By: Peter Thiel

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Peter Thiel is an interesting dude for a number of reasons. He is a contrarian on many things, no-more so than in his views on education. He created the Thiel Foundation that pays gives students $100,000 to fund a business if they skip college/university.

But the most interesting thing about Peter, by far, is that he happens to know the secret question that could make you the next Mark Zuckerberg or Jeff Bezos.

He was one of the original founders of Paypal, which was sold to Ebay for a then staggering sum of $1.5 billion dollars. The senior members of their team went on to start a number of other billion dollar companies, earning for themselves the nickname of the “Paypal Mafia.”

Jawed Karim, Chad Hurley and Steve Chen went on to found Youtube, without which we wouldn’t have our daily dose of kittens on treadmills;

Much to the chagrin of surly restaurant owners everywhere, Jeremy Stoppelman and Russel Simmons went on to create Yelp;

Premal Shah went on to become the president of Kiva, which connects investors to entrepreneurs and students all around the world;

David Sacks went on to create Yammer, which sold to Microsoft for a cool $1.2 billion;

Reid Hoffman went off to start LinkedIn, which as of today has a market cap of about $33 billion;

Elon Musk went on to start 2 other billion dollar companies at the same time - Space X and Tesla - while also becoming the real life inspiration for Robert Downey’s Iron Man;

And finally, Thiel himself went on to found Palantir, whose Palantir Gotham product is used by counter-terrorism analysts in the US government and at the US Department of Defence. Also a billion-dollar-plus company.

Oh yes, I almost forgot to mention. Thiel was also the first outside investor in Facebook, putting in $500,000 in a seed round which he later cashed in for over $1 billion when Zuckerberg took the company public. That, and he still owns 5 million shares in the company.

What’s the point to all of this?

If there’s any person on the planet who is qualified to determine what it takes to create a billion dollar company, it’s Peter Thiel.

And now maybe you’ll pay attention to “The Question” in the next section and go on to build the world’s next great company.

So now that we’ve got that out of the way, let’s get to work.

So what is “The Question”?

The next Bill Gates will not build an operating system. Just as the next Mark Zuckerberg will not build a social network. And if you try and mimic what those guys have done, you will most definitely not be following in their footsteps.

The people who found the world’s most successful companies find value in unexpected places, and do this by thinking about first principles instead of formulas. The most contrarian thing of all is not to oppose the crowd but to think for yourself.

A famous example of this is Steve Jobs looking for inspiration for Apple’s computers by looking at kitchen appliances in department stores. He noticed many of them had beautiful form to complement their function.

If you asked everybody who made computers when Jobs came back to Apple to save them from impending bankruptcy, they would tell you that making computers “look pretty” was the dumbest idea they’ve ever heard. People wanted more processing power and more memory, not a computer that looked pretty on a desk.

But that’s not what Jobs was doing at all. He was intensely interested in the entire customer experience. At the time, computers were utilitarian grey boxes, and the last adjective you would use to describe them would be “delightful”.

He understood that the experience customers had in using the machine mattered just as much as what the machine could actually do. And if they carried that approach all the way through the operating system and in the software people would use on the machine, then they would really have something.

The first line of iMac computers and everything that came after - the iPod, iPhone, iPad and now the Watch - were Apple’s answer to “The Question”.

“What important truth do very few people agree with you on?”

Let’s unpack this question.

As Thiel points out in the book, a good answer to this question looks like this. “Most people believe in x, but the truth is the opposite of x.

For Steve Jobs, this statement might look like “Most people believe that consumers want a machine that has more computing power, but the truth is that what they really care about is an incredible experience while using the machine”.

But Jobs didn’t get to this answer in a flash of insight. He got there by paying attention to his environment and watching consumers behave over a long period of time.

The point here is that it’s not enough to simply oppose the crowd. That’s not what a contrarian does. A contrarian like Steve Jobs or Peter Thiel think for themselves.

Here’s how you can get there too.

Step #1 - Find out what everybody agrees on.

“The Question” is usually very hard to answer directly. You’re not just going to finish this summary and have the next billion dollar idea pop in your head. It’s easier, Thiel says, to start with a preliminary question: “What does everybody agree on?”

You could look for this answer inside your industry or outside of your industry, but the trick is to make sure that you’ve found something that’s believed by almost everybody.

Step #2 - Dig deeper to figure out if it’s true or not

Once you’ve found something that everybody believes to be true, ask yourself what assumptions people are making to come to that conclusion.

In some cases you’ll find out that everybody believes something to be true simply because they want it to be true. A great example of this comes from the financial industry. Nassim Nicholas Taleb wrote an incredible book called The Black Swan, where he lays out the theory that rare and improbable events occur much more often than we believe they do, and that they have a disproportionate impact on the course of history.

In the book he highlights that one of the assumptions that people in the financial sector were basing their models on was incorrect. The one main mistake they made was to assume that the normal distribution (aka the bell curve) model could account for all possible events, and thus form the basis of their risk models.

Ironically (and unfortunately), the book was published in 2007 just in time for the economy to crash and prove his point.

Taleb had looked into a delusional popular belief, and found what lies behind it: what Thiel calls the contrarian truth.

Step #3 - Based on this contrarian truth, what valuable company is nobody building?

It’s one thing to uncover a contrarian truth - it’s another thing completely to turn that into a world-changing business.

