[00:02:38] Shawn O’Malley: Thiel is a complicated person as we all are with nuanced and at times highly contrarian views, which are almost certainly would 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, Zero to One, is written in the context of Silicon Valley, addressing the next generation of tech founders.

[00:03:00] Shawn O’Malley: 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 detailed notes on these lectures and connected with Thiel, they agreed to work together to turn them into a book.

[00:03:15] Shawn O’Malley: With that, let me go ahead and just read you a few sentences from the foreword to set the tone for our deep dive on Peter Thiel 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.

[00:03:31] Shawn O’Malley: And the next Mark Zuckerberg won’t create a social network. You’re copying these guys. You aren’t learning from them. Of course, it’s easier to copy a model than to 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.

[00:03:49] Shawn O’Malley: 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 Zuckerberg or Bill Gates, I can definitely appreciate the point he’s making, especially in the context of trying to inspire the next generation of entrepreneurs at the cutting edge of technology.

[00:04:18] Shawn O’Malley: 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 Thiel is talking to people who are thinking about starting 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 lifetimes.

[00:04:39] Shawn O’Malley: So again, just keep that in mind as I go through the book. Thiel proceeds to warn in the preface that the biggest threat facing corporate America today is complacency and inability to embrace investing in their own disruptive innovation, which is something Clayton Christensen wrote about extensively in his book, The Innovator’s Dilemma, could be far worse for the health of the economy than the 2008 financial crisis.

[00:05:02] Shawn O’Malley: While profits may continue to grow in the meantime, without heavy reinvestment in the next disruptive innovations, American companies would be putting themselves increasingly at risk of displacement from abroad, where the status quo may be less stagnant. As Thiel puts it, today’s best practices lead to dead ends.

[00:05:19] Shawn O’Malley: 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 industries.

[00:05:40] Shawn O’Malley: Zero to One in his words is about building companies that create new things, drawing directly from everything Thiel has learned as a co-founder of PayPal and Palantir 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.

[00:06:06] Shawn O’Malley: One commonality he’s found though, is that successful entrepreneurs tend to think about business differently than 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 Thiel 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 peek into how Thiel approaches the world and the type of people he wants to work with.

[00:06:40] Shawn O’Malley: And honestly, I have to say, I’m not sure whether Thiel 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.

[00:06:59] Shawn O’Malley: And again, I couldn’t come up with one that I thought was of very much consequence, but maybe you can. More power to you if so. The question itself is super powerful because it cuts through all the normal job interview BS and elegantly extracts what may be the most valuable piece of information about someone.

[00:07:14] Shawn O’Malley: If you’re a young Elon Musk, your answer might have been that the future of automobiles is electric and are 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 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.

[00:07:41] Shawn O’Malley: 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.

[00:07:59] Shawn O’Malley: And that’s the point here. As an investor and entrepreneur, Thiel 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.

[00:08:23] Shawn O’Malley: Perhaps you do have some valuable variant perceptions of what could or 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 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 hedge yourself in any way.

[00:08:45] Shawn O’Malley: Thiel continues by saying that the most common answers he gets tend to fall into similar categories. There is some flavor of saying that America’s educational system is 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.

[00:09:04] Shawn O’Malley: And the third statement simply takes one side in a familiar debate. In Thiel’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.

[00:09:22] Shawn O’Malley: But when we think of the future, we 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 Thiel argues we can know two things. It must be different, and it must be rooted in today’s world.

[00:09:42] Shawn O’Malley: He outlines two types of progress, which will sound familiar if you read the Innovator’s Dilemma or listened to my episode on it a few weeks back. Essentially, there’s horizontal progress, where we continue to improve upon existing 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.

[00:10:00] Shawn O’Malley: 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 to one vertical advancement would be going from the flip phone to the first iPhone.

[00:10:17] Shawn O’Malley: It’s a paradigm changing shift. Vertical progress is harder to imagine 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.

[00:10:36] Shawn O’Malley: I’ll probably say this a handful of times throughout the episode, but Peter Thiel 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 then relates that to a more macro perspective is just super interesting to me.

[00:10:53] Shawn O’Malley: 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. Their 20 year plan has been essentially to become what the United States is today, embracing technologies from across the 19th, centuries, including everything from railroads to air conditioning and artificial intelligence.

[00:11:17] Shawn O’Malley: They’ve skipped some of the steps along the way, but as they develop, they’re copying much of the playbook for development from the U. S. 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’ve had periods of both horizontal advancements, like globalization, and vertical advancements, where we made big technological leaps.

