Peter Thiel is many things. A staunch libertarian, he is the billionaire Founder of PayPal and Palintir, an early investor in Facebook, and confidant to the likes of Elon Musk and Mark Zuckerberg. The small group of colleagues he had at PayPal’s inception left to form companies like YouTube, LinkedIn, Square, Yelp and Tesla among others. An imprint of business success for which he has been dubbed ‘Don of the Paypal Mafia’.
Thiel’s 2014 book Zero to One is also intriguing for a number of reasons. Formed from lectures Theil gave to Stanford’s graduate business cohort, the book is based on seminar notes taken by its postgraduate co-author, Blake Masters. It could fairly be read as notes to the next generation of Silicon Valley entrepreneurs.
The language is clear, bold and frank. You would be hard pressed to find a book by another billionaire industry leader which speaks as openly about the normative aims of entrepreneurial capitalists, the methods by which entrepreneurs can attract investors, and how entrepreneurs can tackle their competitors. Thiel’s unvarnished understanding of entrepreneurial capitalism also does much to explain current tensions around ‘big tech’ in the U.S.
For Thiel, entrepreneurs creating the ideal ‘start up’ company should seek to create a set of products or services that is completely new, unlike any service before – thereby moving from ‘nothing to something’ or from ‘zero to one’. Entrepreneurs that move from ‘one to two’ can still create valuable companies, but they simply create ‘horizontal progress’ by emulating companies rather than ‘vertical progress’ by driving new innovations. It is the creation of ‘vertical progress’ that entrepreneurs should focus on, as it provides the greatest chance to not just create lasting business value but retain it against all other competitors:
‘Creating value is not enough – you also need to capture some of the value you create…U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012…the airlines made only 37 cents a passenger. Compare them to Google, which creates less value but captures far more.’ (Thiel & Masters, 2014, pg. 22)
By capturing more value for their companies, entrepreneurs can overtake competitors, create monopolies through new products and services they provide and thereby sustain higher profits and set prices. Contra to free-market capitalists that hold competition (and its competitor-focused incentive to innovate) as creating value, it is the monopolization of markets where companies capture value and maximise profits that Thiel sees as ensuring company longevity:
‘American’s mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.’ (Thiel & Masters, 2014, pg. 25) [Theil’s emphasis]
This business differentiation (through ‘zero to one’ innovation) and its corresponding potential for value capture is so vital in Thiel’s account, that entrepreneurs should make monopolization of their market an integral aim for their company from its foundation:
‘Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one.’ (Thiel & Masters, 2014, pg. 53)
For those critical of capitalism’s capacity to create market inequalities, Thiel’s open admission that market inequality should be exploited by entrepreneurs is, at the very least, more honest than free-market apologetics that claim monopolies to be a natural outcome of consumer demand for a particular innovation. Far less visible in Thiel’s account though is what companies should do once they have achieved a monopoly in their market.
The recent antitrust inquiries into the ‘big tech’ companies in the U.S. Congress can be observed in this light. Far from creating more ‘zero to one’ innovations, this set of monopolistic companies (incl. Amazon, Google, Facebook, Apple) have focused almost exclusively on horizontal progress by undertaking aggressive acquisitions of successful ‘zero to one’ companies, or simply replicating their technology at scale in a ‘one to two’ fashion. Thiel sits on the Board of Facebook – one of the worst offenders for seeking to replicate competitors that threaten its market dominance.
The antitrust hearings have borne this out. Internal Facebook emails have been published that demonstrate that Facebook considers company acquisitions as a valid means of maintaining its market dominance. In 2012, in regards to the potential acquisition of Instagram, CEO Mark Zuckerberg wrote to another Facebook Executive in an internal email that:
‘Even if some new competitors springs up, buying Instagram…now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. Within that time, if we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale.’
Instagram is far from the only instance in which Facebook has been found replicated technology of potential competitors or simply acquiring companies before they could become a competitor. As a case study of monopolism, Facebook speaks to a problematic paradox at the core of Theil’s account of entrepreneurial capitalism. Let’s call this Thiel’s Paradox: new market innovations can create monopolies, but market monopolies rarely create new innovations. The operational logic of monopolism necessitates this is so. If such companies were practicing radical innovation at their scale, they could risk losing their monopoly position in the market. Shifting large amounts of capital and high-skilled labor to create new ventures without a guaranteed ‘value capture’ outcome would be incredibly inefficient and risky. For monopolists, the better market strategy is to utilize their scale to become a ‘1 to 2’ company, by buying or replicating ‘zero to one’ companies that have already innovated new forms of ‘value capture’, who in turn are attracted to the monopolist’s ability to replicate their innovations at scale.
It is the practical moves of the ‘big tech’ companies that demonstrate Thiel’s Paradox most clearly. Apple is now moving towards iPhone 12. Microsoft has flagged interest in the sale of Tik Tok’s US operations, while Facebook is rolling out a ‘Reels’ feature on Instagram that feels eerily familiar to social media users. Ironically, if Thiel’s Paradox holds it represents a worldview that Thiel claims to despise. Namely, an attitude of ‘indefinite optimism’ toward the future that Thiel sees as pervasive in contemporary American culture:
‘To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely. Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones.’ (Thiel & Masters, 2014, Pg. 68)
‘Big tech’ and its push for acquisition, replication and re-arrangement of smaller, innovative companies reveal the practical reality of Thiel’s entrepreneurial capitalist vision. Far from innovation being intrinsic to ‘big tech’ companies, innovation is merely a means toward a monopolistic market position. Once a market is monopolised, such companies continue their market dominance by replicating and acquiring nascent competitors and developing second-hand innovation at a scale only they can access.
Anti-competition experts and government bodies are right to be concerned about the monopolistic nature of ‘big tech’. However, if entrepreneurial innovation is what drives rapid economic growth and business value, Thiel’s account shows us that we should be also concerned when monopolistic companies actively stop innovating. That Thiel has very little to say about how entrepreneurs should innovate once they monopolise their market suggests that his account of entrepreneurial capitalism may encourage the formation of new markets, but only to the end of dominating them.
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