Thiel’s Law

by on April 28, 2012 at 7:26 am in Education, Philosophy, Web/Tech | Permalink

Thiel’s law: A startup messed up at its foundation cannot be fixed.

That is from the new section of Peter’s lecture notes, recommended of course.  To pose a simple question, how many other people are there in the world you would rather listen to?  Does that not mean Peter is one of the seminal public intellectuals of our time, albeit working through some non-traditional media of communications?

Hat tip goes to The Browser, which by the way is better than The Tatler ever was.

Sergey Kurdakov April 28, 2012 at 7:42 am

That is correct for most of the cases.

But still – many startups won’t even start if all things are neatly arranged.

on another side – I personally know at least one startup ( an encyclopedia publisher ) which was messed from the start, but still was quite successful, it eventually dissolved, but owner become quite reach person and the business ( as a part of large corporation ) is still alive.

Michael Heller April 28, 2012 at 7:53 am

I know what Thiel means — and it’s probably good cautionary advice for people considering starting a company or a technology — but I think he’s fundamentally wrong.

The idea is path-dependence, Brian Arthur, Paul David, QWERTY, North on institutions.

But it contradicts evolution.

Thiel goes on to say: “Or 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.”

I can’t imagine Hayek or James Buchanan agreeing. Don’t give up hope. The constitution *can* be amended. The Euro can be fixed. The fact that the universe had an origin way back then does not tell us the world can’t be fixed.

celestus April 28, 2012 at 9:00 am

“how many other people are there in the world you would rather listen to?”

A lot. The mindset that made Thiel the type of startup founder who is successful 10% of the time- this is my idea! I believe in it! I will risk everything on my idea! I KNOW the U.S. dollar is collapsing, I just KNOW it, hyperinflation MUST be coming, haven’t you even read Atlas Shrugged?- is the same mindset that makes you successful 10% of the time in the financial markets. In startups 10% is very good, in finance it’s not. How’s Clarium Capital done the last few years?

Of course, if you switch the question around to “how many other people are there in the world you would rather have someone else listen to?” the number dwindles.

where is my capital?! April 28, 2012 at 6:03 pm

You have to appreciate Theil’s gall though. Turning billions into millions doesnt even slow him down as he continues to spew his libertarian crap

dan1111 April 29, 2012 at 9:46 am

“Turning billions into millions” is a bit misleading. While the performance of the fund has not been great in recent years, most of the reduction in its size came from people withdrawing their money, rather than outright losses. Definitely not a win for him, but I would think he gets some leeway when he has both PayPal AND Facebook under his belt.

I don’t agree with the guy on everything–I’m not about to support Ron Paul–but he does seem interesting and worth listening to.

iggy April 28, 2012 at 12:29 pm

It’s a completely mundane statement.

Millian April 28, 2012 at 12:43 pm

Public intellectuals often believe nonsensical theories of social organisation which obscure their insights. Most of the last centuries’ geniuses were reactionaries or Communists.

Becky Hargrove April 28, 2012 at 1:06 pm

“0 to 1 – the idea of technology – parallels founding movements. The 1 to n of globalization, by contrast, parallels post founding execution.” One knows they are in 1 to n when they see people still pushing a button that no longer responds. No one wants to respond to the people pushing the button, because they know the button is not responding and thinking about that is depressing.

Will April 28, 2012 at 1:40 pm

Are you kidding, Tyler?

There is nothing brilliant about saying that a start-up whose foundation is “messed up” is unfixable?

In fact, its not even necessarily a true statement.

I guess the bar for what qualifies someone to be a “public intellectual” has been lowered to anyone wealthy enough or famous enough to command uncritical attention and unqualified priase from otherwise sensible and intelligent people based only on their celebrity.

NL_ April 28, 2012 at 2:12 pm

I’ve read about half and so far it is really interesting. As a libertarian studying tax law and corporate law, I like the stuff worrying about agency, incentives, equity, debt, and entity choice. Aligns with my ideology and with my training. I really enjoy all the stuff about slicing and dicing the equity stakes to align the incentives among the various creditors. It’s nothing new or groundbreaking, but I still enjoy reading about it.

But it’s interesting how little he pays attention to the actual business model or product. No rule of thumb for which industries to avoid, what signs will tell you a business model is bad, etc. I feel like he must have some idea for which business models suck (e.g. over-reliance on a certain market segment, over-emphasis on marketing) but maybe he didn’t want to share them.

jpa April 29, 2012 at 1:56 pm

or more likely: that information gets dated really fast (markets and biz models)

R. Pointer April 28, 2012 at 2:29 pm

Have Kasparov et al fixed their book situ? And why is the kindle version out in 2016?

jseliger April 28, 2012 at 3:36 pm

Does that not mean Peter is one of the seminal public intellectuals of our time, albeit working through some non-traditional media of communications?