[00:11:41] Shawn O’Malley: As well as periods where neither or just one were occurring. Thiel’s view is that since 1971, we’ve 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 of the internet and computers.

[00:12:06] Shawn O’Malley: We’ve gotten better at enabling computers to do things, but we haven’t made nearly the same technological progress in other areas. A commercial flight today is much the same as it was in 1990, and we still rely on the same railroads we used over a hundred years ago. Cars are more efficient and luxurious now, but they’re not profoundly different than they were in the 1960s.

[00:12:26] Shawn O’Malley: 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 digital realm, we haven’t really made any other revolutionary zero to one advances in technology since then.

[00:12:48] Shawn O’Malley: Again, I’m not saying I fully agree with that, but, you know, that is Peter Thiel’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 that we made it to the moon in 1969 and haven’t been back since.

[00:13:07] Shawn O’Malley: So, I could probably play devil’s advocate here, but I do appreciate where Thiel 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 193zero to one950.

[00:13:29] Shawn O’Malley: Thiel makes another interesting point that even the language we use implies some technological end of history that we’ve already accomplished everything there is to accomplish. The term developed countries suggests that some countries have reached the pinnacle of advancement, while developing countries have progress yet to make.

[00:13:45] Shawn O’Malley: 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 in developing technologies that will continue to make it possible to do more with less.

[00:14:07] Shawn O’Malley: In Thiel’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.

[00:14:30] Shawn O’Malley: It’s up to us, then, to build a future that is more prosperous and peaceful than any ever known before. Thiel says, quote, Any 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.

[00:14:49] Shawn O’Malley: For example, Thiel talks about how vertical progress is often driven by small groups of passionate devotees bound by the same vision while working in stark contrast to larger, more bureaucratic organizations. And as a result, his definition of a startup is that it’s the largest group of people you can convince to build a better future.

[00:15:07] Shawn O’Malley: But paradoxically, to actually be able to get things done, a startup must remain small. zero to one is less a manual or record of information and more a way of thinking, because that is, in Thiel’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.

[00:15:33] Shawn O’Malley: But at a minimum, I think Zero to One is important to read because it’s in many ways a guiding book for the next wave of innovators in Silicon Valley and 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.

[00:15:52] Shawn O’Malley: I’m not exactly hoping to be like Peter Thiel and find the next Mark Zuckerberg to invest in while they’re still in college, but I do want to know how the Mark Zuckerberg’s and Peter Thiel’s of the world approach innovation and investing, especially because companies like Meta and PayPal are no longer startups and are in fact some of the biggest businesses in our economy.

[00:16:09] Shawn O’Malley: Turning back to the book and Thiel’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.

[00:16:24] Shawn O’Malley: In the 1990s, for example, with the internet revolution and full action, it was common to disregard traditional metrics of profitability 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.

[00:16:42] Shawn O’Malley: 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 becomes clear to enough people that the current set of widely held beliefs are not sustainable.

[00:17:02] Shawn O’Malley: At the onset of the dot com bubble, companies like Yahoo and Amazon listed publicly for the first time and promptly quadrupled in value, while Fed Chairman Alan Greenspan warned against irrational exuberance in markets. To market participants at the time, it was far less clear that their optimism about the digital age was unfounded.

[00:17:21] Shawn O’Malley: the.com bubble was in Thiel’s words, 18 months of mania from 1998 to 2000. It was a Silicon Valley gold rush. Thiel writes quote, everywhere I looked, people were starting in flipping companies with alarming casualness. One person told Thiel 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.

[00:17:43] Shawn O’Malley: The thing about bubbles is that they’re intoxicating, greed, excitement, and envy all conspire together to disarm even the most staunch professionals. I can’t speak to what it was like during the dot com bubble, but I know in 2020 and 2021, we can all remember something similar. Suddenly everyone was day trading stocks, buying obscure crypto tokens and seemingly getting massively rich all along the way.

[00:18:05] Shawn O’Malley: 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 Thiel’s perspective, he says that the dot com bubble was a period he knew couldn’t last, so he was trying to raise as much money from investors as he could to support PayPal before the music stopped.

[00:18:26] Shawn O’Malley: PayPal needed at least 1 million users to be economically viable, and after other marketing efforts had fallen short, the 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 catch in on the internet hype while they could.

[00:18:48] Shawn O’Malley: PayPal managed to survive, as we all know, but when the bubble did pop, Thiel 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.

