, would one have to do more than just the opposite of everyone else? His new book—a polished version of some lectures he gave at Stanford for aspiring entrepreneurs in 2012—suggests that there is such a creed as Thielism. His theories on what makes a good technology company and how such companies can improve society are by turns brazen, thoughtful, and precise; the challenge lies in separating the truth from the truthiness. Thiel insightfully diagnoses the failings of today’s technology (see Q&A), but the cures he suggests are questionable.

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According to Thiel, most startups funded by his fellow Silicon Valley investors shouldn’t exist. All prospective entrepreneurs, he suggests, should ask themselves a simple and essential question: “What valuable company is nobody building?” If they don’t have an answer, they should do something else.

Things Reviewed
  • Zero to One By Peter Thiel with Blake Masters
    Crown Business, 2014

You see, Thiel is not interested in funding entrepreneurs trying to build a business that will beat the competition; competition, in fact, is precisely what he thinks every company should avoid. The true goal of every startup is to become a monopoly, a company so dominant in its technological arena that it can give investors enormous financial returns with cash to spare for the intensive R&D that can ensure its long-term viability. Google, Thiel points out, is a handy case study. The profits from dominating the Internet search business since the early 2000s have allowed it to diversify into cloud computing, mobile devices, and robotics. According to Thiel, this kind of market supremacy offers returns to more than just investors: companies that create de facto monopolies and use the profits to innovate, as Google has, are truly valuable to society. “Monopolies drive progress,” he writes, in his contrarian way. “The promise of years or even decades of monopoly profits provides a powerful incentive to innovate.”

His point is a good one—at least as a source for debate. Consider that today’s communications infrastructure is largely built upon innovations—the transistor, UNIX, digital signal transmission—that came out of AT&T, the U.S. phone monopoly for most of the 20th century. For contrary evidence, you might look to Microsoft, which has typified a powerful company’s use of bullying and market share to limit consumers’ choices without creating innovations of comparable magnitude. In any event, Thiel seems bothered by the fact that many economists focus on the dangers of monopolies without considering the potential benefits. In his cosmology, they’re simply mistaken. His faith in the ameliorative forces of the marketplace assures him that even a dominant company (such as Microsoft) will eventually be eclipsed by a younger and more creative company (such as Google). Capitalism, he promises us, has a habit of righting technological wrongs in time.

Thiel’s view on monopolies is a fair demonstration of the way he can take familiar business tropes that have circulated in the Valley for years—always create a technology that’s 10 times as good as an existing one; look for “network effects” that boost the value of your product as more people use it—and make them seem new. Sometimes he makes good points by flat-out denying received wisdom. He advises entrepreneurs not to seek the “first-mover advantage” so often spoken of in technology business circles, for example. “It’s much better to be the last mover,” he says. “Make the last great development in a specific market and enjoy years or even decades of monopoly profits.”

Any would-be Silicon Valley founder should consider Thiel’s advice. He knows California’s startup culture as well as anyone, and he has an interesting mind. Also, don’t forget: he’s made more than a billion dollars playing this game.

It’s less clear whether his ideas have much to offer the rest of us. Thiel has been asking a huge question for a few years now: How can we avoid a dismal future of resource depletion, environmental degradation, mass unemployment, and technological stagnation? He thinks the answer is a new wave of startups that grow as large as Microsoft, Google, and Amazon but take on bigger problems, such as curing cancer or providing cheap, clean energy. He claims we aren’t making progress on such things now because we’ve grown less ambitious as a society.

But in fact, we are making progress on civilization’s problems. The steady power of incrementalism is despised by VCs who know it will never give them a thunderous payoff. But it gives us a trajectory toward cheap solar power and many other technologies that Thiel rightly says that we need. A slew of advances in agriculture have dramatically increased crop yields across the world. Highly targeted cancer therapies are on the horizon; study of the microbiome offers a new frontier for personalized medicine; and neuroscience is lending fascinating insights into the design of software and computer chips. Perhaps it’s disappointing we haven’t yet made it to Mars, but Thiel’s friend Elon Musk is working on that.

This is an admittedly optimistic take. And maybe, in our darker moods—when a loved one is ill and beyond the reach of current treatments; when we ponder the melting ice caps or our own mortality (Thiel is 46); when we ask why everyone in Silicon Valley wants to create the next Uber when we already have Uber—we should honor Thiel for exhorting technologists to do more. More gurus more like him might thin the Valley’s ranks of me-too app entrepreneurs and attract new legions of biotech and clean-tech savants.

But Thiel is unpersuasive on how we might make the kind of steam-engine-sized advances that he seeks. Part of the problem is that he has nothing to say about the pursuit or funding of basic science and engineering, even though they form the foundation for all the Valley’s technology ventures—and for Thiel’s enormous fortune. And something else is awry here as well. Technology investing, even as part of a larger philosophical vision, is not the same as planning society’s future. It is about giving advice and funding to young people who tend to be brilliant, cash-starved, and immature. It is about making wise and calculated bets that will earn a large financial return.

You wouldn’t know it from Thiel, but investing is most of all about providing the feedstock with which some of the larger companies—not to mention universities and government agencies like NASA or DARPA—work to solve difficult problems. Our ecosystem for innovation is no doubt imperfect, but it has an established logic and a proven success rate. Sometimes a good idea is seeded through government funding: a 1994 NSF grant led Stanford grad students Larry Page and Sergey Brin to found Google. In other cases, a startup’s ideas only really start to spread after the company gets swallowed by a larger one. The biotech companies that have been bought by pharmaceutical giants such as Pfizer and Novartis provide good examples. Startups that wisely resist getting bought up, such as Facebook or Google, usually don’t have much impact until they grow much larger (as Thiel acknowledges in his arguments for monopolies). Tesla—which took a $465 million government loan in its early days—manufactures 35,000 electric cars a year, making it interesting and successful. Producing 100,000 electric cars a year, as Tesla hopes it will by 2016, would make the company important and transformational.

Though Thiel’s manifesto doesn’t entertain the possibility, it’s arguable that big, slow, bureaucratic businesses like IBM, GE, Intel, Boeing, and Toyota have changed the world more than the upstart monopolies he apotheosizes. In fairness to Thiel, we might acknowledge that once upon a time, these graying companies were startups, too. But hard as it might be to believe, history tells us that the future often starts far, far away from the bustling garages of Silicon Valley.

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