In order to take this next step, you need to understand both how to create and extract value from the market.

Thiel suggests that all world changing companies are different - each one earns a monopoly by solving a unique problem. All other companies are the same - they fail to escape the competition.

Thus, you are stuck in a conundrum. You can’t chose a solution that is slightly better than what is out on the market today. A better mousetrap simply won’t do.

What you need to do is create a business that can reap monopoly profits.

Why you should build a monopoly

Most advice around starting and growing a business focusses on competition. Standing out from the crowd, differentiation, and even creating a Blue Ocean Strategy - all start with the premise that you have competition and that you need to be better than them in some important way.

But as Thiel points out in the book, focussing on competition misses the point:

Tolstoy opens Anna Karenina by observing: "All happy families are alike; each unhappy family is unhappy in its own way." All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape the competition.

When it comes down to it, competition means no profits for anybody, no meaningful differentiation, and a struggle for survival.

Monopolies, on the other hand, enjoy years or even decades of monopoly profits. And it's a virtuous cycle, because monopolies can then use those profits to keep innovating, make long-term plans and finance the ambitious research projects that firms locked in competition can’t dream of.

Most people miss this obvious opportunity because monopolies are supposed to be a societal evil - mandated out of existence by laws and regulations.

But consider Google, who most definitely enjoys a monopoly in the search engine market. Of course, they like to tell the world that they are a technology company with vast ambitions in things like self-driving cars, mobile devices and wearable computers. But 95% of it's revenue come from search advertising, where it owns 68% of the market.

That's the type of company you should be striving to build.

What a monopoly company looks like

Now that we've covered that you need to uncover a truth that almost nobody else agrees with, and turn that into a company that focusses on creating a monopoly, let's take a look at what a monopoly company looks like.

Proprietary Technology

As Thiel points out, a proprietary technology should be at least 10 times better than its closest substitute in some important dimension.

Of course, the easiest way to make a 10X improvement is to create something completely new.

Don't get caught up in "technology" either - Thiel is talking about a better way to do things when he uses the word. For instance, Amazon made its first 10X improvement when they offered at least 10 times as many books as any other bookstore.

Network Effects

Simply put, network effects mean that a product becomes more useful as more people use it. For instance, you would get no value from using a social network that nobody else was using. That's why you use Facebook.

There's a snag here though - network effects are powerful, but you also need to make your product/service valuable for the very first users when the network is small.

So, your strategy needs to start with dominating small markets. For instance, Facebook started with just Harvard students, then moved on to a small group of other schools, and you know the rest of that story.

Economies of Scale

As Thiel points out, a monopoly business gets stronger as it gets bigger, because the fixed costs of creating a product can be spread out over ever greater quantities of sales.

This is especially true in businesses where the marginal cost of producing another copy of the product is close to zero - like software or digital media companies.

A good startup should have the potential for great scale built into its first design.

Branding

A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.

Apple is the most often referred to example, and it's one worth studying if you want to create your own powerful monopoly brand as well.

How to build a monopoly company

Of course, understanding what something looks like doesn't tell you how to build it. So let's talk about some specific strategies to go from an idea to a monopoly.

Start Small and Monopolise

Thiel tells us that the perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. And if we are going to err, always err on the side of starting too small instead of too large.

Going after a majority share of a $1 billion market is better than going after a 1% of a $100 billion market. The larger market will either (a) lack a good starting point, or (b) be open to competition so it's hard to ever reach that 1%.

Scaling Up

After you've dominated a small market, you can scale up by moving on to others.

Jeff Bezos started with the vision to dominate all of online retail, but he deliberately started with books - a market he could create a 10X improvement in and dominate. Only after they dominated that market did they move on to adjacent markets.

It takes discipline to expand gradually - discipline that most companies and founders lack.

Don't Disrupt

As you go into adjacent markets, remember that your goal is to avoid competition as much as possible.

If you frame what your company does in terms of "disruption", you are focussing on competition. And if your company can be described by referencing how you do things differently than the people already in the market, you won't be creating a monopoly.

Move Last, Not First

For all that's been written about first mover advantage in the business world, almost all monopolies are created by moving last.

Your goal should be to make the last great development in a specific market, and enjoy years or even decades of monopoly profits.

The Importance Of Sales

Most people in business underrate the importance of distribution - which is another term for everything it takes to sell a product - especially founders of technology companies.

Simply put, a great idea without a great way to sell it is a bad business.

Thiel points out two important truths when it comes to why companies fail or succeed:

1. Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure.

2. If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.

In fact, superior sales and distribution is so important that it can create a monopoly by itself with no product differentiation. The converse is not true.

There is a lot of great sales advice in the book that we don't have the time to get into, but there are two main thing to remember.

First, that the net profit you earn on average over the course of your relationship with a customer (Customer Lifetime Value) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost).

And second, that you can do well at almost any average price point, except for what Thiel calls the "distribution doldrums" - products priced around $1,000. It's too small to put sales reps on it (you can't afford to pay reps), and it's too large for a customer to purchase directly from your marketing efforts.

Conclusion

So, are you ready to change the world?

If you can create a business that uncovers a contrarian truth, and has the characteristics of a company that reaps monopoly profits, we just might be seeing you on Forbes richest people list sometime soon.