Chapter Two of Peter Thiel's New Book
Party Like It’s 1999
Our contrarian question—What important truth do very few people agree with you on?—is difficult to answer directly. It may be easier to start with a preliminary: what does everybody agree on? “Madness is rare in individuals—but in groups, parties, nations, and ages it is the rule,” Nietzsche wrote (before he went mad). If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
Consider an elementary proposition: companies exist to make money, not to lose it. This should be obvious to any thinking person. But it wasn’t so obvious to many in the late1990s, when no loss was too big to be described as an investment in an even bigger, brighter future. The conventional wisdom of the “New Economy” accepted page views as a more authoritative, forward‐looking financial metric than something as pedestrian as profit.
Conventional beliefs only ever come to appear arbitrary and wrong in retrospect; whenever one collapses, we call the old belief a bubble. But the distortions caused by bubbles don’t disappear when they pop. The internet bubble of the ’90s was the biggest of the last eight decades, and the lessons learned afterward define and distort almost all thinking about technology today. The first step to thinking clearly is to question what we think we know about the past.
A Quick History of the ’90s
The 1990s have a good image. We tend to remember them as a prosperous, optimistic decade that happened to end with the internet boom and bust. But many of those years were not as cheerful as our nostalgia holds. We’ve long since forgotten the global context for the 18 months of dot‐com mania at decade’s end.
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74 comments
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You aren't supposed to use the text field for submissions that are really links. I assume links in the text field aren't clickable to discourage this behavior.
Well, I doubt it's everything he knows, but yeah, I found it to be well worth the money. :)
For those interested in more, Blake (the co-author from the book) took Peter Thiel's CS183 class in Stanford, and has class notes freely available on his blog (the notes generated the idea for the book, from my understanding):
http://blakemasters.com/peter-thiels-cs183-startup
I highly recommend the book.
I'm not sure I agree with that proposition, at least in the general form in which it's stated.
Yes, the objective of any particular company is to make money. But is that why companies exist? We support the concept of a company, build laws and systems that allow one to be created. And clearly the reason we have those laws and system isn't so that the company can make money.
So the instrumental goal of a company is to make money, but the terminal value of companies existing is something different. Perhaps it's that they help us collaborate on issues that outscale any particular mind (though in that we have to be mindful of the Moloch [1] and keep in mind that corporations think in alien ways [2])...
If so, corporations exist to solve human issues primarily; and making money is only a measure of how successful they are at that.
1: http://slatestarcodex.com/2014/07/30/meditations-on-moloch/
2: http://www.antipope.org/charlie/blog-static/2010/12/invaders...
A club is usually focused on providing value to their members, rather than the world at large; I'm not sure how it's similar.
But the point made by Thiel was not meant to be some existential musing on the purpose of companies generally. The proposition that "companies exist to make money, not lose it" is "elementary" because he is there referring only to companies with commercial objects. In other words, 'for profit' companies exist to make money, and at least for those companies it is a mistake to focus on other metrics to the exclusion of profit.
As for the historical relationship between the development of company law and commerce, a good place to start would be the history of limited liability companies and corporations (in the UK, US and elsewhere) and the effect of limiting liability on entrepreneurship.
But, to me, "company" usually means something like "an organization with higher-level goals that include selling things to customers and making money for its other stakeholders". When that's not the case, I think of words like "charity", "non-profit", and "club".
Regarding 'terminal' and 'instrumental', perhaps the better descriptors would be 'direct' and... uh, not sure, let's take indirect by symmetry.
The direct goals of a company is to make money. The reason we want to have organisations that focus on making money is because .. (we believe that organisations with larger positive impact are better posed to make more money, we want to harness the self-interest to improve efficiency, etc etc). The point is just having a company that makes a lot of money but doesn't improve the world is counterproductive.
http://en.wikipedia.org/wiki/Theory_of_the_firm
one of thiel's general business examples is "capitalism and competition are opposites". although his point is sound (business schools explicitly teach you to look for ways to avoid/eliminate competition), his definition of capitalism is a bit distorted to make this phrase work. capitalism is a decentralized economic system for deploying capital efficiently based on supply and demand, not simply for accumulating/concentrating capital (which is how thiel sees it).
but if you want a stable and efficient economic (and political) system, you want capital to continuously flow through the system, not accumulate.
http://en.wikipedia.org/wiki/Clarium_Capital
Now he's claiming to know things about the economy again.
During and after the liquidity crunch of 2008 and the recession, Clarium reduced in capital dramatically primarily because people were withdrawing their capital, not due to losses. He did not lose $8 billion, instead, most of the capital under management was drawn down, as it was with many hedge funds.
The annual returns of Clarium were volatile, but overall, impressive. Here is a list for the returns pre 2011 (after which reporting was kept to the remaining investors -- rumor is that it has done well but this is not public).
2002: 29.4%
2003: 65.6%
2004: 5.6%
2005: 57.1%
2006: -7.8%
2007: 40.3%
2008: -4.5%
2009: -25%
2010: -23%
From:
http://3.bp.blogspot.com/_-M95ijQ3Mq0/Sw0Tax_AoTI/AAAAAAAAAC...
http://www.hedgefundinsight.org/the-limits-to-fundamental-co...
and from:
http://www.bloomberg.com/news/2011-01-12/clarium-hedge-fund-...
