Peter Thiel’s now-famous question that forms the foundation of his book Zero to One is this: what is one thing you believe to be true that most do not?
A major thesis of his book is basically his answer to his own question. He believes entrepreneurs should not chase competitive markets where they might provide great value but capture very little of it. Rather they should find monopolies in (usually) smaller lesser-known markets where they can capture a large portion of the value they provide. In short, competition is for losers and monopolies are for winners. Of course, the long-held “truth” he is calling bullshit on is: that winners win by facing the competition. Instead, Peter believes winners win by avoiding competition.
I totally agree Peter. However, I’m not writing this post to talk about why I agree, because that would be boring. Rather, I’d like to present a contrarian belief of my own -
- Long held “truth”: winners win by working hard.
- My belief: winners win by doing no work.
I didn’t choose the brick-laying example by accident - it’s from one of my favorite movies: Good Will Hunting. Will says “What’s wrong with laying brick? That’s someone’s house I’m building.” This No Work™ argument isn’t saying that there’s no value in laying brick. In fact, there is tremendous value to society for laying brick. But just as Peter Thiel has identified that tremendous value is created by the airline industry for society yet it is excruciatingly difficult for airlines to capture that value created because the profit is competed away; I would similarly argue that while laying brick creates tremendous value for society, it is excruciatingly difficult for brick layers to capture that value because the profit is worked away.
So let’s move on to another example: successful companies in Silicon Valley. Specifically, let’s hone in on Airbnb. Airbnb’s $13 billion valuation has become the subject of great hair pulling and frustration among the incumbents of the hotel industry - it has exceeded the valuation of the Hilton Group. Yet Airbnb does exponentially less work than Hilton does. The Hilton hotels staff 100x more employees that do significantly more manual labor (think of all those sheets and towels cleaned and replaced, and the tooth brushes they run up to the rooms!) and in-person contact with customers on a daily basis than Airbnb’s staff ever needed to in its entire existence. Hilton’s 100x headcount is exacerbated by the inevitable management overhead and oversight it creates. Additionally, most of those hotel workers perform unskilled labor at minimum wage rates and hence their motivations are guided by selfish needs to get by on their income rather than the average Airbnb employee’s selfless desires to provide value and innovate for their employer. This is all just human nature but nonetheless the circumstances create a giant gap in the value of work at Airbnb vs. Hilton - in fact it is an exponential gap. The Hilton employees’ capacity for innovation and value creation has been worked away, whereas Airbnb does comparatively No Work™ and hence can spend time on value-add initatives. Finally, Hilton owns and operates actual real estate while Airbnb doesn’t own a single building. The ownership and management of real estate creates more net work for Hilton because it now inherently needs to spend time fighting the fires of excess room inventory, financing with large debt structures, locational risk involved in real estate development, and other “today” issues for which solving them doesn’t add value but merely maintains value. Again we see that Hilton’s profit has been worked away.
Another way to observe the exponential value captured by doing No Work™ is in comparing service industries with product industries. In a service industry, what you sell is your work. Therefore it is inherently unscalable because human work output is not mass-manufacturable: its marginal value captured equals marginal work done. You are literally trading time for money. It is a horrible deal with lower odds of success than playing Vegas because in this trade, the house wins over your relativistically impossible endeavor to create more time with which to barter for more value. However in a product industry, mass manufacturing gives you the advantage of being able to capture value independent of time spent and work done.
This is why if you look at the list of portfolio companies of top VC firms, you will not find any companies that perform services themselves. Instead, smart investors invest only in product companies that can mass-manufacture their product and do no marginal work to capture more value. Successful portfolio companies either broker services (the act of brokering a service is a mass-manufacturable activity in of itself) or sell a mass-manufactured product. The common theme here is that there is no marginal work needed to capture more value. Put another (more contrarian) way, VCs only invest in companies that do No Work™ and hence capture a large chunk of value. Even if a service company has profits, smart investors know to avoid that kind of fake profit. They know what real profit is: profit that has not been worked away.
There is nothing fundamentally wrong with working hard. Hard work is a great tenet to live by and an important American virtue. But our society’s tendency to equivocally deify hard work leads to the same sheep-like behavior problem as deifying competition. Eventually people forget that if they are working too hard to capture value, chances are there is an exponentially better way to capture value with exponentially less work.