Zero to One

cover of the book zero to one by peter thiel

Why read this

  • To get actionable guidance by a innovation-focused multi-billionaire on building a successful future-oriented business;
  • To think in a different way about the world of startups, business, and technology.

Why listen to the author

He has partnered and invested with some of the most successful tech entrepreneurs in the USA (and probably the world), such as:

Each of the above companies are worth at least $1 billion, by the way. For what it’s worth, he also taught for several years at Stanford; Reading Zero To One is like looking inside the mind of one of the most successful multi-billionaire investors alive today…

 


Zero to One by Peter Thiel – Book Notes

Reading time: 20 min.

What innovation really is

The beginning of the book is essentially about the difference between going from “1 to n”, or horizontal progress (doing more of what’s already been done, improving incrementally) vs. going from “0 to 1”, or vertical progress (doing something totally new, that’s never been done before). “If you take one typewriter and build 100, you’ve made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.” (fig. 1).

Fig. 1 — Technology is responsible for vertical progress while globalization for horizontal.
Fig. 1 — Technology is responsible for vertical progress while globalization for horizontal.

Don’t be afraid to ask contrarian questions. A contrarian is a person who takes up a position opposed to that of the majority, regardless of how unpopular it may be. So, contrarian questions are those that question commonly accepted views — that question things that the majority of people accept as truths. “Conventional beliefs only ever appear arbitrary and wrong in retrospect; whenever one collapses, we call the old belief a bubble.” Before the time of Copernicus, it was accepted as truth that the sun revolved around the earth. Can you imagine that? Well now think about how many ridiculous views we today view as truth, that will be ridiculed tomorrow. Are you going to be the one to finally ignite the change?

What to take from this:

  • Be bold and challenge the status-quo: “So what?”, “What if?”, “Why is that?”, “What important truth do very few people agree with you on?”, “What valuable company is nobody building?”;
  • Think vertically (0→1), not horizontally (1→n).

A new way of guiding businesses?

After the dot-com crash in the 90’s, people had to reevaluate their beliefs about running a company, as a way to learn from the mistakes that resulted in the crash. Thiel argues that Silicon Valley entrepreneurs came up with four big lessons which ended up guiding business thinking today. The lessons were that it’s better to:

  • Make incremental advances — visions of grandeur inflated the bubble, so they should not be nourished.;
  • Stay lean and flexible — since you can’t know what your business will do and planning decreases flexibility, then planning is bad. You should discover what’s best for your company by science-like experimentation;
  • Improve on the competition — If you start with an already existing customer, you know there’s a business to have, which means that you pick things that are already being sold, and then improve them;
  • Focus on product rather than sales — if it

However he says that these were wrongly accepted as dogmas, and that they only work for particular cases, and therefore we should always analyze each specific case. Still, he proposes that:

  • It’s better to risk being bold than being trivial;
  • It’s better to have a plan than no plan;
  • Competitive markets destroy profits;
  • Sales matters just as much as product;

What to take from this:

  • Instead of doing the opposite of something that didn’t work in the past, think for yourself, and formulate an informed hypothesis of whether it might work in your own particular situation.

On Why Competition is Bad

Thiel challenges the notion that competition in business is good. He argues that under perfect competition, there are no profits, little differentiation, and struggle for survival. The more we compete, the less we gain. For example, low profits means that they have less cash to invest in other things, namely in innovation [of course with this I suppose he is assuming those companies are ruled by good people, that care about the progress of the world, and not just increasing their personal wealth like many do] than companies that operate as a monopoly. A monopoly is a company that controls the greatest part of a market. For example, in search engines Google has the monopoly. It has more profit than all airline companies combined, despite providing less value than them. However, these high profit margins allow Google to invest much more in innovation (which they do) than the airliners can.

Microsoft and Google also kept battling each other. As startups, each was happy to leave the other alone and prosper by themselves. As they grew, and started expanding to adjacent markets, war between the two started — Windows vs. Chrome OS, Office vs. Docs, Bing vs. Google Search, Surface vs. Nexus, Explorer vs. Chrome. This war cost them their dominance, as Apple came along and overtook them all. In January 2013, Apple was worth $500 billion, whereas Google and Microsoft combined were valued at $467 billion. Considering how just three years before Microsoft and Google were each more valuable than Apple,  you can see how war is a costly business.

