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How many secrets can there be? #peterthiel

by Saul Fleischman on September 11, 2013

I am sharing my notes from Peter Thiel’s Stanford course, “Startup” – CS183

The following are from the Secrets lecture.  Selections and edits are my own.

What important truth do very few people agree with you on?  What great company is no one starting?  Is it just really hard?  Or is it a fool’s errand?  This distinction is important.  Intermediate, difficult things are at least possible.  Impossible things are not.  Knowing the difference is the difference between pursuing lucrative ventures and guaranteed failure.

Capitalism and competition are antonyms

That is a secret; it is an important truth, and most people disagree with it. People generally believe that the differences between firms are pretty small. They miss the big monopoly secret because they don’t see through the human secrets behind it. Monopolists pretend that they’re not monopolists (“Don’t regulate us!”) and non-monopolists pretend that they are (“We are so big and important!”). Things only tend to look similar on the surface.

The power law secret operates similarly. In one sense it’s a secret about finance. Startup outcomes are not evenly distributed; the follow a power law distribution. But in another sense it’s a very human secret. People are uncomfortable talking about inequality, so they either ignore it or rationalize it away. It is psychologically difficult for investors to admit that their best investment is worth more than the rest of their portfolio companies combined. So they ignore or hide that fact, and it becomes a secret.

Salespeople do best when people do not know they’re dealing with salespeople

The distribution secret also has two sides to it.  Distribution is much more important than people think.  That makes it a business secret.  But it’s a human secret too, since the people involved in distribution work very hard to hide what’s going on.

On some level, every form of injustice involves a secret

Something is being done. It’s unjust.  It’s happening because society allows it to happen.  The majority of people don’t understand the injustice of it.  Invariably that’s understood only by a small minority.  Either everything is right as it is.  Or whatever injustice exists is mysterious and can’t be fixed.

We have experienced decades of extraordinary inefficiencies.  You weren’t allowed to say in 2000 that people were behaving somewhat irrationally regarding Internet companies.  You weren’t allowed to say in 2007 that there was a housing bubble.  The market could not be understood.  To the extent anyone could understand, it was the Fed. They had a model that said no more than $25B could be lost in the worst-case scenario.  There was no second-guessing.  We all know how that turned out.

 The Case For Secrets

That difficult problems do get solved is evidence that secrets exist.  It’s not always straightforward to tell whether a given problem is merely hard or actually impossible.  But the people who actually solve hard problems are people who believe in secrets.  If you believe something is hard, you might still think you can do it.  You’ll try things, and maybe you’ll succeed.  But if you think something is impossible, you won’t even try.

The story of web 2.0 and the information age has been the story that, on some level, many small secrets can add up and change the world.  It’s easy to make fun of things like Twitter.  Most tweets are probably useless. But in the aggregate, the platform has proven quite powerful.  Social media has played a non-trivial role in political transformation and even governmental overthrow.  The secret force behind this web 2.0 empowerment is the fact that there are far more secrets that people think.  If things are very different in the increasingly transparent world, it just means that they were covered up before.  To the extent that things are not transparent, they are secretive.

The big version of this is WikiLeaks.  The Julian Assange line is that, “New technology… can give us practical methods for preventing or reducing important communication between authoritarian conspirators.”  Conspiracy is broadly defined as anything involving any information that’s shared between a few people but not amongst everybody.  The crazy twist here is that more secrets ended up coming out than Assange probably would have liked.  There are so many secrets that what they are isn’t the only factor.  What can matter even more is the order in which they get revealed.  Does the secret that brings down a government get revealed before the secret that would destroy its revealer?

How To Find Secrets

Develop a good method or approach to finding secrets.  We know that important secrets are neither small, silly nor esoteric. Important ones are the big ones that are true.  So those are the first two criteria to build into your model.  You can safely discard anything that is small or false.  There are secrets of nature and then there are secrets about people.  Natural secrets involve science and the world around us.  The process of finding them involves going out and getting the universe to yield its secrets to us.  Secrets about people are different.  These are things that people hide because they don’t want other people to know about them.  So two distinct questions to ask are: What secrets is nature not telling you?  What secrets are people not telling you?

