Zero to One – Book Review

Zero to One – Peter Thiel is an book about how to not just start a business, but how to make sure it defines a new category and progresses the world further. There is quite a bit of contrarian thought process similar to Hackers and Painters. Peter Thiel starts out the book saying that the big industry defining businesses will only happen once: Bill Gates and the operating system, Mark Zuckerberg and social networks, etc. These are one-time events and the next ‘Bill Gates’ will not create a new operating system, they will create something completely new that nobody had ever thought of. If you were to make a ‘new version’ of current technology, Thiel would call this going from 1 to n. It is incremental relative to what has already been done. The premise of 0 to 1 is that you are creating value from something that didn’t exist before (or didn’t exist in the dominant form you would see from Facebook, Microsoft, Google, etc).

Thiel says that one of the main questions he asks during a job interview is: “what important truth do very few people agree with you on?” He is looking for what inspires a contrarian mindset in the person he is going to hire because if they do not have any unique ideas, they are only thinking what they had been taught in school without thoughts of their own. “brilliant thinking is rare, but courage is in even shorter supply than genius.”

Challenges for the Future

  • While we cannot completely predict the future, we do know two things for certain:
    • It is going to be different
    • It must be rooted in today’s world
  • Progress can be defined in two ways:
    • Horizontal progress builds on previous things that we already know work (1 to n)
      • Globalization is a great example of horizontal progress: taking things that work somewhere (U.S) and moving them other places (China, Africa, etc.)
    • Vertical progress is the creation of something completely new (0 to 1)
      • More difficult to imagine because it is something that has never been done before.
      • The single word definition for vertical progress is technology, or any new or better way of doing things.
  • Why this matters?
    • “Spreading old ways to create wealth around the world will result in devastation not riches. In a world of scarce resources, globalization without new technology is unsustainable”
  • Startup thinking
    • It is hard (and rare) to develop new things in big organizations
    • It is also hard to do it all by yourself
    • “Startups operate on the principle that you need work of other people to get stuff done, but you also need to stay small enough so that you actually can.”

Dot Com Crash

  • The Dot Com bubble led to the Silicon Valley learning the following lessons that are still used dogmatically in today’s startup world:
    • Make incremental advances
    • Stay lean and flexible
    • Improve on the competition
    • Focus on products, not sales
  • Thiel argues that the following are probably more correct: 
    • It is better to risk boldness than triviality
    • A bad plan is better than no plan
    • Competitive markets destroy profits
    • Sales matters just as much as product
  • Thiel argues you shouldn’t necessarily oppose the cloud, but you should think for yourself

All Happy Companies are Different

  • Ask yourself the following business question: what valuable company is nobody building?
  • Thiel goes into the differences between monopolies and perfect competition.
    • Under perfect competition, no companies make an economic profit
    • Thiel views monopolies as the kind of business that is so good at what it does that no other firm can offer a close substitute.
      • Monopolies are the only way to create and capture lasting value. You don’t want to build an undifferentiated commodity business
      • The lesson here is that you want to stay away from competitive markets and focus on where you can create a monopoly.
      • When looking at your target market you need to include the relevant data: does Google compete with the U.S. Search advertising industry? The U.S. Online advertising? or even the global advertising industry? Companies that have a monopoly will typically downplay their significance in the market. Meanwhile the company that is in a fiercely competitive market will try to show how dominant they are in a smaller market than what they should be measuring themselves against-this can be very dangerous if you are not correctly understanding your market and competition.
  • Are monopolies bad?
    • No- Only in a world where nothing changes. In a static world, the monopolist is just a rent collector.
    • In the real world you can invent new and better things
    • If monopolies were bad, why would the government protect monopolies by creating and protecting patents?
    • Monopoly is the condition of every successful business
    • Monopolies are the economic wild card that create value in an economist’s static model. We should retrain our brain- “monopolies are good”

Competition and Rivalry

  • “Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past”
  • “Winning is better than losing, but everybody loses when the war isn’t one worth fighting”
  • Thiel’s PayPal was in a rivalry with Elon Musk’s X.com as the internet bubble approached and they realized they had to merge together to survive the
  • Don’t let your ego fight over trivialities

