Video: Competition is for Losers

Peter Thiel has some grand ideas, he thinks very much towards an ideal world, which is hard to relate to sometimes. However he gives a lecture to Stanford Students during Sam Altman’s “How to Start a Startup” class about Competition which can serve as a great lesson to anyone. An important statement he makes here is the following:

“Perfect competition” is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.

The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximises its profits.

It’s pretty clear which one has more benefits to the company, and which situation we’d rather be in. In the world we’re in today, great ideas are everywhere. The startup culture has lead to more people following through on them and creating real value for customers. But it also creates vastly saturated markets, which over time become highly competitive.

As a startup, we have no control over whether new entrants come into a given market or not, or to what level another firm creates a similar product and is able to create a competitive environment, or even if the great idea we had just got made by someone else. But there are things a company can do to mitigate that risk and choosing your own market to operate in is something you can have control over, where the factors in choosing a given market should prioritise the possibility of creating a product that gives you the best possible chance of achieving that monopoly.

We made the decision to set up our company in Dubai after having spent time working in London for specifically that reason. We hope over time that comes true, but we definitely wouldn’t be where we were today if we didn’t take advantage of the weak points the market still has (maturity, level of local innovation, accessible workforce, Venture Capital deal flow, banking sector constraints) and using it as a way to test the market, iterate our product and build a company from the ground up.

Note 1: A great perspective on startups can be found in Peter Thiel’s Book “Zero to One”, where he expands more on the subject of the video below and offers great insight on a range of important topics and cases from his vast experience and success in this sector. A really great read I’d recommend to anyone.

Note 2: By the way, the entire semester’s worth of lectures are available at the linked title above. Sam, who is President of Y Combinator brings in a series of Silicon Valley superstars to run each week’s lecture. There probably is no better source of knowledge to form a well rounded understanding of the startup world and Silicon Valley than by following this class. It’s only a dozen or so of 1 hour long lectures and it’s worth every minute.