Anti-competition

You could ask: what can people who are running companies not say?  That would get you thinking, and you would soon realize that monopolists have to pretend that they are small and things are enormously competitive, while non-monopolists have to pretend they are large players with a permanent edge.  The other route you could take is the Econ 101 route where the fact that economic profits get competed away in perfect competition is a secret about nature.  Either approach could work.  But you get there much faster if you ask the people question.  The same is true with the power law secret.  You could start with quantitative analysis, plot out the distribution of startup outcomes, and go from there.  Or you could look at what VCs say, wonder what they can’t say, and think about why.

Many venture capitalists seem to be looking for incremental improvements

One way to get started thinking about big secrets is to think about majors that aren’t at Stanford.  Physics, for example, is a real major at all real universities.  So ignore it for a moment.  The opposite of physics might be nutrition.  Stanford doesn’t have it.  Real universities don’t let you major in nutrition.  That might mean we’re onto something.  And indeed, one company that Founders Fund has found particularly interesting is putting together a sort of Manhattan Project for Nutrition.

Cool people don’t talk about being cool

All the cleantech stuff was driven by unstated desire to be fashionable?  One option would be to swear off cleantech entirely.  But could you profit from the insight?  Could you start a cleantech company that embraced the dynamic and focused on making a fashion statement?  The answer is yes.  You could start Tesla, which is exactly what Elon Musk did.

What To Do With Secrets? Patent it, if you can. What to do beyond that?

Source: http://www.uspto.gov/inventors/patents.jsp

The challenge in the startup context is to figure out exactly who and how many people you should share your secret with.  A lot of this is timing.  The right time to bring people in is rarely at the very beginning, all at once.  But it’s not never, either.  The timing question is a complicated one, but some intermediate answer is likely the best.  Much depends on what you think the rest of the ecosystem looks like.  If you think that you have a big secret but lots of other people are about to discover it, it’s worth being risky.

You have to move as fast as possible and tell whomever you need to.

This is what PayPal did in the summer of 1999.  After some failed business models involving beaming money via palm pilots, they realized that linking money and e-mail together would be powerful.  This seemed like a really big secret.  But it also didn’t seem very hard.  Surely, other people were going to figure out the same thing in short order.  So the PayPal team had scramble and share the secret liberally.  This is never without its risks.  People you talk to may end up competing with you instead of joining you.

Try to identify important truths

Say you’re looking for a startup job.  You know it’s important to land on the right part of the distribution curve.  You want to go to one of the great companies.  This may seem easy, since there’s a general sense in the media and tech community about what the best companies are.  People perceive that startup A is much better than B, which in turn is much better than C.  So you’d shoot for A and line up an interview at B as a backup, right?

Maybe.  That works in a world where the power law is true, but there are no secrets.But in a world with many secrets, the best companies may be hidden.  The power law is the same.  But it’s harder to navigate because people may have misidentified the best companies.  Your task in a secretive world is to identify the hidden companies with the potential to be the best.  What potentially great company are people overlooking?  Do not take the perceived distribution of best to worst as a given.  That is the fundamentalist view.  The market, the media, the tech blogs—they all know better than you.  You can’t find secret startups that might be great.  What do you know?

This doesn’t mean you should seek out and join obscure companies.  Esoteric truths are not what we’re after.  But you should try to identify important truths.  And very often those are hidden.

For my notes from the same course on Startup Company Formation, see this post.

About Saul Fleischman

Founder of emerging social media tool sites. Bootstrapping innovation with lean startup development teams. I do project management, user experience, PR, marketing and community development.

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  • Ryan Biddulph

    I love the note about salespeople Saul ;) The best never make it feel like you are being sold to ;)

  • Para juego

    I have actually, I do not look for the small company. that does not mean I desire hole in the renowned company, I mean everything should be transparent and clear, to make sense of the more favorite

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