Last Mover advantage

  • A monopoly is only a great business if if can endure in the future
    • A tech company’s value is typically expected to come 10-15 years in the future
    • The most important question for durability is this: “Will this business still be around a decade from now” 
      • Numbers will not tell you the answer to this question, you will need to think critically about the qualitative characteristics of your business
  • Characteristics of a monopoly
    • Proprietary technology – a good rule of thumb is that it should be 10X better than ints closest substitute
      • This means you will need to invent something completely new to escape the competition
      • Examples
        • Apple iPad combined integrated design and operating system that solved the shortcomings of all other tablets to thatpoint
        • Amazon launched its claim to be the ‘world’s largest bookstore’ because it could request any book from their suppliers vs having to hold inventory of 100k books like Barnes and Noble
    • Network Effects
      • Facebook works because all of your friends are on Facebook.
      • You need to be able to start small, but also able to scale
        • Facebook started as just for Harvard students, but expanded to the world
        • “This is why successful network businesses rarely get started by MBA types: the initial markets are so small they don’t even appear to be business opportunities at all”
    • Economies of Scale
      • Software is a natural one here, once you create the product, incremental variable cost is close to zero
      • A service business like a yoga studio for example could never become a monopoly because of the cost associated with spreading , hiring, training, etc.
        • Air BnB and Uber were able to try and solve these issues by adding a software model to services
    • Branding
      • A company has a monopoly on its brand by definition – try to create a strong brand
        • Apple is the strongest tech brand, but you need to realize that it was build on the back of superior products.
        • Beginning with brand rather than substance is dangerous – Yahoo! story on page 53
        • When Steve Jobs returned to Apple, he slashed several product lines in order to focus on the handful of opportunities for 10X improvement
  • Building a monopoly
    • Choose your market carefully and expand deliberately- start with a very small market: it is easier to dominate a small market than a large one.
      • If you think your initial market might be too big, it almost certainly is.
      • “the perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors”
        • Any big market is a bad choice
        • Any big market already served by competing companies is even worse
          • Big red flag when entrepreneurs talk about getting 1% of a $100B market
            • The large market will lack a good starting point or be open to competition
    • Scaling up
      • Amazon shows how you can go from dominating a niche to expanding to adjacent markets: CD’s, videos, and software
        • Ebay did the same thing with collectibles: Beanie Babies, which was able to scale to other products, but it didn’t work as well for commodity products that you would buy at Amazon.
    • Don’t Disrupt- avoid competition altogether
      • “if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create.”
      • “if your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to be a monopoly”
      • First mover advantage
        • This is tactic, not a goal. What really matters is making the last development in a market that allows them to enjoy years of monopoly profits

You Are Not a Lottery Ticket

  • Jack Dorsey said on Twitter once “success is never accidental” he took a lot of heat for it (coming from a billionaire white man) but there is a lot of truth to this statement. Waldo Emerson wrote “Shallow men believe in luck, believe in circumstances… strong men believe in cause and effect”
  • Thiel distinguishes between definite and indefinite people
    • A definite view – favors firm convictions , instead of pursuing many-sided mediocrity and calling it ‘well-roundedness.’ the goal is to make yourself indistinguishable.
    • Indefinite attitudes towards the future rely on randomness, lack of concrete plans to carry out. Becoming omnicompetent in order to be prepared for the completely unknown future.
  • Thiel created a matrix to show the difference between Definite and Indefinite and how they relate to Optimism and Pessimism. It is worth a read starting on page 62, and the diagram is below:

Thiel Definite

  • This matrix shows different scenarios/mindsets of the future along with the financial  (investments vs. savings scenarios) that correspond.
    • Indefinite Pessimism
      • Europe in the present keeps on kicking the can down the road. they know the future will be bleak, but they do not know what to do about it. They are reactionary when things happen, and there is hope that things won’t get worse.
    • Definite Pessimism
      • China knows that their future will be worse than it is today, but know they must prepare for the downfall. Savings are really high and the rich are trying to get their money out of the country
    • Definite Optimism
      • Knows the future will be better than the present if we plan and work to make it better. Thiel mentioned several large, bold things that have been accomplished in the past (nearly every decade until the 70’s): manhattan project, Empire state building, Interstate system, men on the moon/space program, etc. These bold strokes of innovation and growth have been replaced by Indefinite Optimism where we are unwilling to take major risks.
    • Indefinite Optimisim
      • America today- there is little investment and value creation or risk. Thiel blames the Baby Boomer population that “learned from childhood to overrate the power of chance and underrate the importance of planning”
    • Indefinite thinking spreads to other areas
      • Finance- is the only way to make money when you have no idea how to create wealth
      • Politics- the government used to be able to coordinate complex solutions to problems, but today the gov only provides insurance and entitlements
      • Philosophy
      • Life- instead of searching for a way to prolong lives, we have started looking at ‘life tables’ to tell us how long we are supposed to live. On page 75 Thiel put a side by side comparison of Biotech startups (indefinite thinking) vs. Software startups (definite thinking). This is why U.S. companies are letting so much cash pile up on their balance sheets- they don’t have a clear idea of what they should do with it.
    • The problem with all of this is that it is unsustainable: “how can things get better if there are no plans for it?”
      • For startups this is especially true- there is advice out there that you should build something and iterate it based on feedback. This is an ‘indefinite’ plan – Thiel argues that while Darwinism might be a fine theory in other contexts, for startups intelligent design works best.
      • Steve Jobs saw this in that you can change the world through careful planning- When the iPod was released, it was seen as ‘a nice feature for macintosh users’ but Jobs planned on the iPod to be the first generation of portable post-PC devices.
    • Thiel argues we need to have a cultural revolution to break us out this ‘indefinite thinking’ and back to a definite future. “It begins by rejecting the unjust tyranny of Chance”

Follow the Money: The Power Law (starting page 82)

  • I won’t spent too much time on this chapter, it is mainly about VC’s. The basic idea about the ‘power law’ is that the 80/20 rule applies to startups as well. A VC might invest in several startups in order to build a portfolio, but most likely only one or two will be very successful. What typically happens then is that they will give all of their attention to the struggling startups while neglecting the one that could make them the most money and gain that monopoly footing.
    • VC’s also have a curve where they will have the initial cash investment, then several of the startups will likely fail before the ones that succeed actually pay out. This can be a major cash issue for some VC’s

Secrets

  • “what valuable company is nobody building?” Thiel argues that every correct answer is necessarily a secret, or something important and well known. If you break the concept of ‘ideas’ into three groups, they would be:
    • Conventions – an easy truth we teach to grade school kids
    • Secrets – something that is hard, but doable. It is possible to figure these out with a lot of work
    • Mysteries – the unknown and unsolvable
  • Thiel argues we do not look for secrets like we used to. He gives a couple of reasons for this:
    • Incrementalism – we are taught the right way to do things is one small step at a time. This is how our education reward system is currently set up- there is no incentive for being an over-achiever.
    • Risk aversion- people are scared of secrets because they are afraid of being wrong.
    • Complacency- The social elites have the most freedom and ability to explore new thinking, but are often the least likely to. Why would you search for a new secret if you are already comfortably collecting rent on the stuff that has already been done?
    • Flatness- basically this is the mindset that “if it were possible to discover something new, wouldn’t someone from the faceless global talent pool of smarter and more creative people have found it already?”. This voice of doubt dissuades people from even trying: “we have given up our sense of wonder at secrets left to be discovered”
  • Why secrets must still exist
    • “to say that there are no secrets left today would mean that we live in a society with no hidden injustices”
      • look for irrationality
      • look for bubbles
      • look for things that are unjust
      • look for things that should be better
      • Think to yourself “in 100 years, what would I expect to replace this technology?”
      • Thiel talks about a ton of ideas on page 102 saying “The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers
  • The Two kinds of secrets
    • People – Things that people don’t know about themselves or things they hide because they do not want others to know
      • Finding out secrets about people, you need to ask yourself ‘what are people not allowed to talk about? what is forbidden or taboo?’ (this was also discussed in one of Paul Graham’s essays in the book Hackers & Painters
    • Nature – some undiscovered aspect of the physical world
  • What to do with secrets?
    • It is rarely a good idea to tell everybody everything you know. There is a golden mean between telling nobody and telling everybody. Thiel’s rule is “who ever you need to, and no more”
    • “Every great business is built around a secret that is hidden from the outside”