[00:19:09] Shawn O’Malley: And the entrepreneurs who stuck with Silicon Valley learned lessons from this time that still shape their thinking today. Firstly, many learned to focus on incremental improvements. Grand visions are what stoked the bubble, and anyone making grandiose promises about tomorrow were deemed not trustworthy.

[00:19:25] Shawn O’Malley: 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 dot com bubble prioritized flexibility while treating entrepreneurship as nothing more than agnostic experimentation. On top of this, In Thiel’s opinion, many dot com era entrepreneurs decided that it was better to try and improve upon what existing competitors were doing, rather than building whole new markets.

[00:19:51] Shawn O’Malley: 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. com bubble that afterwards, Silicon Valley leaders wanted products to almost entirely speak for themselves.

[00:20:11] Shawn O’Malley: They wanted viral growth instead of paid marketing. And while these thinkings have been ingrained into startups for over two decades, Thiel 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 wade into uncharted waters.

[00:20:30] Shawn O’Malley: A bad plan for building the future is better than no plan, and sales matters just as much as product. He writes that there 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 safely, and judged themselves capable of creating it.

[00:20:49] Shawn O’Malley: Thiel adds that we still need that technology and we may even need some 1999 style hubris 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?

[00:21:09] Shawn O’Malley: 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 as someone who 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.

[00:21:30] Shawn O’Malley: Much of what we know about economics broadly is extrapolated from past crashes and economic boom and bust 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 different circumstances.

[00:21:47] Shawn O’Malley: Every product, company, economy, and 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 Thiel made me think in a way that a lot of books don’t.

[00:22:12] Shawn O’Malley: Here’s another great quote from Thiel reflecting on the dot com bubble. The most contrarian thing of all is not to oppose the crowd, but to think for yourself. That reminds me a lot of what Joel Greenblatt 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.

[00:22:32] Shawn O’Malley: 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 pretty hardwired into our brains. 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.

[00:22:50] Shawn O’Malley: Of course, you’re going to be biased in favor of NVIDIA when you sit down to do a valuation 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.

[00:23:06] Shawn O’Malley: So when I hear the quote from Peter Thiel, it just 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.

[00:23:22] Shawn O’Malley: 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.

[00:23:47] Shawn O’Malley: I was getting a ton of value 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 COVID. Yet, even if I was paying a fee, these delivery businesses were certainly not earning a profit off of me.

[00:24:02] Shawn O’Malley: 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 investor, that’s just a bad spot to be in. A more common example is also with airlines.

[00:24:20] Shawn O’Malley: We are all undoubtedly better off for being able to fly anywhere, almost anytime we want to, thanks to major commercial airlines. 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.

[00:24:39] Shawn O’Malley: That’s actually something Buffett has talked about a couple of times over the years. Airlines are the 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 trip.

[00:25:01] Shawn O’Malley: So whether you’re building a startup or investing in a recent IPO 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, of dollars’ worth of 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.

[00:25:22] Shawn O’Malley: Google’s profit margins over the past decade have been, at various points, almost 100 times higher than the airline industry’s. 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 enough value from it?

[00:25:38] Shawn O’Malley: Or is there an unbuilt business that would create value for society and lends itself to capturing some of that value too? This is a great framework to use for assessing any businesses you’re considering investing 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.

[00:25:57] Shawn O’Malley: 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 gained popularity, but never really cracked the code on a sustainably profitable business model, reflecting how much value they created.

[00:26:14] Shawn O’Malley: 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 isn’t being able to capture much of the value that a company creates.

[00:26:34] Shawn O’Malley: And that boils down to perfect competition and monopolies. Airline seats are 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 offered to 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.

[00:26:54] Shawn O’Malley: 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 differentiate from each other, which means they largely end up competing on price or convenience.

[00:27:10] Shawn O’Malley: And as a shareholder in airline companies, that is not really a very good position to be in. That lack of 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 Thiel wrote this book, had no credible competitors.

[00:27:32] Shawn O’Malley: Only the rise of AI chatbots have been able to 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 combine 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.

[00:28:00] Shawn O’Malley: Despite what is taught in econ classes, monopolies are good, at least from the perspective of shareholders and business founders. Google is an infinitely more attractive company to invest in than any airline, and while Google loves to deny that they have a monopoly, that unto itself is a tell that they do.

[00:28:18] Shawn O’Malley: 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 quietly raking in billions in profits while trying to understate the quality of their business.

