Zero to One: Notes On Start Ups, Or How To Build The Future – by Peter Thiel
How strongly I recommend it: 10/10
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This is one the best books about entrepreneurship I’ve read recently. It tackles in a simple way how to build the future doing something new, not merely copying what someone else’s already doing.
“What important truth do very few people agree with you on?”
OUR CONTRARIAN QUESTION—What important truth do very few people agree with you on?—is difficult to answer directly. It may be easier to start with a preliminary: what does everybody agree on? “Madness is rare in individuals—but in groups, parties, nations, and ages it is the rule,” Nietzsche wrote (before he went mad). If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
1. Make incremental advances
2. Stay lean and flexible
All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.
3. Improve on the competition
Don’t try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors.
4. Focus on product, not sales
If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution. Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth.
And yet the opposite principles are probably more correct: 1. It is better to risk boldness than triviality. 2. A bad plan is better than no plan. 3. Competitive markets destroy profits. 4. Sales matters just as much as product.
1. Proprietary Technology
Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.
Proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
2. Network Effects
Network effects make a product more useful as more people use it.
The initial markets are so small that they often don’t even appear to be business opportunities at all.
A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.
BUILDING A MONOPOLY
Brand, scale, network effects, and technology in some combination define a monopoly; but to get them to work, you need to choose your market carefully and expand deliberately.
Start Small and Monopolize
Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision. In this one particular at least, business is like chess. Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.”
Leanness is a methodology, not a goal. Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum.
Why should you expect your own business to succeed without a plan to make it happen? Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.
The power of planning explains the difficulty of valuing private companies.
Founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough. When Yahoo! offered to buy Facebook for $1 billion in July 2006, I thought we should at least consider it. But Mark Zuckerberg walked into the board meeting and announced: “Okay, guys, this is just a formality, it shouldn’t take more than 10 minutes. We’re obviously not going to sell here.” Mark saw where he could take the company, and Yahoo! didn’t. A business with a good definite plan will always be underrated in a world where people see the future as random.
Few people imagined that it was possible to build a billion-dollar business by simply connecting people who want to go places with people willing to drive them there.
Secrets about people are different: they are things that people don’t know about themselves or things they hide because they don’t want others to know. So when thinking about what kind of company to build, there are two distinct questions to ask:
- What secrets is nature not telling you?
- What secrets are people not telling you?
It’s easy to assume that natural secrets are the most important: the people who look for them can sound intimidatingly authoritative.
The best place to look for secrets is where no one else is looking. Most people think only in terms of what they’ve been taught; schooling itself aims to impart conventional wisdom. So you might ask: are there any fields that matter but haven’t been standardized and institutionalized?
If you find a secret, you face a choice: Do you tell anyone? Or do you keep it to yourself?
It depends on the secret: some are more dangerous than others. As Faust tells Wagner:
The few who knew what might be learned,
Foolish enough to put their whole heart on show,
And reveal their feelings to the crowd below,
Mankind has always crucified and burned.
Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know.
So who do you tell? Whoever you need to, and no more. In practice, there’s always a golden mean between telling nobody and telling everybody—and that’s a company. The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
As Tolkien wrote in The Lord of the Rings:
The Road goes ever on and on
Down from the door where it began.
Life is a long journey; the road marked out by the steps of previous travelers has no end in sight. But later on in the tale, another verse appears:
Still round the corner there may wait
A new road or a secret gate,
And though we pass them by today,
Tomorrow we may come this way
And take the hidden paths that run
Towards the Moon or to the Sun.
The road doesn’t have to be infinite after all. Take the hidden paths.
“Thiel’s law”: a startup messed up at its foundation cannot be fixed.
As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.
To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts:
- Ownership: who legally owns a company’s equity?
- Possession: who actually runs the company on a day-to-day basis?
- Control: who formally governs the company’s affairs?
A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control.
In theory, this division works smoothly. Financial upside from part ownership attracts and rewards investors and workers. Effective possession motivates and empowers founders and employees—it means they can get stuff done. Oversight from the board places managers’ plans in a broader perspective. In practice, distributing these functions among different people makes sense, but it also multiplies opportunities for misalignment.
