Book Summary: Zero to One by Peter Thiel
Every great business breakthrough happens only once. The next version will only be a copy.
“Best practices” lead to dead ends. The best paths are new ones. New paths are forged by technology. Technology allows us to do more with less.
Every innovation is new and unique—innovation cannot be taught. It is accomplished by thinking about things from first principles rather than a formula.
The Contrarian Question
What truth do you know that what important truth do very few people agree with you on? We only know two things about the future: that it will be different and that it will be rooted in the present. Good answers attempt to predict the future in some aspect and take the form of “most people believe X, I believe in the opposite of X.”
There are two types of progress, horizontal and vertical. Horizontal progress takes things from one to n. Globalization is a form of horizontal progress. Technological innovation (zero to one) is vertical progress.
New technology tends to come from start ups. A startup is the largest group of people you can convince to reshape the future in a certain way. Startups have two tasks: to question received ideas and rethink the strategy.
The dot com bubble of the late 1990s led to confining dogma about what a start up should be.
Four lessons from the dot com crash:
- Make incremental advances.
- Stay lean and flexible. Iterate.
- Improve on the competition. Don’t try to create a brand new market.
- Focus on the product, not sales.
While these ideas are good for minimizing risk, they are not going to result in businesses that change the future.
In order to make the future great, some of the hubris of the dot com bubble needs to be brought back. It is important that the future not be viewed as indefinite if we are to design it. Bold long term plans should be made, and highly competitive markets should be avoided in order to be highly successful.
Competition Is a Bad Thing
A company may provide a lot of value, but it will not be successful if it cannot capture a good portion of the value that it creates.
Perfect competition: the default and ideal state of a free market. Supply equals demand, and many firms compete to offer in-differentiated products. This results in economic profits being completely eroded due to price wars and intense competition.
Monopoly: a market in which a single player owns the market through innovation, government relationship, or patent protection. The monopoly will produce the quantity of goods required to maximize its profits.
Competition is the opposite of capitalism, as all means of accumulating capital are competed away in the long term.
Differentiation in trivial categories won’t lead to a sustainable competitive advantage.
Monopolies are always trying to undermine their own monopoly in order to divert attention from their windfall profits. In the case of perfect competition, however, corporations are touting how different they are from their competition.
In business, money is either very important or it is everything. Monopolistic companies are able to look beyond quarterly profits in order to define a bold vision for the future.
Monopolies are only bad for society in a static world. Monopolies drive progress because the incentive of monopoly profits is incredibly powerful.
All good companies succeed for different reasons. They each earn a monopoly by solving different problems. All bad companies fail for the same reason— they cannot to escape competition.
If you can’t beat a rival, it might be better to merge. There is no middle ground in competition–either avoid rivalry and competition altogether or quickly end it.
The value of a business today is the sum of all of its cash flows in the future. To estimate the durability of your company, you need to think about the qualitative factors of your industry.
A monopoly business tends to have some combination of these traits:
- Proprietary technology
- Network effects
- Economies of scale
Proprietary technology is the most tangible advantage a company can have. As a rule of thumb, the technology should be at least 10 times better than the next best alternative to escape competition.
Companies relying on the network effect must ironically start with small, focused markets to lock in widespread adoption.
Fixed costs can get averaged down over greater and greater sales. This is why software companies can become monopolies, but it is difficult for a service company to become one.
Yahoo’s priorities—people, products, traffic, revenue.
To build a monopoly business, you must choose a focused market and scale very carefully. Every startup should start with a very small market. It is easier to dominate a small market then a large one.
Definite/Indefinite and Optimistic/Pessimistic
People think of the future as either definite or indefinite. Likewise, people are either optimistic or pessimistic about the future, which leads to four different types of people. Indefinite optimists, not knowing what the future holds, assemble a portfolio of diverse experiences and extracurricular activities. They try to prepare for the future, but don’t know what they’re preparing for. A definite optimist makes tangible plans for the future, and prepares accordingly. Indefinite pessimists don’t know what the future holds, but they know it will be negative. This describes Europe since the 1970s–you might as well eat, drink and be merry if the future is getting worse. China is probably the most definitely pessimistic place in the world. They have definite plans for growth, but rely on copying the western society blueprint in order to grow. Definite optimists see how great the future can be, and design and implement the technologies needed in order to realize it.
In today’s world, big long-range plans are dismissed as lunacy or hubris.
Finance vs. Engineering
Finance and engineering sit at opposite ends of the definite/indefinite spectrum. People in finance expect the future to be better (optimistic), but don’t feel the need to design it, instead focusing on optimizing and rearranging a portfolio.
This is why people in management consulting and private equity don’t build businesses themselves, but instead rearrange parts of other businesses to squeeze out more efficiency. In contrast, engineers seek to mold and shape the future in a focused (definite) way.
Finance epitomizes indefinite thinking because it’s the only way to make money when you don’t know how to create wealth. If you don’t know what to do with money, then money itself becomes the most important thing (to maximize optionality). In a definite future, money is a means to an end.
These categories permeate through business, politics, and even philosophy.
Eroom’s Law (the opposite of Moore’s Law) hypothesizes that the number of prescription drugs that get approved for $1 billion spent on R&D halves every 9 years. This might be the result of indefinite optimism on the part of pharmaceutical companies, who try to come up with new drugs using random combinations of compounds. Indefinite optimism is not sustainable. How can the future get better when there’s no one to design for it? The lean startup is a methodology, not a goal. It won’t help incremental improvements from failing. Iteration without a bold plan will not take you from zero to one.