Foundations

  • “Thiel’s Law”: a startup messed up at its foundation cannot be fixed. Bad decisions made early on are very hard to correct after they are made.
    • Who you choose to partner with- ‘how well the founders know each other and how well they work together matter just as much (as technical abilities and complementary skill sets)
    • Ownership- its very hard to go from 0 to 1 without a team. In the boardroom for example, the ideal board size is three (and it should never exceed five) Thiel splits the functions of 3 concepts:
      • Ownership – who legally owns the equity?
      • Possession: who actually runs the company’s day to day business?
      • Control: who formally governs the company’s affairs
    • Team- everyone you involve should be involved full time (with some exceptions) but is key to note that if you do not own stock options or draw a regular salary, you are fundamentally misaligned (consulting).
    • Cash is not king- for startups, Thiel has found that a company does better the less it pays the CEO. Two main reasons being that if they make too much they risk becoming too much like a politician than a founder, it also sets an example if you are taking the lowest salary in the company. It also sets an example if you take the highest salary in the company
    • Vested Interests – Equity is seen as a useful form of compensation for cash-strapped startups. You need to allocate it very carefully- do not give everyone even shares. See page 115 for more on this. The key is to keep all compensation and equity details secret
    • Extending the Founding – Bob Dylan said ‘ he who is not busy being born is busy dying’. Thiel takes this to mean ‘being for’ is not a one time event. The most valuable company maintains an openness to invention that is most characteristic of beginnings

The Mechanics of Mafia

  • What would the ideal company culture look like? Immediately you think of the working conditions at Google or other Silicon Valley companies. Thiel argues that without substance the perks will not work.
    • “A startup is a team of people on a mission and a good culture is just what that looks like on the inside”
  • The PayPal Mafia as it is known has an impressive list of the initial PayPal team that has gone on to start seven businesses -all worth at least one billion each
    • The culture was strong enough to transcend the original company
  • Recruiting
    • Should never be outsourced
    • The first core group will likely be attracted by large equity stakes or high profile responsibilities
    • You need to answer the question “why should the 20th employee join your company?”
      • How do you attract someone who is also looking at a position at Google? There is no specific answer, but you need to convey your answer around your mission and your team: why is your mission compelling. Explain why the company is a good match for him personally
      • Offer them a an opportunity to do irreplaceable work on a unique problem alongside great people
    • Your goal is to build a tribe of like-minded people fiercely devoted to the company’s mission
    • “the best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing“- defining roles reduced conflict, it simplified managing people.
  • Cults and Consultants
    • Thiel created a linear spectrum that showed consultants on one side with cults  on the other. The idea being that consultants are detached and the cults are dogmatic and completely devoted. He put “Zero to One Companies” in a circle on the side closer to cults. stressing that while cults tend to be fanatically wrong about something, successful startups tend to be fanatically right about something those on the outside have missed.

If you Build It, Will They Come? (starting page 126)

