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COMPETITION IS FOR LOSERS OCTOBER 7, 2014
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Page 1: Y Combinator Startup Class #5 : Competition is for losers

COMPETITION IS FOR LOSERS

OCTOBER 7, 2014

Page 2: Y Combinator Startup Class #5 : Competition is for losers

OUTLINE

1.  capturing value 2.  lies people tell 3.  how to build a monopoly 4.  last mover advantage 5.  history of innovation 6.  psychology of competition

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Page 3: Y Combinator Startup Class #5 : Competition is for losers

CAPTURING VALUE

A business creates X dollars of value and captures Y% of X.

X and Y are independent variables

Page 4: Y Combinator Startup Class #5 : Competition is for losers

BIG PIECE OF A SMALL PIE

2012 revenue: $195.6B

2012 profit margin: 0.2%

2012 revenue: $50.2B

2012 profit margin: 21.0%

Market capitalization:

$112.4B Market capitalization:

$393.8B

All United States airline carriers combined

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Page 5: Y Combinator Startup Class #5 : Competition is for losers

PERFECT COMPETITION

psychologically unhealthy

irrelevant in a dynamic world

preempts question of value

cons pros

easy to model

efficient in a static world

politically salable

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Page 6: Y Combinator Startup Class #5 : Competition is for losers

MONOPOLY

lower output, higher prices

price discrimination

stifle innovation

tying

cons pros

incentive to innovate

stable, long-term planning

deeper project financing

symptomatic of creation

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Page 7: Y Combinator Startup Class #5 : Competition is for losers

OUTLINE

1.  capturing value 2.  lies people tell 3.  how to build a monopoly 4.  last mover advantage 5.  history of innovation 6.  psychology of competition

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Page 8: Y Combinator Startup Class #5 : Competition is for losers

reality: major perceived: minor

firm A

perfect competition monopoly

firm B

DIFFERENCES UNDERESTIMATED

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Page 9: Y Combinator Startup Class #5 : Competition is for losers

non-monopolies

“we’re in a narrow market”

monopolies

“we’re in a huge market”

relevant market: A ∩ B ∩ C

relevant market: A υ B υ C

NARRATIVES

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Page 10: Y Combinator Startup Class #5 : Competition is for losers

BRITISH FOOD IN PALO ALTO

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Page 11: Y Combinator Startup Class #5 : Competition is for losers

College football star...

joins elite group of hackers...

...to catch the shark that killed his friend

BLOCKBUSTER MOVIE

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Page 12: Y Combinator Startup Class #5 : Competition is for losers

teen hackers sharks

hometown hero

IS THE INTERSECTION VALUABLE?

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Page 13: Y Combinator Startup Class #5 : Competition is for losers

STARTUP VERSION

Page 14: Y Combinator Startup Class #5 : Competition is for losers

THE SEACH MARKET

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Page 15: Y Combinator Startup Class #5 : Competition is for losers

Global advertising

$495B

US advertising $150B

US online advertising

$37B

US search advertising

$17B

THE ADVERTISING MARKET

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Page 16: Y Combinator Startup Class #5 : Competition is for losers

Global consumer technology

$964B

televisions

automobiles

smartphones

social networks

infrastructure

“The Internet is incredibly competitive, and new forms of accessing information are being utilized every day.”

---Eric Schmidt

US search advertising

$17B

THE TECHNOLOGY MARKET

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Page 17: Y Combinator Startup Class #5 : Competition is for losers

Google

Apple

Microsoft

Amazon

$98B

$45B

$52B

$10B

cash

40%

gross margin

65%

78%

14%

EVIDENCE OF NARROW MARKETS

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Page 18: Y Combinator Startup Class #5 : Competition is for losers

OUTLINE

1.  capturing value 2.  lies people tell 3.  how to build a monopoly 4.  last mover advantage 5.  history of innovation 6.  psychology of competition

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Page 19: Y Combinator Startup Class #5 : Competition is for losers

THE RIGHT SIZE

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start small and monopolize

it’s easier to dominate a small market than a large one

if you think your initial market might be too big, it almost certainly is

Page 20: Y Combinator Startup Class #5 : Competition is for losers

“We believe there's a tremendous opportunity

ahead across the $5 trillion retail market globally.”

