Lessons from Peter Thiel

The team at Moneyworks4me believes in continuous learning, and we learn from various sources. But why would I spend my weekend reading "Zero to One" by Peter Thiel, a book celebrated in the startup world? This book discusses what a startup must do: question received ideas and rethink business from scratch.

For those unacquainted, Peter Thiel is one of the Paypal Mafia. The "PayPal Mafia" refers to a group of former PayPal employees and founders who have since founded and developed additional technology companies in Silicon Valley, such as Tesla, Inc., LinkedIn, Palantir Technologies, SpaceX, Affirm, Slide, Kiva, YouTube, Yelp, and Yammer. He currently serves as the managing partner of The Founders Fund and sits on the board of Facebook.

This book resonates with investors as it gives us a lens through which we can analyze early stage companies (few small caps) as well as find out what creates values in bigger enterprises. There are very few businesses which make it big, and learning from Thiel who has created billion dollar companies, one can know how founders think. So what does he teach us?

Investors would like to invest in companies that are monopolies, scalable, available at reasonable valuations, and create value for shareholders. But what stops every business from turning into a monopoly? Mostly, these businesses fail to answer one or more of the questions below:

While we know monopoly businesses capture the most market value when operating in a favorable industry. Finding them in current market situations is a challenge. Regulations, free market economy, competition from global peers all pose as hindrance. But finding companies with dominant market share in a segment or niche is possible. Take example of ITC in cigarette market, Asian paints in decorative paints, Indigo in aviation or IRCTC, Concor and CAMS in their respective markets.

But will just buying such businesses be enough?

No, a small number of items in a given distribution will have an outsized impact on an overall dataset which is the power law. For investors, this means that a select few investments can significantly boost overall portfolio returns (consider our investment in Bector Foods,  which has become 4x and boosted our portfolio returns). Hence, we must be very careful and follow a process-driven approach to investments.

Investing is an art as well as science and learning from a Paypal mafia member does leave us more informed. We are keen on honing our investment process and this book provides insights for both entrepreneurs and investors. The key takeaway would be to look for a monopoly or company with dominant market share in a segment/niche operating in a favorable industry and which can successfully answer the above-mentioned questions.