Here is a good chart, for pre-2010 data.
http://www.marketfolly.com/2009/02/peter-thiels-clarium-capi...
Even despite the tough losses sustained through 2008, 2009 and 2010, the fund returned, net, from October 2002 (fund start date) to the end of 2010, 2.53x.
That's an 8.25 year, aggregated annual return of 11.9%.
http://www.wolframalpha.com/input/?i=%281.294+*+1.656+*+1.05...
For comparison, the S&P 500 over the same time period rose from a deep dip of about 800 to about 1260, a rise of 57%, for an aggregate annual return of about 5.6%.
It was volatile too, without the strong gains to buffer the losses. If you had your money in Clarium the entire time, you'd be well ahead, even net of fees -- you would have more than doubled your money (2.14x return net). Comparing the two cases, if you held Clarium vs S&P 500, you'd have 36% more capital.
Hardly a fund that's full of it, and has no idea what it's doing.
The tragedy of Clarium is that money flooded in in 2007 and early 2008, and then largely exited during 2009 and 2010, forcing a major unwind at the worst time. Macro-economically, Clarium was correct about the recovery being slow and drawn out. But the financial world, in particular their bets against the dollar, were not born out in that timeframe.
http://qr.ae/iKZQV
And I do know that Clarium is probably one of the better hedge funds by any measure. Peter Theil seems like an ethical and good person. That's so rare in that world it's probably the reason he was able to raise money without any expertise in trading.
He was the first outside investor in Facebook[2]...
And perhaps most well known for co-founding PayPal with Elon Musk and Max Levchin.
There's a ton of vids with him being interviewed on YouTube, if you want the gist of the guy.
I've bookmarked this one for later. A Conversation with Peter Thiel and Niall Ferguson[3]. (Niall Ferguson has done some fine work, as well)
[1] http://en.wikipedia.org/wiki/Peter_Thiel#Anti-aging_research [2] In the intro section: http://en.wikipedia.org/wiki/Peter_Thiel [3] https://www.youtube.com/watch?v=exfbmY7mg8s
Didn't this question originate from Peter himself? I recall he claimed so in an interview from Pando but I can't find the link.
It's the very first result on Youtube for "Pando Thiel", 6 minutes in.
http://youtu.be/p6taTMa4nls?t=5m44s
I couldn't help but feel that, in 10 years, Silicon Valley's current bubble (which Peter Thiel buys into) will seem this way.
Which falls flat when you consider that Twitter has proven itself to be anything but a successful business the past seven years or so. It's currently bleeding money at an epic rate, and if you assume a $30 to $35 billion market cap, there is almost no scenario in which it can ever justify that by earning a profit (even if revenue were profit today, they'd still be fairly valued; best case scenario possible is in ten years they're worth about what they are now, assuming non-stop growth and that they eventually have a $5b sales / $1.xb profit business)).
On the downside of this stock market bubble, when cash is harder to come by, Twitter is still bleeding out, and their growth trails off, the company is worth maybe 15% of what it's currently trading for. Thiel will of course no longer be discussing Twitter as a good example at that point (he'll then stick to only Facebook as the example).
After the initial dust settles, what we want is a valuable, defensible, first good or a much better, must have and not just nice to have solution to a problem where such a solution can be the crucial, nearly sufficient means of a valuable new company.
Okay, now for the lesson: However we come up with such a solution, we have to evaluate it. Well, we can look around just a little and see that some parts of our society are very good at technical evaluations of such solutions. With everything else being assumed, a successful technical evaluation is supposed to be able to remove about all doubt about the business success. E.g., the ideal solution would be a one pill, safe, effective, cheap cure for any cancer. Big company? Sure. Done. And we should expect such solutions in other areas.
In particular, we are able to plan, propose, and have evaluated just on paper solutions for major problems. Examples: Hoover Dam. The new World Trade Center. The Erie Canal. Powered, controlled flight as the Wright brothers were on the way to Kitty Hawk. The SR-71. GPS. Many more. Evaluated just on paper, and then executed as planned. Sand Hill Road needs to be able to do much the same, and that is much of what Peter is missing.
Instead of such solid history of project evaluation, Peter goes off on various emotional reactions to various irrational flights of triviality in various headlines, etc.
Peter, friendly advice: Learn how to evaluate research results and their applications to valuable, practical projects. E.g., borrow from evaluations of GPS, the SR-71, Hoover Dam, etc.
The biggest danger with this line of thinking is picking a straw man version of what everyone else believes. Or of underestimating the difference between belief and execution.
In this case, few sophisticated investors truly believed that page views were the ultimate metric. But those were one of the few publicly available metrics you could compare between websites. Their problem was in execution (getting better engagement and monetization metrics) rather than mistaken beliefs.
Straw men are common in startup pitches: "Our software will be powerful and easy to use", as if their competitors had a different goal.
So before proceeding on the assumption that everyone else believes something silly, think hard about reasons why it might only appear that way.