It’s crucial to choose wisely: every single member of your board matters. Even one problem director will cause you pain, and may even jeopardize your company’s future.
A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
Giving everyone equal shares is usually a mistake: every individual has different talents and responsibilities as well as different opportunity costs, so equal amounts will seem arbitrary and unfair from the start. On the other hand, granting different amounts up front is just as sure to seem unfair. Resentment at this stage can kill a company, but there’s no ownership formula to perfectly avoid it.
Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future.
THE MECHANICS OF MAFIA
“Company culture” doesn’t exist apart from the company itself: no company has a culture; every company is a culture.
They had to be talented, but even more than that they had to be excited about working specifically with us. That was the start of the PayPal Mafia.
The only good answers are specific to your company, so you won’t find them in this book. But there are two general kinds of good answers: answers about your mission and answers about your team. You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done. That’s the only thing that can make its importance unique.
From the outside, everyone in your company should be different in the same way.
Max Levchin, my co-founder at PayPal, says that startups should make their early staff as personally similar as possible. Startups have limited resources and small teams. They must work quickly and efficiently in order to survive, and that’s easier to do when everyone shares an understanding of the world.
DO ONE THING
The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing. I had started doing this just to simplify the task of managing people. But then I noticed a deeper result: defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities.
Eliminating competition makes it easier for everyone to build the kinds of long-term relationships that transcend mere professionalism.
IF YOU BUILD IT, WILL THEY COME?
Complex sales works best when you don’t have “salesmen” at all. Palantir, the data analytics company I co-founded with my law school classmate Alex Karp, doesn’t employ anyone separately tasked with selling its product. Instead, Alex, who is Palantir’s CEO, spends 25 days a month on the road, meeting with clients and potential clients. Our deal sizes range from $1 million to $100 million. At that price point, buyers want to talk to the CEO, not the VP of Sales.
A product is viral if its core functionality encourages users to invite their friends to become users too. This is how Facebook and PayPal both grew quickly: every time someone shares with a friend or makes a payment, they naturally invite more and more people into the network. This isn’t just cheap—it’s fast, too. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth. The ideal viral loop should be as quick and frictionless as possible. Funny YouTube videos or internet memes get millions of views very quickly because they have extremely short cycle times: people see the kitten, feel warm inside, and forward it to their friends in a matter of seconds.
By directly paying people to sign up and then paying them more to refer friends, we achieved extraordinary growth. This strategy cost us $20 per customer, but it also led to 7% daily growth, which meant that our user base nearly doubled every 10 days. After four or five months, we had hundreds of thousands of users and a viable opportunity to build a great company by servicing money transfers for small fees that ended up greatly exceeding our customer acquisition cost.
Selling to Non-Customers
You should never assume that people will admire your company without a public relations strategy.
MAN AND MACHINE
The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
But the most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?
Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer:
- The Engineering Question
Can you create breakthrough technology instead of incremental improvements?
- The Timing Question
Is now the right time to start your particular business?
- The Monopoly Question
Are you starting with a big share of a small market?
- The People Question
Do you have the right team?
- The Distribution Question
Do you have a way to not just create but deliver your product?
- The Durability Question
Will your market position be defensible 10 and 20 years into the future?
- The Secret Question
Have you identified a unique opportunity that others don’t see?
THE MONOPOLY QUESTION
Customers won’t care about any particular technology unless it solves a particular problem in a superior way. And if you can’t monopolize a unique solution for a small market, you’ll be stuck with vicious competition.
THE PEOPLE QUESTION
There’s nothing wrong with a CEO who can sell, but if he actually looks like a salesman, he’s probably bad at sales and worse at tech.
THE DURABILITY QUESTION
Every entrepreneur should plan to be the last mover in her particular market. That starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in?
