Investment Strategy Part I: Peter Thiel: Maximizing Returns
At any cost.
Peter Thiel is a German-born American entrepreneur and investor.
He founded PayPal, Palantir, invested in Facebook, headed the hedge-fund Clarium Capital, founded the VC firm Founders’ Fund, and wrote several books among which stands Zero to One, a philosophical treaty on the business of startups.
Thiel is said to be a “contrarian investor”, meaning he does not practice “traditional” stock, bond, and real estate investing.
This article is the first of our mini-series that will focus on four different investors with different strategies:
- Peter Thiel
- Warren Buffett
- Ray Dalio
- Nassim Taleb
This week’s article is about Peter Thiel.
The only thing Peter Thiel focuses on when investing is the amount of return his investment is likely to make.
This explains why he made most of his money founding companies himself (Paypal and Palantir) on one hand, and by investing very early on in promising startups (such as Facebook) on the other.
Thiel noticed that the investment world worked according to Pareto’s law: most companies don’t make money, and only a handful of companies make the most of it.
So he always looks for that one company that will become the Google of search engines or the Facebook of social media, to invest in.
To do so, he uses a set of heuristics and variables, namely, secrets and monopolies.
Secrets and Monopolies
Most of Peter Thiel’s business philosophy was laid out in his 2014 book Zero to One.
Thiel observed that the most profitable businesses of all time were built on non-obvious societal principles that he calls “secrets”. He also noticed that these companies often ended up becoming monopolies.
Let’s talk about secrets first.
A secret is a non-obvious observation or principle that founders believe in and use to build their company on.
Tesla’s secret was that cars would inevitably shift to become electric at some point.
The iPhone’s secret was that people prefer typing on a screen than on buttons, despite what Steve Ballmer thought at the time.
And Facebook’s secret was that people love spying on their neighbours.
More recently, Substack’s secret was that the newspaper audience would eventually want to read different opinions from different creators.
And TikTok’s secret was that videos are more entertaining than pictures.
Today, it is easy to look back and say “of course the iPhone was going to work!”
But at the time, these companies made bets on non-obvious principles that more than one considered “risky”.
Thiel invested in companies built on such a principle, particularly if he believed in the principle himself.
According to Peter Thiel, companies making the most money are effective monopolies, even though they don’t say they are.
Microsoft has a monopoly on computer systems, Google has a monopoly on search engines, etc.
Monopolies are great businesses because they have little competition. This means they can dedicate more time to innovation, and hence have higher chances of survival.
Companies that are barely earning money, on the other hand, focus on daily business — not on reinventing their business.
According to Thiel, a company has a chance to become a monopoly when it develops a technology that is ten times better than what already exists.
For example, Google made a search engine that was ten times better than what existed at the time, so they rapidly became number one.
Monopolies are characterized by their specific mission. Facebook wanted to connect the entire planet, and SpaceX wanted to put someone on Mars.
A mission is important for two reasons.
- It helps the startup measure its progress.
- It helps a startup hire the right people
A startup attracts a lot of people but only those genuinely motivated by the mission should be allowed to work there.
Working in startups isn’t easy, and more than a mere 40 hours a week have to be dedicated to making it thrive.
Success is a matter of developing the right product with the right people.
Putting It Together
Peter Thiel doesn’t seek to invest in a lot of companies or diversify his portfolio.
Thiel looks for that one company that will enable him to return “at least the total value of the fund”.
If his fund is worth €10 million and he seeks to invest one million in a startup, that startup will have to grow at least ten-fold.
This is why he’s usually looking for small startups.
He selects only the ones that:
- Have 10X technology
- Are built on secrets
- Could become monopolies
This highly focused and unconventional approach has enabled him to develop a fortune worth several billion.
While investing in startups can reveal extremely fruitful, it’s nonetheless risky.
90% of startups fail after 5 years, but those that succeed, succeed big.
There are several platforms out there that enable retail investors to make small investments in startups crowdfunding their budget.
Interested to invest in a startup? LandEx will soon raise money on the crowdfunding platform Seedrs.
We plan to use that money to improve LandEx and expand internationally both in terms of supply and demand.
Find out more on our coming-soon page.
When investing, your capital is at risk.
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