[00:28:39] Shawn O’Malley: 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& T have been broken up in the past. It’s such an interesting way to think about things, but again, I think Thiel is right.

[00:28:57] Shawn O’Malley: The truly rare, exceedingly powerful monopolies are more incentivized to 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.

[00:29:16] Shawn O’Malley: The elephant in the room is in how you define monopoly. While Google has something like 90 percent control over the global search market, rather than telling you that, Google’s management wants to paint a picture of information technology more broadly, where Google looks much more like a small fish in a big pond.

[00:29:32] Shawn O’Malley: Conversely, in Thiel’s view, many startups make the fatal flaw of underestimating competition by defining the market they compete in too narrowly to make themselves seem like more of a leader than they are. 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 monopoly if the real market they’re competing in isn’t just for British food against all types of restaurants in Palo Alto.

[00:29:57] Shawn O’Malley: 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 in how they define their set of competitors.

[00:30:17] Shawn O’Malley: 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 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 placate regulators, or if they’re a wannabe monopoly trying to impress investors.

[00:30:43] Shawn O’Malley: 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 undercutting their competitors or by being protected by regulators as some utilities are.

[00:30:58] Shawn O’Malley: 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 Thiel 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 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.

[00:31:36] Shawn O’Malley: 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. Thiel offers another pretty compelling anecdote here to deliver the message, where he describes how him and his colleagues would frequently have their pick of restaurants to get lunch at in PayPal’s early days.

[00:31:56] Shawn O’Malley: 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.

[00:32:13] Shawn O’Malley: As you’ve surely picked up on by now, Thiel has unorthodox views on the world, which is what has drawn so many people to follow 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.

[00:32:31] Shawn O’Malley: Thiel 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 Thiel that a company has the flexibility to focus on building things that customers truly want, things they may not even realize they want to.

[00:32:52] Shawn O’Malley: If 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.

[00:33:14] Shawn O’Malley: While the rest of Silicon Valley was undercutting each other on improving existing products, Apple stepped in and designed the iPhone. And while Apple has something of a monopoly on smartphones today in the U. S., 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 to one product that people actually wanted has brought them decades of monopoly status.

[00:33:39] Shawn O’Malley: And in Thiel’s view, again, that is not necessarily a bad thing. Thiel sees competition as more of a human construct than a natural byproduct of the business world. In fact, he describes how capitalism and competition are, in a sense, antithetical. In economics, capitalism refers to the accumulation of capital, whereas competition refers to the erosion of profits.

[00:34:01] Shawn O’Malley: I’d say that, at a minimum, he sees most competition as laziness and wasted effort, because so much competition 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 to one invention in building a card reader that could plug into mobile phones for processing payments, all the other companies like Intuit and even PayPal that built slightly differently shaped card readers that serve the same purpose were not a productive allocation of time and resources.

[00:34:31] Shawn O’Malley: You could probably say the same thing for large language models and chatbots today, too. ChatGPT was, of course, a Zero to One 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, Thiel makes a point that made me question many of my preconceptions about competition and monopolies.

[00:34:50] Shawn O’Malley: 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 gives me access to their streaming platform, Thursday night football and free delivery on almost any product you can imagine.

[00:35:12] Shawn O’Malley: Plus discounts at Whole Foods and a whole bunch of other services is just incredibly valuable and nothing like the monopolies of the 19th and 20th centuries. From Thiel’s perspective, creative monopolies like Apple, Amazon, and Google, born from innovation, earn their periods of excess profits as a reward for building zero to one inventions that give society what it really wants, or didn’t know it wanted.

[00:35:33] Shawn O’Malley: 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 profits they created by distributing them across their employee base and shareholders.

[00:35:51] Shawn O’Malley: 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 force 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 of the population.

[00:36:18] Shawn O’Malley: While business is often compared to war, Thiel says that competition specifically is what resembles war. Allegedly necessary, supposedly valiant, and ultimately destructive. While Thiel battled with Elon Musk during the dot com bubble, as Thiel oversaw PayPal and Musk led an almost identical company called X.

[00:36:35] Shawn O’Malley: com, they nearly ran each other into the ground before deciding to compete no longer and instead merge. He credits that decision and the humility it took to set both of their egos aside as what saved both companies and enabled the merged business to survive the bubble’s burst and remain today. In terms of what it actually looks like to build a creative monopoly, Thiel says that a creative monopoly must have a product that is at least 10 times better than the closest substitute.

[00:37:00] Shawn O’Malley: It’s not an exact science to calculate this, but you can appreciate what he means 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.

