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> It's important to articulate why the company will eventually be in a strategically valuable position (i.e. a monopoly). I find it interesting, and disconcert

• kitbrennan 11y ago
  Really this advice is born out of two things: 1. Many investors argue you should build your product in a narrow vertical that has the opportunity to turn into a much larger market. Given you start in a narrow vertical, you should aim to dominate that vertical ('Crossing The Chasm' makes a very coherent argument in favour of this). 2. Investors are aiming for 10-100x returns, and it's hard to do that if you are not going to become the clear market leader. Whether this leads to a better society is an interesting question. One might argue that it makes your company more likely to be successful, and successful startups are job/value creators which is better for society.
• andreasklinger 11y ago
  why? it's the ideal state in capitalism for the single market player. it's just the extreme version of unfair market adv and most will anyhow not succeed getting there (btw no political notion to this - it just is fact from my pov)
  • calpaterson 11y ago
    The ideal state in capitalism is for businesses to be interchangable and suffer perfect competition in order to maximise the consumer surplus. This is different from the ideal state for capitalists, who obviously want a monopoly.
    • beat 11y ago
      As Peter Thiel observed, in the "ideal state" of capitalism, profit is impossible. Perfect competition drives profits to zero. All profit in capitalist systems results from various forms of friction - imperfections in "perfect competition". Barriers to entry are an imperfection. We're not in the startup world out of an ideological obsession with the perfectly spherical cows of economic fantasy. We're here to make money (among other things). We are trying to build high-growth sustainable business models. That means high profits, much higher than can be achieved in highly competitive industries. Perhaps we shouldn't be saying "monopoly" so much as high demand, low competition, high barrier to entry.
      • omalleyt 11y ago
        It's not that in perfect competition profit is impossible, it's that in perfect competition the rate of return of capital invested would equal the risk free rate + what are you compensated for the risk you are taking on. You wouldn't see the excess returns that come from rent-seeking behaviors
    • andreasklinger 11y ago
      this is only true if the market is fluid and market players have comparable powers/options - but it's not the goal of the players themselves
• deleted 11y ago
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• dragonwriter 11y ago
  > I find it interesting, and disconcerting, that articulating a defensible competitive advantage is no longer sufficient advice. Now it's, "can you be a monopoly? no? go home". A "defensible competitive advantage" is precisely a "monopoly" as that term is used in economics; that is, a defensible competitive advantage meansyou have something that assures that no other notionally "competing" product or combination of products is a perfect substitute for at least some subset of your products use cases; within that subset of use cases, you therefore have some range of pricing power, which defines a monopoly.
• calpaterson 11y ago
  I think this is a combination of two things. Firstly the common business definitions of monopoly are weaker than the common economic definitions of monopoly. In some cases the Michael Porter's of the world are happy to call something a monopoly casually if it has any unique selling point. Secondly, the standards for companies that raise venture capital are higher than for most normal businesses.
• snappy173 11y ago
  i find it downright scary. that such insane scale is a prerequisite for success leads to companies taking greater and greater risks. to achieve monopoly scale requires it. ignoring local laws and regulations becomes rational in this environment, as we have seen.
  • beat 11y ago
    "Local laws and regulations" == "limited monopoly". Assuming you're referring to service businesses like Uber, you're talking about competing with businesses that exploit these local legal monopolies in a corrupt manner to prevent competition and thus become local monopolies themselves. My first Uber ride was in Omaha, the week the service started there, and my driver was a (former) cabbie. She said there were four taxi companies in town, but all four were owned by the same person (faux competition). They regularly cheated drivers out of wages, overcharged customers, and used crappy vehicles. You'll find similar situations in cities all over the country - taxis as local monopoly, enforced by the police and depending on the taxi monopoly's cozy relationship with the local political machine. Uber challenges the local regulations, but they win by offering a service that is less expensive and much higher quality than the monopolies they compete with.
  • pjlegato 11y ago
    It's not a prerequisite for success. It's a prerequisite for raising an insane VC round. Plenty of profitable businesses take a different path and don't try to be a Thielian monopoly. That's fine, it's not invalid as a business. But that's not what VCs are interested in investing in. The extremely high startu failure rate means they need enormous returns on the very few investments in their portfolio that actually work. Such huge returns imply a Thielian monopoly business.