- Jeff Bezos

START SMALL AND EXPAND

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Page 21: Y Combinator Startup Class #5 : Competition is for losers

“Build a platform – prepare for the unexpected…you’ll know you’re successful when the platform you’ve built

serves you in unexpected ways.” - Pierre Omidyar

START SMALL AND EXPAND

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Page 22: Y Combinator Startup Class #5 : Competition is for losers

START SMALL AND EXPAND

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THEN NOW

148mm active accounts $1 in $6 spent on e-commerce globally is spent with PayPal

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START BIG AND SHRINK

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Page 24: Y Combinator Startup Class #5 : Competition is for losers

OUTLINE

1.  capturing value 2.  lies people tell 3.  how to build a monopoly 4.  last mover advantage 5.  history of innovation 6.  psychology of competition

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Page 25: Y Combinator Startup Class #5 : Competition is for losers

CHARACTERISITICS OF MONOPOLY

proprietary technology

network effects

economies of scale

branding

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Page 26: Y Combinator Startup Class #5 : Competition is for losers

VALUE OF THE FUTURE

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Discounted Cash Flows

GROWTH GROWTH RATE > DISCOUNT RATE

DURABILITY GROWTH RATE < DISCOUNT RATE

2010’s 2020’s, 2030’s

• EASY TO MEASURE • SHORTER TIME HORIZON

• HARD TO MEASURE • LONGER TIME HORIZON

10-25% 75-90%

Page 27: Y Combinator Startup Class #5 : Competition is for losers

OUTLINE

1.  capturing value 2.  lies people tell 3.  how to build a monopoly 4.  last mover advantage 5.  history of innovation 6.  psychology of competition

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Page 28: Y Combinator Startup Class #5 : Competition is for losers

TECHNOLOGICAL INNOVATION

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18th 19th 20th 21st

1712 Steam engine 1764 Spinning jenny

1800 Battery 1804 Railway locomotive 1838 Morse code 1856 Refrigeration 1876 Telephone 1877 Phonograph 1879 Light bulb

1902 Air conditioning 1903 Airplane 1923 Electric refrigeration 1945 Atomic bomb 1947 Transistor 1969 Man on the moon 1971 Microprocessor 1973 Xerox graphical user interface 1975 Internet protocol suite 1984 First mobile phone 1991 World Wide Web 1996 Deep Blue

2004 Facebook 2007 iPhone 2012 Tesla Model S

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SCIENTIFIC INNOVATION

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18th 19th 20th 21st

1745 First capacitor (von Kleist) 1751 lightning is electrical (Franklin) 1763 Bayes' theorem 1787 Law of ideal gas (Charles) 1789 Conservation of mass (Lavoisier)

1804 Morphine (Sertürner) 1843 Law of Conservation of energy (Joule) 1848 Absolute Zero (Kelvin) 1859 Evolution (Darwin) 1865 Laws of inheritance, genetics (Mendel) 1869 Periodic table (Mendeleev) 1895 X-rays (Röntgen)

1913 Model of the atom (Bohr) 1915 General relativity (Einstein) 1927 Big Bang Theory (Lemaître) 1928 Penicillin (Flemming) 1951 First cancer line (Gey) 1952 First polio vaccine (Salk) 1953 Double helix (Watson & Crick) 1994 Fermat's Last Theorem proof 1997 Dolly the sheep cloned

2001 Human genome mapped 2006 Existence of Dark Matter 2008 Water on Mars

Page 30: Y Combinator Startup Class #5 : Competition is for losers

CAPTURING VALUE

A business creates X dollars of value and captures Y% of X.

X and Y are independent variables

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Page 31: Y Combinator Startup Class #5 : Competition is for losers

SUCCESS CASES

Vertically integrated complex monopolies

Ford, Standard Oil, Tesla, SpaceX

Software

economies of scale, low marginal cost, high adoption rate

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Page 32: Y Combinator Startup Class #5 : Competition is for losers

OUTLINE

1.  capturing value 2.  lies people tell 3.  how to build a monopoly 4.  last mover advantage 5.  history of innovation 6.  psychology of competition

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Page 33: Y Combinator Startup Class #5 : Competition is for losers

MIMETIC PREFERENCES

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Page 34: Y Combinator Startup Class #5 : Competition is for losers

COMPETITION AS VALIDATION

education

career paths

investments

business decisions

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Page 35: Y Combinator Startup Class #5 : Competition is for losers

COMPETITION IS FOR LOSERS

OCTOBER 7, 2014