  • This chapter is about the importance of sales. Something a lot of startups will disregard as less important. The problem is that if you have invented something new but don’t have an effective way to sell it you have a bad business, no matter how good the product is.
  • Strong distribution plan (for effectiveness)
    • Your Customer Lifetime Value (CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost (CAC))
  • There is a continuum of sales below that shows the target markets and distribution channels to use. There is a noticeable dead spot in the ‘sales to small business’ section

sales continuum

  • Complex Sales- those of 7 figures or more deal with large businesses and bureaucracies and government and requires a sales grandmaster (Thiel points to Elon Musk) that focuses on just a few of the most crucial people to overcome political inertia. Customer is going to want to talk directly with the CEO on business deals of this size.
  • Personal sales – usually takes the work  of a sales team that can move the product to a wider audience than the CEO alone. Sometimes it is key to focus small and expand (example on page 133)
  • There is a dead zone in the ‘sales to small business’ section. For example if you wanted to sell to all convenience stores or CNC tool shops it is a bit more difficult (less profitable and lower CLV-CAC value) since it needs a personal sales effort for a relatively small sale.
  • Marketing and Advertising- For relatively low priced products that have mass appeal but lack of method for viral distribution- you do not see door to door sales of laundry detergent. Startups need to be careful not to compete on advertising with big business budgets.
  • Viral marketing- “a product is viral if its core functionality encourages users to invite their friends to become users too (Facebook, PayPal)
  • The Power Law of Distribution – If you can get just one distribution channel to work, you have a great business.
  • Selling to non-customers – selling ideas to investors, stakeholders, employees, etc. “never assume people will admire your company without a public relations strategy.”
  • “Everybody Sells” – look around, if you don’t see any salespeople, your the salesperson!

Man and Machine

  • This chapter is about the rise of AI, Automation, machine learning, etc. Thiel has a more optimistic view of the rise of the machines. He believes that the best companies will use technology as complementary vs. a substitute for workers.
  • “The most valuable businesses of the coming decades will be built by entrepreneurs who seek to empower people rather than make them obsolete”
  • The Complementary vs substitute attitude is in part because he recognizes computers and humans are better at doing completely different things from one another. For example, it was a big deal when supercomputers were able to identify a cat with 75% accuracy from millions of YouTube thumbnails. But he put this into perspective that a 4 year old can do this with 100% accuracy.
    • Computers are good at handling a lot of data
    • Humans are good at making judgements
  • Computers are tools, not complements
    • “better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more”
    • The REAL question that companies of the next generation need to ask is “how can computers help humans solve hard problems?”

Seeing Green (pg 152)

  • This chapter gives a nice overview of the 7 questions to ask and runs through a couple of examples of companies and industries that have succeeded and failed. As a side note, this is also a great chapter from an investor’s point of view. If you are investing in a startup company you should be asking yourself these 7 questions about the potential investment.
    • Engineering: Can you create a breakthrough technology instead of just incremental improvements?
    • Timing: Is this the right time to start your particular business?
    • Monopoly: are you starting with a big share of a small market?
    • People: Do you have the right team?
    • Distribution: do you have a way to not just create but deliver your product?
    • Durability: Will your market position be defensible 10 and 20 years into the future?
    • Secret: Have you identified a unique opportunity that others don’t see?
  • Starting on page 156, Thiel went through an example based on everything the “Cleantech movement” got wrong in the late 2000’s and compared it to Elon Musk’s Tesla- part of the movement, but was strategic in hitting all seven of the questions.
    • This isn’t to say that it is not an opportunity, but the companies all were pushing the same technology and it became highly competitive. They were all trying to ‘shoot an elephant’ when it came to the massive market opportunity. Tesla shows a good example of the exception.

The Founder’s Paradox

  • Thiel argues that founders hold onto the more ‘extreme’ traits of the personality spectrum (below). Founders also are likely to have ‘fatter’ tails when it comes to the graph. Founder Distribution.png
  • We should be more tolerant of the founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.

Conclusion: Stagnation or Singularity

  • Thiel finishes the book with a prophecy/challenge. He says there are 4 scenarios that could happen in the future:
    • Recurrent collapse – a more historical view of how things have been in the past: an alternation between prosperity and ruin.
    • Plateau – This is what most people seem to assume: that the ‘developed’ world will plateau and the developing world will catch up. Overall the future would look a lot like the present.
    • Extinction – A collapse so devastating that we won’t survive it
    • Takeoff – This is likely the most difficult to imagine: accelerating takeoff toward a much better future
  • The challenge to us is “which of the four will it be?”

RG

 

 

 

 

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