Founders with bold visions don’t sell their companies.
Startup returns follow a power law distribution. The first rule of startup investing is that any investment you make must be capable of carrying the entire fund. Typically, the returns of the best investment equal or exceed that of the entire remainder of the portfolio.
The power law implies that not all startups and not all industries will succeed. It is important to choose a career wisely, as it is not possible to carry a portfolio of possible careers. The difference in magnitude of power law companies will dwarf the difference within the company in terms of position. Time itself also follows a power law as some moments matter disproportionately more than others.
The business version of the contrarian question: what valuable business is no one building?
Every great idea started with some kind of secret. If there are many secrets out there, then there are many valuable businesses that have yet to be built.
People tend to not look for secrets for four reasons:
- Linear thinking. From an early age, we are taught to think incrementally, and do things incrementally better than her peers.
- Risk aversion.
- Complacency. The people that are most capable of discovering secrets instead use their skills to collect rent on problems that have already been solved.
- Global flatness. Because of today’s global society, there’s a tendency to think that if there were a problem worth solving, someone would already have done it.
There are two types of secrets: secrets about nature and secrets about people. Business ideas should uncover some truth about nature or about people. Secrets about people are under appreciated, potentially because they require less education to uncover. What are people not allowed to talk about, or what is taboo? Are there any fields that matter but have not been standardized or institutionalized yet? If you uncover a secret, only tell people about it if you need to. A great company is a conspiracy to change the world. Take the hidden path.
You can’t build a great company on a bad foundation. Get the first things right. Pick the right co-founder. It should be someone you have a history of working well with.
It’s very hard to go from zero to one without a team.
To identify possible sources of misalignment, it is important to identify imbalances in equity ownership (founders), operational possession (management), and control (board of directors). It is easier for a small board to reach consensus and be effective (5 is a good maximum unless you’re a public company). Everyone involved with your company should be full time whenever possible. If people aren’t awarded equity or draw a salary, they are fundamentally misaligned. A company does better the less it pays it CEO. High salaries incentivize maintaining the status quo. Taking a low salary sets the standard for other employees. Any kind of cash compensation encourages short term thinking. The company is born only once. Only at the very beginning do you have the chance to align everyone’s goals on the future.
Without substance, office perks don’t work.
Why should the 20th employee join your company?
At a startup, everyone should be responsible for doing one unique thing. Just one thing.
Cultures of extreme dedication are cults. On the other side of the spectrum, cultures with no dedication are consulting firms. The ideal start up is a milder version of a cult.
Customers will not buy a product just because you build it. You have to sell it.
Sales mastery is underrated. It works best when hidden. Superior sales can create a monopoly without a superior product. The reverse is not true. Customer lifetime value (CLV) must exceed the cost to acquire that customer (CAC). Meticulous attention to detail is required for complex, high-dollar sales. Salespeople are not required for big deals. At a certain price point, people want to deal with the CEO directly. For smaller deals, it is best to figure out how to break into a niche that could open the product up to a wider audience using only a modest salesforce. Potential customers will not feel comfortable doing a deal an order of magnitude greater than what has been done in the past.
Advertising can work for startups, but only if the customer lifetime value exceeds the acquisition cost. Otherwise, it is better for startups to avoid having to compete with large corporations for advertising space. Viral loops can help create exponential growth for your product. The key is to shorten the cycle time required for users to sign up and forward to potential new users.
Poor sales, not poor product, is the most common cause of failure. Focus on getting one distribution channel to work extremely well, ideally one with a viral marketing component.
A well-thought out PR strategy is critical for the growth of your company. What potential investors and new employees find when they Google you matters.
Computers are complements for humans, not replacements. That’s because computers abilities and human abilities are fundamentally different. Indefinite fears of computers taking over should not stop us for making definite plans for tomorrow.
Seven questions every new business must ask itself:
- Breakthrough. Can you create a breakthrough technology that’s more than just an incremental advance?
- Timing. Is now the right time?
- Monopoly. Are you capturing a large piece of a small market?
- People. Do you have the right people?
- Distribution. Do you have a means to distribute your product?
- Durability. Will you still be in business 10 or 20 years from now? What will stop China from overtaking my business?
- Secrets. Have you uncovered an opportunity that others don’t see?
Every business plan must address these seven issues.
You can only offer your customers transparent superiority when your product is 10x better then the next best alternative.
Make sure you are looking at the right market when making projections about market capture.
The best problems are often those that no one else is trying to solve. The problem with social entrepreneurship is the ambiguity between corporate and social motives. Often trying to do both results in accomplishing neither.
An entrepreneur can’t win at the macro scale unless his plans begin at the microscale.
Founders are often eccentric, and simultaneously both insiders and outsiders. We need unusual people in order to push business beyond mediocrity and incrementalism. However, it is important not to underestimate the importance of only one person.
For outlooks on the future:
– Alternating periods of prosperity and ruin.
– The world converges to a plateau standard of living.
– Devastating collapse we don’t survive.
– Ascending take off into a poorly and future.
The fourth possibility will lead us to the “singularity,” in which exponential technological adaptation exceeds current human understanding.
Futuristic technologies will not invent themselves we need to seize the opportunities we have to create great things that will make the future better, not just different. By seeing the world in a new way, we can re-imagine it and improve it for the future.