• roymurdock 11y ago
  I found that quote to be the most interesting bit of the piece as well. Obviously it's in every company's best interest to hold a monopoly position in a large market. It's that strong self interest and drive to do whatever it takes to be #1 that I think YC is generally looking for in its founders, rather than a truly brilliant or unique idea. Ideas are cheap, execution and grit is rare. This will be increasingly true for the new biotech/hardware startups that YC is looking at - grinding away in the lab for a shot at a patented monopoly position is the name of the game. It's just interesting to see the goal of becoming a monopoly stated so bluntly as the end goal of every company that comes through YC. It clashes a bit with the hacker ethos of doing something because its intrinsically cool, interesting, and not expected to scale. Seems like YC is entering a new phase as a larger, more mature organization.
  • pjlegato 11y ago
    Startups aren't (and have never been) about the hacker ethos of doing things just because they're intrinsically cool and interesting. There is a small bit of overlap (as in a Venn diagram) between the spheres of "doing things that hackers find technologically cool" and "doing things that make a lot of money." That small area of overlap is where startups are. The vast majority of hacker-cool material isn't (and has never been) in that startup slice.
  • pbreit 11y ago
    There's another way to look at it that is useful: first, try to be a monopoly in a small market. Instead of being one-of-many in a large market.
• mathattack 11y ago
  I realize this is a good way to maximize value for investors, but is this a healthy way to grow new companies and build a better society? It's complicated, but for startups the answer is Yes. If every auto company merged into one monopoly, society (other than the shareholders) would be worse for it. This is why anti-trust legislation exists. If startups create things that never existed before and wind up owning the market for a few years, society benefits. This is why patent protection exists. (Yes - it's abused in software, but that's another story) It's certainly not black and white. As a buyer, I may say "I'd rather have service X from many providers than one provider, but I'd rather have it from one provider than not at all."
• AndrewKemendo 11y ago
  I realize this is a good way to maximize value for investors Full stop there. This post is about attracting investors. From my experience in the fundraising world, there doesn't exist an investor who has the goal of "building a better society" over maximizing return. At best it's a nice to have feature of an investment that it's making something better.
  • pcmaffey 11y ago
    These things are not mutually exclusive given large enough time scale. In fact, they are correlative. Thus, the conclusion to be drawn from this is that most investors are bad at what they do. Even if that fault is only a short-sightedness.
    • cubano 11y ago
      A big problem with this mindset, I believe, is the unintended-consequence issue. No one really knows how things are going to eventually turn out. History is utterly littered with the debris of feel-good movements and ideas that, once implemented, turned out to have negative outcomes unforeseen by the original instigators.
• nostromo 11y ago
  I think they're using the Peter Thiel version of the word, not the traditional economics version of the word. For example, while Facebook, Apple, Google, and present-day Microsoft all are not strictly speaking monopolies (they have viable competitors) -- they each have various features that make switching difficult (but not impossible).
  • mbesto 11y ago
    > I think they're using the Peter Thiel version of the word, not the traditional economics version of the word. Which is a poor way to communicate a point when the widely considered definition of one of your words doesn't match the one you're articulating. It assumes everyone has read Peter Thiel's book (ps - everyone has not). It's the same with the word "startup". For a majority of the world a startup is business that has just started, but for YC (well, pg specifically[0]), the definition is "A startup is a company designed to grow fast" and more specifically notes "Being newly founded does not in itself make a company a startup". The definitions are not only considered inconsistent but they're explicitly inconsistent. Communication is important and this is one of those instances where I think many people might scoff at the notion that YC is building monopolies and that's "bad". [0] - http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html
    • chejazi 11y ago
      Maybe a clarification is in order. BUT, this is YC's attempt to make their advice available to the broader community. If you're interested in YC and listen to their advice, you will likely have heard about Peter Thiel's monopoly (see Sam Altman's "How to Start a Startup" series w/ Peter Thiel otherwise). I'm just happy they're making this advice available. EDIT: Here ya go https://www.youtube.com/watch?v=-oKjLVECMKA https://www.youtube.com/watch?v=-oKjLVECMKA
    • staunch 11y ago
      Context does matter though. If you're talking about startups in Silicon Valley, it's completely correct to exclude normal small business and focus on technology-based startups aka "tech startups". They really are very different kinds of businesses. The problem may be that that "tech startup" is too verbose and lame sounding.