Theil believes monopolies are key for the improvement of technologies, specially, breakthrough ones (which are mainly fueled by vertical progress), which in turn he believes are key for the improvement of the world in a greater degree than globalization (fueled by horizontal progress). “…humans are distinguished from other species by our ability to work miracles. We call these miracles technology.” So, according to this logic, for the human race to improve, we need monopolies that drive technological innovation faster. Which is why he then teaches how to build one.

On Building a Monopoly

Dominate a Niche… Then Scale and Expand from there

Start by focusing on a small market with little competition. Once you’ve got it, THEN expand your horizons. Remember how Google started by just being a search engine and now is involved in multiple areas? Or how Jeff Bezos from Amazon started it with the purpose of making it the world’s largest bookstore? When it happened, he then expanded into adjacent markets. Or how Facebook started by having the monopoly of the social network in Mark’s college. It’s better to be a large fish in an unpopulated lake, than a small fish in an ocean full of sharks. “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.”

This was one of the many reasons Tesla was successful — it didn’t initially try to compete against big auto manufacturers. Instead, it began by making power-trains, then high end luxury models (to which there was no solid alternative). At the same time it serves as an original equipment manufacturer for other manufacturers, an uncommon strategy that worked well.

Don’t Disrupt

A disruption is like a virus for a market. It penetrates it and completely changes the way the market operates, dethroning established companies. Examples are Napster and Uber. Napster disrupted the music recording industry almost overnight and became massively huge as a result of doing so… and ended up filing for bankruptcy soon after. Uber is also under a lot of pressure, and it’s to be seen if it will crack. Avoid startup ideas that disrupt and compete. This sounds counter intuitive at first, because many new businesses want to promote like crazy and let the competition know that there’s a new sheriff in town, but in all actuality, the best approach in the beginning is to avoid these tactics, as they may sometimes lead to problems a startup shouldn’t be dealing with. Even when expanding to adjacent markets, avoid competition and disruption as much as possible.

Have these characteristics

Most monopolies seem to share the these characteristics:

  • Proprietary Technology: this is a company’s biggest advantage because it’s the part that makes it difficult to replicate. For example it is very difficult to replicate Google’s awesome algorithm.
  • Network Effects: that scale with the number of people, that is, they give more value the more the more people use it. It’s hard to compete with youtube, because everyone uses it, making it much better than a competitor that is exactly the same but with less users. Reddit, Twitter, and other social networks have these;
  • Scalability: ensure you build a product is scalable. Once you start selling high quantities you decrease the cost of each unit. Also, the fixed costs can be spread out over increasing sales. All this makes it harder for competitors to make profits and penetrate your market;
  • Branding: it raises awareness, which reduces your distribution and advertising costs. A prime example is Apple, which people immediately associate with certain characteristics;

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Future profits and the last vs first mover advantage

The topic of future profits is debatable, but Silicon Valley indeed valorizes short-term profits. This has the problem of missing the point: Will your company be around 10 years from now? Some companies, like Paypal and Tesla motors spent their first years without making a profit… but they had the end goal in mind, which is now one of the reasons they’re reaping the benefits of continued growth, and well projected into the future.

The first to make something only has an advantage susceptible of converting the company into a monopoly if it is >~10X better than the status-quo (improvements less than that are called marginal improvements). This ensures that, at least, you’re making it hard for others to catch up. And the best way to do it is not through incremental improvements but breakthrough technology (for which a monopoly is necessary for there to be enough money to invest in innovation). For example, PayPal’s was the 1st payment system to allow transactions to be conducted with email (a 0→1 innovation, and a ~10X improvement on payment transfers/acceptance). Apple’s iPad was at least a ~10X improvement on tablets. Before that tablets were never considered as a viable product, they were too hard to use, and too clunky, among other things. Apple improved on all that. Yet, it is no good if someone else comes and unseats you. In this case it is best to make last great development in a specific market and reap the fruits of a mature ecosystem. So basically, being the one that unseats the others with a 10X improvement on what there is. How can we make it hard to replicate?

What to take from this:

  • Develop a 0→1 offering (product or service) for a niche market that improves the status-quo by 10X (e.g. in performance/convenience) so that it gets noticed and shifts consumer behavior. Then scale up, and only then expand to adjacent markets;
  • Do not disrupt. Avoid competing;
  • Make sure it is scalable, can benefit from network effects and is is highly brandable.

