Ep 476 | Peter Thiel's "Power Law" and How to Use it to Your Advantage

Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast, where we believe that every single day brings a new opportunity to get better. In Peter Thiel's book Zero to One, a great book that many of you have probably read if you're in the startup world or forget about venture capital startup, if you're just an entrepreneur building a business, I think Zero to One's an excellent read. In Zero to One, Peter Thiel, who is a very, very well-known venture capitalist, discusses his power law. What is the power law? It's a principle that says a small number of things or efforts or investments or actions, a small number of things account for the majority of outcomes. Now, you may have heard a statement like this or a theory like this before in the discussion around Pareto's principle, the 80/20 rule. The difference though here is 80/20, which Pareto had first said in his— in the farms in Italy, or I'm sorry, the landowners of Italy, 20% owned 80% of the land. And then when you looked at the farms, 20% of the farms yielded 80% of the results. Well, Peter Thiel actually applies it beyond, uh, just, just general, general knowledge. He talks about it specifically to businesses and startups and investing. What, what Peter Thiel explains is that returns are not evenly distributed. And when you understand this sort of thing, it can give you a massive, massive advantage over your competition. So for example, in venture capital, which is Peter Thiel's space. One successful investment in a portfolio accounts for almost all of the returns of that venture capital fund, while the other investments usually fail or only produce modest gains. So what this means is that focusing on the opportunities that have the potential to dominate their markets is absolutely crucial. The core idea here is Not all opportunities are equal, so you should focus on where there's massive potential. Successful businesses capture exponential value, so a market leader often takes the lion's share of profits. And then lastly, effort should be concentrated. It should not be spread thin. So when you put a disproportionate amount of energy into a promising venture, it typically yields better outcomes based on the power law than equal effort across everything. So let's talk about some examples, some business examples that illustrate the power law, and, and hopefully it helps you better understand how it can be leveraged in your world. So I mentioned venture capital, and I said that one startup usually dominates the returns of a portfolio. So when Peter invested in Facebook in 2004, I think it was, he had originally put in $500,000. That investment turned into over a billion dollars. That Facebook investment massively outperformed all other investments in his entire portfolio. So the lesson for, for venture capitalists was don't aim for a lot of good investments. Instead, you have to aim for one great investment that dominates the returns. How about in big tech platforms? There's single winners in big tech platforms. Google, Google controls over 90% of the search engine market. It captures the lion's share of advertising revenue in that particular space. Similarly, Amazon dominates e-commerce. It generates far more revenue than its competitors combined. So the lesson here is that these businesses demonstrate how one company oftentimes takes the largest share of value in, in a winner-takes-all sort of market. In software, Microsoft's Windows dominates operating systems. It's, it's still the de facto choice for PCs worldwide. The market share disparity between Windows and its competitors shows you how one product generates the vast majority of value. So the lesson here: build products that scale exponentially, that could become a dominant player in your niche. In entertainment, Disney continues to leverage its IP, its intellectual property— Marvel, Star Wars, etc. And what it does with that intellectual property is produce blockbuster movies that still dominate the global box office. So a few major franchises account for the majority of the company's revenue. So the lesson here: Disney invests in creating and amplifying a few hits rather than spreading their resources evenly. How about in content creation on YouTube? Guy I talk about all the time, MrBeast. The guy dominates engagement. He pulls in millions of views on every video. Most creators on YouTube barely get any traction. He pulls in millions. Focusing on being exceptional or creating a viral product that attracts outsized attention is a much better path than just trying to be good enough. In real estate, location's everything. Top-performing office buildings in London or in New York City, they command the highest rents by far, even within the same city. So, the lesson in real estate, invest or develop assets in the best areas that promise outsized returns over time. Again, this is the power law. Marketing campaigns, you'll see that one ad outperforms all others. In startups, you'll see things like Shopify that focused specifically on one path. They didn't try to build everything for everyone. But they became the best in their niche. They had a narrowed focus. They came up with one high-value niche where they could dominate, and then they expanded later. Even in personal productivity, even in personal productivity, Steve Jobs once said, "I'm as proud of the things that we haven't done as the things we have done." Apple, especially, especially during Jobs's time, focused its energy on a small number of high-impact products like the iPod or the iPhone, and they became some of the most profitable products of all time. So the takeaway here: eliminate the distractions, double down on the few activities that will create exponential results. So the key takeaways as we're talking about the power law, okay? Number 1, identify opportunities that have outsized potential. Don't treat every project or every investment equally. Focus on those with the chance to dominate. Number 2, double down on winners. Once you find something that works, amplify it rather than trying to diversify prematurely. Double down on winners. Number 3, embrace asymmetry. What does that mean? It means that recognize Pareto's principle that 80% of your results will come from 20% of your efforts, your investments, or your customers. Focus there. Focus there. So the focusing question for you today, as we're talking about this power law, how does this apply to your world? In your business, in your business, are you diversifying? Are you spread too thin? Is there one or two or three things though that if you put all your eggs in that respect, those respective baskets, you'd have exponential success? Or in the markets you're trying to attack, should it be markets or should it just be market or niche within a market? And if you go all in, could you dominate that space like history would say, you know, most successful companies in business have done versus being a jack of all trades? You can see how this shows up everywhere. My guess, somewhere in your business, you are violating this power law. And if Peter Thiel became CEO for the day in your company, what changes might he make? Something to really consider. That's all I have for you today, the No Days Off Podcast. Thank you so much for listening. And remember, every single day brings a new opportunity to get better. So let's get after it.