Hedge Funder Peter Thiel Taught A Class At Stanford — Here Are Some Of The Coolest Things We Learned

Peter Thiel

Photo: www.acceleratingfuture.com

Venture capitalist and hedge fund manager Peter Thiel just finished guest teaching a course at Stanford University, where he gets to impart his wisdom on hungry minds.Obviously we can just add this to the laundry list of reasons why we wish we were back in school.

Luckily though, one of those hungry minds is Blake Masters, a third year student at Stanford’s Law school who is kind enough to blog about his notes and let us publish them.

Here’s his idea behind the class:

Details are well understood; the big picture remains unclear. A fundamental challenge—in business as in life—is to integrate the micro and macro such that all things make sense…. Humanities majors may well learn a great deal about the world. But they don’t really learn career skills through their studies. Engineering majors, conversely, learn in great technical detail. But they might not learn why, how, or where they should apply their skills in the workforce. The best students, workers, and thinkers will integrate these questions into a cohesive narrative. This course aims to facilitate that process.

Is your mind blown yet? If not, keep going, we’ve collected the most awesome points from Thiel’s class.

Pencils up.


Starting a good company is like figuring out a hard truth.

Thiel told his class that the easiest truths to come by are like conventional wisdom -- everyone knows it. However the best companies are hard to come by, they're hard truths that people haven't realised yet.

Thiel would call those truths, 'vertical or intensive progress' because they mean people are doing new things. He believes there are two kinds of progress, the other kind is 'horizontal or extensive progress' where people copy what's already been done.

Source: Blake Masters/Thiel's Class

These truths are like secrets, and there are two kinds of them.

There are the secrets of the natural world, and there are secrets about people.

The secrets of the natural world are discovered through scientific innovation. Those about people are more difficult to find and less appreciated sometimes. They can be sociological or anthropological. They can be about a person. Often, they are hard to find but incredibly profitable.

Source: Blake Masters/Thiel's Class

Got a secret? Good, but know that a startup that is messed up from the beginning won't survive.

Make sure you get it right from the start (from Blake's notes on Thiel's class):

Beginnings of things are very important. Beginnings are qualitatively different...think about the origin of a country; it necessarily involves a great many elements that you do not see in the normal course of business. Here in the U.S., the Founders generally got a lot of things right. Some things they got quite wrong. But most of the time they can't really be fixed. Alaska has 2 senators. So does California. So Alaska, despite having something like 1/50th of California's population, has equal power in the Senate. Some say that's a feature, not a bug. Whatever it is, we're likely to be stuck with it as long as this country exists.

Oh, and be a Delaware C-Corp.

And in that start-up, money should not be your number one driver — it should be changing the world.

Sure, says Thiel, people are happier when they're richer, but only when they're making up to about $70,000 a year. After that, 'marginal improvements brought by higher income are more or less offset by other factors (stress, more hours, etc. Plus there is obviously diminishing marginal utility of money even absent offsetting factors).'

So why do it? To be famous? Probably not.

You launch a start-up, says Thiel, to change the world.

Source: Blake Masters/Thiel's Class

Changing the world means progress, and Thiel cites four theories about how progress will continue in the future.

Some basically say your start-up won't change the world, but here we go:

  1. After the industrial revolution, 'technology will decelerate and growth will become asymptotic.'
  2. Progress is cyclical -- 'Technological progress moves in cycles; advances are made, retrenchments ensue. Repeat.'
  3. Then there's 'collapse/destruction. Some technological advance will do us in.'
  4. Lastly, there could be 'singularity where technological development yields some AI or intellectual event horizon.'

Source: Blake Masters/Thiel's Class

That said, if you want to understand the future of business right now, you've got to look at the 1990s.

That's right, 'party like it's 1999.'

Think: PayPal, the collapse of hedge fund Long Term Capital Management, George HW Bush and Bill Clinton), Netscape, Beanie Babies (kidding).

From Blake's notes on Thiel's class:

The key takeaway for most people was that the tech explosion of the late '90s was all a bubble. A shift back to the real economy was needed...

The only problem with those lessons is that they're probably all wrong. At their core are complex, reactionary emotions; they're driven by hubris, envy, and resentment against the '90s generally. When base emotions are driving, analysis becomes untrustworthy.

The reality is that people were right about lots of things in the '90s. The indirect proof that judged tech to be king was not weakened by the excesses that would come...

Back then there was a tech bubble. Are we in one now? Thiel says that doesn't matter.

The most important thing is to get away from Bubble/anti-Bubble thinking and do the truly contrarian thing -- think for yourself. Think about the value you're adding.

From Blake's notes on Thiel's class:

The question of what is valuable is a much better question than debating bubble or no bubble. The value question gets better as it gets more specific: is company X valuable? Why? How should we figure that out? Those are the questions we need to ask.

What matters? The three things that make a good company.

Here they are (from Blake's notes on Thiel's class):

Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create.

And more specifically, the three steps to making a valuable tech company.

From Blake's notes on Thiel's class:

'There are three steps to creating a truly valuable tech company. First, you want to find, create, or discover a new market. Second, you monopolize that market. Then you figure out how to expand that monopoly over time.'

But even if you have a great company there's still competition, which is more complicated than you think.

That said, there are still ways to own market if you keep a few things in mind.

'For a company to own its market, it must have some combination of brand, scale cost advantages, network effects, or proprietary technology.'

Source: Blake Masters/Thiel's Class

The toughest of those things is mastering your brand and making it perfectly unique.

But once you've got it, you can build a monopoly:

One way to think about brand is as a classic code word for monopoly. But getting more specific than that is hard. Whatever a brand is, it means that people do not see products as interchangeable and are thus willing to pay more. Take Pepsi and Coke, for example. Most people have a fairly strong preference for one or the other. Both companies generate huge cash flows because consumers, it turns out, aren't very indifferent at all. They buy into one of the two brands. Brand is a tricky concept for investors to understand and identify in advance. But what's understood is that if you manage to build a brand, you build a monopoly.

Source: Blake Masters/Thiel's Class

Creating a culture is tough too. The secret is to have something unique that your team shares.

From Blake's notes on Thiel's class:

Good company culture is more nuanced than simple homogeneity or heterogeneity. On the homogeneity side, everyone being alike isn't enough. A robust company culture is one in which people have something in common that distinguishes them quite sharply from rest of the world. If everybody likes ice cream, that probably doesn't matter.

Oh and you also need to strike the right balance between athletes (competitive people) and nerds (creators) no matter what.

When you're finding investors, make sure you're talking to someone who needs investments.

This may seem obvious, but get specific. Talk to senior partners or a principal or you're wasting your time. Also, make sure to pitch when you're strong -- when you don't need money.

Source: Blake Masters/Thiel's Class

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