I wish that Thiel, or one of Thiel’s assistants, or someone (who is not me) would keep a centralized, perhaps blog-like repository of all the random places his writing and ideas appear; it’s very hard to track all these non-traditional communications channels. Searching for Peter Thiel Blog yields all kinds of interesting stuff that I haven’t heard of.

Some guy performs this function for Elmore Leonard, and although the site is badly designed whoever is keeping up with Leonard-related material does an impressive job.

The Original D April 28, 2012 at 3:38 pm

Just in the domain of startups alone, I find Paul Graham much more thought-provoking. And actionable.

Steve Sailer April 28, 2012 at 8:49 pm

Not to say anything against Thiel, but Paul Graham is definitely worth reading.

Glenn Mercer April 28, 2012 at 8:26 pm

Two things:

1. I am reading the Thiel lecture notes with great interest and find them fascinating and enlightening.

2. EXCEPT (you knew this was coming), and I need help here from real economists, as I do not have credentials in the field, he seems to continually confuse PROFITS and RENTS when he excoriates ‘perfect competition.’ I quote an example, from Blake Masters’s wonderful lecture notes (thank you Blake!):

“But another truth about the world of perfect competition is that investors should not invest in any companies, because no company can or will make a profit.”

I always thought (again, help me out here, people) that perfect competition meant things like selling up to the point where marginal cost equaled marginal revenue, or where no supplier had the power to set price, etc…. and a strong implication therefore that some kind of ‘excess’ profit would be competed away… but where the heck does perfect competition lead to NO profit? Seems absurd.

Ricardo April 29, 2012 at 6:05 am

You are right.

“Perfect competition” means means the risk-adjusted rate of return on an investment will be the same across firms or sectors. The rate will still (generally) be positive, though.

This is a problematic concept but it is problematic for other reasons: it is premised on the idea that firms cannot set prices and that every firm in a sector will be about the same size and produce the same amount of output.

Glenn Mercer April 29, 2012 at 2:04 pm

Thank you! (And how could I not trust an answer from someone with a screen name like Ricardo!) GM

Andrew' April 29, 2012 at 7:15 am

How many? Not many.

Does this make Thiel the first superstar teacher?

Floccina April 30, 2012 at 11:08 am

I sometimes wonder if we should be listening to people like Peter Theil. What he did worked for him but perhaps is not appropriate where it will be applied and even some of his success might be random. Never the less I do like these lectures but I try to look at is a small piece of evidence rather than gospel.

Foobarista April 30, 2012 at 4:41 pm

I’ve always thought this about chatty rich guys like him, particularly Warren Buffet, although Thiel’s take on things is a bit more useful since he tends to look at a whole lot of businesses.

The main key to investing like Warren Buffet is to be Warren Buffet. Otherwise, you won’t have the insider access he has, or the cachet of having Warren Buffet investing in your company. (Why couldn’t I buy special Goldman Sachs preferred stock at 10%+ a couple years ago? Oh, right – I wasn’t Warren Buffet.)

Dan Weber April 30, 2012 at 3:47 pm

Are S corps really not allowed to give out stock options? I have direct experience that says otherwise.

He also says that absolute share numbers don’t matter. “Only the percentage of firm ownership matters. 200k/10m is the same as 20m/2bn. 2% is 2%.” I have experience with the opposite, where people turned down offers at one company with 2000 options for another giving 2 million options. I’ve asked potential employers, who have quoted an option number to me, what the total number outstanding is, only to get blank looks.

I also disagree very very strongly that liquidation preferences are necessary for lining up incentives. If you can’t figure out any other way to stop the founders from just distributing cash and walking away after investment, you don’t belong in the world of venture capital. Liquidation preference protects the VC while putting everyone else at risk, which means as soon as something looks like trouble, everyone else should bail.

I’ve also seen company-buyback agreements used to totally cock-block someone’s attempt at exiting the company. The company refused to accept the price and (as the stockholder agreement said) demanded an independent audit to determine the “fair” price. This obviously blows any deal out of the water.

There wasn’t much in Thiel’s piece that you wouldn’t have seen a decade ago.

Sunset Shazz April 30, 2012 at 5:57 pm

Peter Thiel’s essays almost always:

(1) Surprise me with a novel insight

and

(2) Make me think.

I agree that he is a gem – like something out of Heinlein.

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