• brudgers 11y ago
  Peter Thiel draws a binary distinction between monopolies which dominate a market and competitive commodity businesses. In such a binary model, the only businesses that can have startup [in the Silicon Valley sense] type growth are monopolies. Of course in a binary model, "monopoly" and "commodity" get stretched to cover a lot of grey flux between the poles. The important thing is which half of the spectrum a company is on, not if the company is on the absolute end of the side with all the potential. This isn't to say that this is the perfect state of the world, only that there is some context around the way the terms of used...in this case, it's a sketch, or a diagram, or a schematic rather than a documentary photograph.
• beat 11y ago
  It depends on how large a VC, too. A small VC might be happy to see you build a $50M company, because their overall requirement for returns is smaller. But if you have a billion dollar fund that investors want to see turned into $10B (or more), a $10M return (20% of $50M) is peanuts. It's not worth the time of the small number of general partners available for due diligence, board seats, and other oversight. Their business model depends on unicorns, not horses, no matter how beautiful the horse.
• pjlegato 11y ago
  Bear in mind that this advice is for companies in YC that are trying to raise a VC round. The failure rate in tech startups is so high that VCs are mostly only interested in investing in the potential to have an outsized Thielian-monopoly return, so that the very few winners in their portfolio can cover the many losses. It doesn't mean that this is the only way to run a successful business or that other ways are invalid or unprofitable. It just means if you want Silicon Valley VC, this is what that particular group of investors is looking for.
• HappyTypist 11y ago
  Monopolies can leverage economies of scale and can be the most beneficial for consumers and the economy. As long as there are no anticompetitive barriers, monopolies can easily fall out when a better product offering comes along.
• elliotec 11y ago
  This sentiment reminds me of DHH's talk at startup school (https://www.youtube.com/watch?v=0CDXJ6bMkMY https://www.youtube.com/watch?v=0CDXJ6bMkMY) in which he explains that the best way to create a business is to make money, but not just make money, make it on your own. I am a little removed from the Silicon Valley echo chamber and enjoy the ability to watch it from the sidelines, but I don't understand the obsession with the 'rapid growth, raise millions from investors, become a unicorn, own the world' mentality. I just don't get it. As a founder, your life is going to be just as good (probably better) if you made a couple million dollars in actual money that you don't have to divide up in odd percentages to all sorts of already rich guys who gave you tons of money in the first place. Why isn't everyone just trying to build products that work, that people like, that make money, and going from there? Why the need to go to YC, or raise any capital AT ALL, for the very very low chance of becoming gajillionaires? I understand the appeal of the #1 king on top thing, but not really, and not with the risks and pain associated with the journey and the reality. Whatever I guess. People will not stop investing or raising money, at least for now.
  • wj 11y ago
    Plenty of people are starting software businesses without taking outside funding. I imagine the majority of Show HN posts are of that variety.
    • elliotec 11y ago
      Agreed, most companies are this way in general. But that's why I'm surprised to see such hype around the alternative.
  • dluan 11y ago
    I'm going to assume you're relatively new to startups, because this didn't always used to be the case. Founders 40, 30, even 10 years ago had much less leverage in that today it's so comparatively cheap to launch an app that can quickly get millions of users. Back then, even to think about launching an app you needed a server. The capital that founders needed came with investors who had all the leverage and board control. It's only recently that you could literally start accepting dollars from paying users without actually paying anything (servers, money integration, etc all free). That means founders have more leverage, which in turn means for the first time founders are getting more of a say in the trajectory of the company. Basically, your feelings are following recent developments, but it's unusual that this is the case. In other words, you are the long tail that previously never got a seat at the table. But, there are still going to be founders already at the table chasing the big bets. Of course, you are also discounting the value of having investors that prioritize growth. In most cases, all companies somewhat converge when it comes to what that start up needs to do to survive and succeed: grow.