Planning is Key

“Hundreds of people have started multiple multi-million-dollar businesses. A few, like Steve Jobs and Elon Musk, have created several multi-billion-dollar companies. If success were mostly a matter of luck, these kinds of serial entrepreneurs probably wouldn’t exist.” Some say that successful people are/were lucky… this is rarely the case. When someone succeeds at something, it was, in the vast majority of cases, the result of tremendous planning, effort and time on making that happen.

Brilliant thinking is rare but courage is in even shorter supply than genius.” (P. Thiel)

This one of the flaws of the education system, which is that it is based on the premise that we have to get lucky sometime and, therefore, that we need to be ready for anything. For example, many engineers study a wide variety of topics. Yet, most will spend most of their lives using only very specific skill-set of what they learned. Another example is how in high-school people spend roughly the same time on each discipline. We’re rewarded for knowing just enough of everything resulting in us being average at everything and excelling at nothing. If you want to one day become successful, be it with a startup or a personal activity, Thiel recommends that you:

  • Figure out what you want and why you want it;
  • Develop a long term plan for the future;
  • Execute against it strategically;
  • Be laser-focused in your skills so that you excel at a few things, instead of average at many.

Take Advantage of the Power of Exponential Growth

Follow the power law and Pareto’s Principle. In venture capital investment investors try to profit from the exponential growth of the few early-stage companies that achieve it. Those that do, several times obtain greater value than all others combined. That’s exactly what happened with Theil’s 2005 investment fund and Facebook.

The Power Law tells us essentially what Pareto’s Principle tells us: the efforts of a few things (20%) are responsible for the majority of results (80%) (fig. 2). Of course this doesn’t apply to everything, the idea is that we should have this in mind, because in many cases it does apply, and that is a game-changer that we should take advantage of. Also, what’s important here is not the numbers 80-20 knowing that a disproportionate amount of things come from a disproportionately small amount of things and applying that to your advantage.

The Power Law and the Pareto Principle
The Power Law and the Pareto Principle

What to take from this:

  • Think hard about where to invest your time, and where your actions will fall on the curve, because a few of them will have disproportionately more return on effort almost all others, so… better to invest on those!

About Your Team

  • Founding members — When you start something, the first and most important decision you make is who do you start with. You should have history with the other founders prior to starting a company together, otherwise you’re just rolling dice. You need to look at the team like the foundation of a house. The strong culture that involved Paypal was that it was composed of people of similar interests and mission, working towards the same goal. That’s, according to Theil, how the members (founders and not) of a startup should be. (This is much better than hiring talented applicants and only based on their accomplishments);
  • Ownership, possession & control —  To anticipate likely sources of misalignment in any company, it’s useful to know the meaning of three concepts:
    • Ownership: who legally owns a company’s equity? (founders, employees, investors);
    • Possession: who actually runs the company on a day-to-day basis? (managers);
    • Control: who formally governs the company’s affairs?  (board of directors which includes founders);
  • On the bus or off the bus —  As a rule of thumb, everyone involved in your company should be ~invested in time, at least full time (won’t apply for example with some subcontractors, like outside lawyers);
  • Cash is not king —  Cash is alluring. It offers freedom and options: once you get your paycheck, you can do whatever you want with it. However, if you take money out of the company to pay high salaries for whoever, you’re basically taking advantage of the company as it is today, instead of using that money to invest into things that create value for the company in the future. Any kind of cash that leaves the company for the benefit of someone, is not future, but present-focused. A slightly better alternative would be to offer cash bonuses as it can be less and offered as a reward. But even then we should be careful because giving out these bonuses could deviate people’s minds to grab value from the company, instead of focusing on attaining the company’s mission. Attaining that mission, should be the reward itself, and why they’re working in your company.
  • Personal interests —  Fortunately startups don’t need to pay high salaries as they can give something better: equity (part ownership of a company). Plus, it can effectively motivate people to create value for the future of the startup. “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.”
  • Extending the founding — The founding moment happens but once, and it is where you have the chance to define the core values of the company and the rules that will guide everyone towards achieving it.

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.” This is the philosphy of Tesla Motors and SpaceX, where people who work there generally all share the same vision with Elon, and thus aren’t just working to get paid, but because they want to achieve that same mission.

