This weekend I finished reading Peter Thiel’s Zero to One: Notes on Startups, or How to Build the Future which debuted this past week. It was a great read utilizing interesting methods to deliver his message whether philosophical, Shakespearian or contrarian. I would recommend folks reads it and consider the messages being delivered. Interestingly, I found several of Thiel’s messages to be consistent with those espoused by value investors such as Warren Buffet and Charlie Munger which was quite fascinating given that value investors and venture capital guys are not considered to run in similar circles.
What became evident in my observations are the views and thoughts of Thiel are similar to Buffett/Munger while the delivery is far different between the sets of individuals. What that tells me is that Thiel is right, there are not a lot of things most people do not know. Those original discoveries are harder to harvest and require a lot of research and development. However what is most fascinating and original is how Thiel delivered his messages in quite an intellectual and complex way that on the surface makes the views seem more unique and original.
Below are some comparisons I noticed which I think speaks to the universality of the topics by two very different sets of individuals and their invest “styles”.
|Monopolies||Thiel suggests monopolies are good for businesses to gain earnings power. Perhaps good for society if earnings are reinvested to produce “zero to one” and therefore valuable products and services.||Buffett suggests investing in companies with Wide-Moats, large Barriers to Entry, large Economies of Scale and where regulatory or government limits the licensing of businesses and therefore new entrants. These are analogous to what Thiel more blatantly calls monopolies.|
|Competition||Competition is not good for businesses as companies in essence fight their way down to zero earnings. Management’s attention is removed from creating true differentiation and new categories of products and services.||Growth is extremely hard to predict and therefore should not have much value when estimating a value of a business. The higher the growth in a sector the greater the possibility of new entrants which will increase competition and reduce earnings and margins. Therefore when valuing companies, little to no value should be placed on growth. At the end of the day, it is hard to know which companies will survive the competition.|
|Diversification||Unlike other venture funds, Thiel focusing on selecting few venture investments and selecting only those that he believes have the potential to return 100% of the total fund investment (not just the single venture investment). The size of the position has to be significant enough that an outsized return will in fact have an outsized impact on the total fund.||While diversification is known as a measure to reduce risk, Buffett has claimed if you were only given 20 investments to make in your entire life, you would be extremely selective of those investments through significant independent research and due diligence. Thiel suggests the same thing looking for zero to one businesses and not incremental businesses when making his selection.|
|Incrementalism||The real value is creating something from nothing. Creating the Nth of something is really incrementalism. Growth through globalization is incrementalism at its core.||One of Munger’s great lines is “efficiency is lack of imagination”. Efficiency and incrementalism I think go hand in hand and it is true that it is the lack of imagination of something new and not experienced previously.|
|Founder and Team Selection||Selecting people you would enjoy working with and who have similar intellectual curiosity, mathematical skills, etc. will help to create a sustaining work environment filled with long hours. This really speaks to the culture at its core which is critical to the startup strategy.||Buffett selects companies with good management in place and are well run. While he has recently ventured into turnarounds via his partnership with 3G, generally speaking he is about good management and solid companies. By way of example, you can see his recent re-affirmations with Benjamin Mooring’s independent dealers as an example of his commitment to cultivating a strong culture that is collaborative and not antagonistic.|
|Long Term View||According to Thiel, long-term planning is often undervalued by people’s indefinite short-term world. There are 10 references to long-term planning and thinking in his book. The longer term the view, the more focused individuals will be on long-term challenges and opportunities of a business.||Buffet’s investment strategy is a long-term owner of businesses so market gyrations do not impact his decision. As well, Buffett is a big proponent of allocating capital to its best and highest use. Taking a long-term view of where to allocate capital evident via his purchase of Burlington Northern and NV Energy which were bought during down periods when others did not see the longer term prospects in these two sectors.|
I think there are several ways to be success in business and I do not agree 100% with Thiel’s views on topics such as equity compensation, homogenous teams, etc. However as he likes to say in his talks, there are nuances and I find that true when it comes to equity compensation and homogenous teams. It’s those nuances that make the discussion interesting.