Solyndra’s trustees in bankruptcy sued later that year on the grounds of attempted monopolization, conspiracy, and predatory pricing. But was competition from Chinese manufacturers really impossible to predict? Cleantech entrepreneurs would have done well to rephrase the durability question and ask: what will stop China from wiping out my business? Without an answer, the result shouldn’t have come as a surprise.
TESLA: 7 FOR 7
Tesla’s technology is so good that other car companies rely on it: Daimler uses Tesla’s battery packs; Mercedes-Benz uses a Tesla powertrain; Toyota uses a Tesla motor. General Motors has even created a task force to track Tesla’s next moves. But Tesla’s greatest technological achievement isn’t any single part or component, but rather its ability to integrate many components into one superior product. The Tesla Model S sedan, elegantly designed from end to end, is more than the sum of its parts: Consumer Reports rated it higher than any other car ever reviewed, and both Motor Trend and Automobile magazines named it their 2013 Car of the Year.
Tesla started with a tiny submarket that it could dominate: the market for high-end electric sports cars. Since the first Roadster rolled off the production line in 2008, Tesla’s sold only about 3,000 of them, but at $109,000 apiece that’s not trivial. Starting small allowed Tesla to undertake the necessary R&D to build the slightly less expensive Model S, and now Tesla owns the luxury electric sedan market, too. They sold more than 20,000 sedans in 2013 and now Tesla is in prime position to expand to broader markets in the future.
Elon describes his staff this way: “If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces. There’s the regular army, and that’s fine, but if you are working at Tesla, you’re choosing to step up your game.”
Most companies underestimate distribution, but Tesla took it so seriously that it decided to own the entire distribution chain. Other car companies are beholden to independent dealerships: Ford and Hyundai make cars, but they rely on other people to sell them. Tesla sells and services its vehicles in its own stores. The up-front costs of Tesla’s approach are much higher than traditional dealership distribution, but it affords control over the customer experience, strengthens Tesla’s brand, and saves the company money in the long run.
Tesla has a head start and it’s moving faster than anyone else—and that combination means its lead is set to widen in the years ahead. A coveted brand is the clearest sign of Tesla’s breakthrough: a car is one of the biggest purchasing decisions that people ever make, and consumers’ trust in that category is hard to win. And unlike every other car company, at Tesla the founder is still in charge, so it’s not going to ease off anytime soon.
Tesla knew that fashion drove interest in cleantech. Rich people especially wanted to appear “green,” even if it meant driving a boxy Prius or clunky Honda Insight. Those cars only made drivers look cool by association with the famous eco-conscious movie stars who owned them as well. So Tesla decided to build cars that made drivers look cool, period—Leonardo DiCaprio even ditched his Prius for an expensive (and expensive-looking) Tesla Roadster. While generic cleantech companies struggled to differentiate themselves, Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.
Could successful energy startups be founded after the cleantech crash just as Web 2.0 startups successfully launched amid the debris of the dot-coms? The macro need for energy solutions is still real. But a valuable business must start by finding a niche and dominating a small market.
Facebook started as a service for just one university campus before it spread to other schools and then the entire world. Finding small markets for energy solutions will be tricky—you could aim to replace diesel as a power source for remote islands, or maybe build modular reactors for quick deployment at military installations in hostile territories. Paradoxically, the challenge for the entrepreneurs who will create Energy 2.0 is to think small.
STAGNATION OR SINGULARITY
No matter how many trends can be traced, the future won’t happen on its own.
Our task today is to find singular ways to create the new things that will make the future not just different, but better—to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.
But 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. Indeed, 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 become a monopoly. Disruption also attracts attention: disruptors are people who look for trouble and find it. Disruptive kids get sent to the principal’s office. Disruptive companies often pick fights they can’t win.
PayPal could be seen as disruptive, but we didn’t try to directly challenge any large competitor. It’s true that we took some business away from Visa when we popularized internet payments: you might use PayPal to buy something online instead of using your Visa card to buy it in a store. But since we expanded the market for payments overall, we gave Visa far more business than we took. The overall dynamic was net positive, unlike Napster’s negative-sum struggle with the U.S. recording industry.