How Startups Capture Exponential Growth
Startup Advice in London: In this week’s newsletter, Dragon Argent’s startup advisory team are going to look at some of the lessons that startup founders can learn from Peter Thiel, co-founder of PayPal, Palantir Technologies and Founders Fund. Peter Theil has built several enterprises, each valued in the billions and has been involved in several very successful funds. He shares his experiences in “Zero to One”, which we have summarised for you below by focusing on his Four Golden Rules and Seven Key Questions.
Rule #1: Build Proprietary Technology That Is 10x Better
One of Thiel's core tenets is that capitalism and competition are in conflict, so an entrepreneur's fundamental goal is to create a monopoly to ensure long term sustainability. Thiel says “it’s always a red flag when entrepreneur’s talk about getting 1% of a $100 billion market.” In his mind, any plan that seeks out robust competition is not a very good plan. So Thiel regards proprietary technology that provides a 10x performance improvement over the closest competitor as essential.
Rule #2: Utilise Network Effects
The reason that organisations like Microsoft, PayPal and Facebook have experienced exponential growth is because they’ve built their success on the network effect. Products that become so ubiquitous, everybody uses them. Thiel recommends that entrepreneurs go after small markets in which network effects will take hold faster and points to his experience at PayPal as an example. When the technology was focused on the dispersed market of Palm Pilot users, it never got very far. However, it was an early success on eBay, which was a far denser community.
Rule #3: Create Economies of Scale
Thiel, like many others, is a big fan of network effects because of their ability to produce accelerating returns to scale. As the market grows, each customer becomes increasingly valuable, not just for what they buy, but for the value they add to the rest of the network. It is, after all, returns to scale that create outsize profits. It’s easy to see how a scalable market, combined with network effects, can make for a very disruptive business model. You start with a market that is too small to attract competition and end up with a high margin business that is hard to attack.
Rule #4: Build A Strong Brand
The last element that Thiel cites is branding, although he goes into far less detail here than the other rules. Yet despite the minimal space that he gives to branding, it is a very important point—and one that startups often don’t pay enough attention to. Intangible value usually accounts for the majority of the value of a successful business. A brand is essentially a promise. We value brands that we trust and that applies not only to consumers, but also to suppliers, employees and other partners.
Thiel recommends that every business should answer the following seven questions to understand if what they are building is sustainable and can experience exponential growth:
The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
The Timing Question: Is now the right time to start your particular business?
The Monopoly Question: Are you starting with a big share of a small market
The People Question: Do you have the right team?
The Distribution Question: Do you have a way to both create and deliver your product?
The Durability Question: Will your market position be defensible, 10 or 20 years into the future?
The Secret Question: Have you identified a unique opportunity that others don’t see?
Thiel argues that whatever your industry, every great business plan must address every one of these questions. If you don’t have good answers to these questions, you’ll run into lots of “bad luck” and your business will fail.
Not every founder sets out to build a multi-billion dollar enterprise – but nonetheless there are lessons we can learn from both Thiel’s Four Golden Rules and Seven Key Questions. For more detail on these, see “Zero to One – Notes on Startups” by Peter Thiel and Blake Masters, or to discuss your strategy, schedule a discovery call with Dragon Argent.
Startup Advice in London: Dragon Argent help business owners strengthen and improve their companies. Our skilled, knowledgeable and approachable team of dedicated advisers have been supporting London's business community for years.