[00:37:23] Shawn O’Malley: Same with Netflix. Netflix’s service was easily 10 times better than Blockbuster’s. And in Thiel’s view, renewable energy technologies haven’t gained more mainstream acceptance because in most cases, they’re nowhere near being a 10 times improvement. Unless a product is overwhelmingly superior, inertia will win out.

[00:37:42] Shawn O’Malley: A product that is a 20 percent 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.

[00:38:00] Shawn O’Malley: In fact, he says most MBAs have trouble identifying the next Zero to One companies because they’re 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 a monopoly over a specific niche.

[00:38:20] Shawn O’Malley: Amazon didn’t start out on day one, trying 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 system for hobbyists, perfected that niche and grew from there.

[00:38:37] Shawn O’Malley: 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 1 percent of that market, that is a red flag to you. Most likely, they’re diving headfirst into an industry that’s more competitive than they realize.

[00:38:53] Shawn O’Malley: 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 opportunity to expand from there. I’ll also add that Thiel 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.

[00:39:19] Shawn O’Malley: To him, the western world has lost its affinity for long term planning and ambitious goals. In just a few years, the U. S. built the Golden Gate Bridge, constructed tens of thousands of miles of interstate highways, and built the first atom bomb and landed on the moon. 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.

[00:39:48] Shawn O’Malley: Thiel argues that startups are the pinnacle of intentional, 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.

[00:40:04] Shawn O’Malley: 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 size of 1 and no ability to rewind 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 vision and work ethic, or whether its presence today stems from a series of past lucky breaks.

[00:40:33] Shawn O’Malley: 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 Thiel’s 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 Thiel 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.

[00:41:10] Shawn O’Malley: Another principle from the book I want to mention today that you’re probably familiar with to some extent is the Pareto Principle. This is a power law showing how the world is not normally and equally distributed, dating back to Pareto’s observation that 20 percent of the noble families in Italy owned 80 percent of the land, which to him, was just as natural as the fact that 20 percent of the pea plants in his yard produced the vast majority of peas.

[00:41:34] Shawn O’Malley: You’ll definitely be familiar with this if you ever read The Black Swan by Nassim Taleb. Batil makes the case for how so much of life around us mirrors the Pareto Principle. In venture capital, the entire industry is built around that one rule. The vast majority of companies in a venture fund’s portfolio will fail, while just one or two big winners will generate all of the returns over a 7 10 year period.

[00:41:56] Shawn O’Malley: And Thiel’s founders fund, he saw that exact same dynamic in action. Facebook earned more for the fund than all the other investments combined and Palantir their second biggest winning investment generated more returns than all the other positions combined besides Facebook. Rather than trying to cast as wide of a net as possible and hoping to reel in one of these big winners, Thiel views this as all the more reason to be extremely intentional.

[00:42:21] Shawn O’Malley: 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 Palantir.

[00:42:37] Shawn O’Malley: And with a portfolio like that, you’re just far likelier to find success. Zero to One is a special book, one that I’d ardently recommend any listener of this podcast to read. Few people are as idiosyncratic thinkers as Thiel, and I think there’s just so much to learn from him. He has truly embraced being a contrarian by thinking for himself.

[00:42:58] Shawn O’Malley: Throughout this episode, I’ve tilted some of the books 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 about culture and hiring well, why people who care too much about employment perks are probably not invested in your culture.

[00:43:19] Shawn O’Malley: And why Thiel never works with part timers or outside consultants besides accountants and lawyers. To wrap things up today, I want to share one more passage from the book that is more inspirational than practical. Thiel writes, The ancients saw all of history as a never ending alternation between prosperity and ruin.

[00:43:36] Shawn O’Malley: Only recently have people dared to hope that we might permanently escape misfortune. And it’s still possible to wonder whether the stability we take for granted will last. However, we usually suppress 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.

[00:43:56] Shawn O’Malley: 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 forms, but any one of them would be so different from the present that they defy description.

[00:44:14] Shawn O’Malley: 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 thing, if you’re going to Omaha in May of 2025 for the Berkshire Hathaway shareholder meeting, I want to hear from you. The Investor’s Podcast Network is hosting events that Friday and Saturday night, and I’d love to meet you there.

[00:44:34] Shawn O’Malley: If you’re interested in learning more and hanging out at The Investor’s Podcast sponsored events, just email me for more information at Shawn@theinvestorspodcast.com that’s Shawn@theinvestorspodcast.com. I’ll see you again next week.

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