Theil’s first team, the one that founded Paypal, became known as the ‘Paypal Mafia’ because many of them went on to either help each other start or invest successful tech companies. “Elon Musk has founded SpaceX and co-founded Tesla Motors; Reid Hoffman co-founded LinkedIn; Steve Chen, Chad Hurley, and Jawed Karim together founded YouTube; Jeremy Stoppelman and Russel Simmons founded Yelp; David Sacks co-founded Yammer;” and he co-founded Palantir. Today each of those companies are worth more than $1 billion.

So… to say that’s impressive is an understatement. What does this mastermind advise, then, about team-building?

Everyone should focus on one big thing. You should focus on making every person in the company responsible for doing just one thing. Every employee’s one thing should be unique, and they should know that they are only evaluated on that one thing. This uniqueness brings us to the next tip.

Everyone should have a sharply distinct role. This is because, according to Theil, most fights that happen inside a company are due to colleagues competing for the same responsibilities. Because in the start members need to take on multiple roles and sometimes even switch, there’s an increased risk for Startups. Thus we should strive to eliminating competition inside the company as well, allowing also that relationships deeper than simply professionalism develop. This is important because a company can fail both from the outside and the inside. More, a strong inner core, creates a stronger shell, which also reduces the chance of failure from the outside.

There should be higher tolerance for strange or unusual people (fig. 4). Those can often bring more value other than by incrementalism.

Don’t overestimate your capacity as an individual. A great founder is the one that can bring out the best work from everyone at his company, and not because he is the one that provides the most value.

CEO's and founders are typically people that aren't average
CEO’s and founders are typically people that aren’t average

What to take from this:

  • Hire people that want to work for you because they believe in what you and the organization believes;
  • Make everyone focus on just one big thing;
  • Eliminate competition, have people working on distinct things;

Advertising is a Necessity and Nailing Distribution a Must

A great sales and distribution mechanism can create a monopoly by itself, even without product differentiation, whereas the inverse isn’t true — It won’t matter how good a product is, if you don’t support it with a strong distribution channel.

You need to ensure that you advertise that awesome new product/service. People in Silicon Valley and in fact many intelligent people (lots of engineers!) believe that a good product will sell itself. It might, but slowly, and definitely not as fast as it could be. Advertising works on everybody, and if you don’t believe it you’re deceiving yourself. But startup companies should avoid battling other companies in advertising, instead they should for example focus on viral marketing. Also you should nail at least one distribution channel, that is, you need to have at least one really good way of delivering the product or service to the customer, because you don’t, the startup/company is doomed.

There are two metrics that define an effective distribution. The total net profit that you gain during your relationship with a customer (Customer Lifetime Value) needs to be higher than what you spend to acquire a new customer (Customer Acquisition Cost). Generally, higher priced products require higher spending for a sale to occur. Let’s see (fig. 5):

  • Complex sales – They require close personal attention to be paid to every detail of every deal, and they often result of months of developing the right relationships. They are rare (~1 or 2 / year) and hard to achieve but sometimes the only way to sell your most valuable products.
  • Personal sales – The CEO doesn’t need to do all the selling by himself, as long as he can gather a small sized sales team that can move the product to a wide audience.
  • Distribution doldrums (deadzone) – Between personal sales (salespeople necessary) and traditional advertising (no salespeople necessary) there is a dead zone. This is because, for example, a $1000 product needs a personal sales effort, but at that price tag, you don’t have the resources to send an actual person to talk to every possible customer. On the other hand, advertising is not targeted enough.
  • Marketing and advertising – These methods work for ~100€-priced products that have mass appeal but still lack capacity for being viraly distributed. For example, olive oil producers can’t afford a salesperson to go door-to-door make sales. To reach their end user, the company has to produce ads for TV, coupons, and attract attention in ways such as a great product box design.
  • Viral marketing – A product is viral when the way it works encourages by itself the users to invite their friends to become users. Facebook thrives because people have their friends there. For me to pay in paypal, someone else also needs to have an account there. Not only is this cheap, but also fast, as it can easily create situations of exponential growth.

deadzone

What to take from this:

  • For low-priced products advertise, virally if possible, and avoid competing;
  • Nail at least one distribution channel.

7 Questions Every Entrepreneur Should Ask Before Starting a Company

  1. The Engineering Question – Can you create a breakthrough technology instead of incremental improvements?
  2. The Timing Question – Is now the right time to start your particular business?
  3. The Monopoly Question – Are you starting with a big share of a small market?
  4. The People Question – Do you have the right team?
  5. The Distribution Question – Do you have a way to not just create but deliver your product?
  6. The Durability Question – