the business environment of biotechnology, which Thiel and I agree is a very promising field for future economic growth, may be different from that of software. In software, companies like Microsoft and Facebook grew to dominance in large part because consumers find an advantage in using the same software as other consumers — this is the network effect. This in turn creates an opportunity for venture capitalists to back the rapid expansion of a firm that is unprofitable for a few years and then wildly profitable a few years later, once the network effect has been captured. It is not necessarily the case that biotechnology will exhibit network effects in which profits are created by rapidly expanding on an early lead.
I should note that Edmund Phelps, in Mass Flourishing, argues that progress is driven not by big individual breakthroughs but instead by cumulative entrepreneurial progress.
UPDATE: Peter Lawler also writes about Thiel. A sample:
What, today, would be “the largest endeavor over which you can have definite mastery”? This would be the startup. For the libertarian Thiel, the startup has replaced the country as the object of the highest human ambition. And that’s the foundation of the future that comes from being ruled by the intelligent designers who are Silicon Valley founders.
I think Thiel just wants to see more high-risk, high-reward types of business ventures. The network effects you mention are just indicative of the possibility of high rewards. In biotechnology, though, the high rewards are almost a given for any venture that seeks to remedy any conditions that are a)widespread and b)significantly degrade quality of life. People will pay lots and lots of money to improve their health and well being.
My sense of Thiel’s case about biotech is that he feels like they are taking an approach too similar to finance – diversified ‘cover your bases’ strategy without enough commitment from visionaries, rather than a committed, planned ‘double or nothing’ bet to solve a common problem. I don’t know whether he’s correct, but that was my takeaway (only halfway thru the book however).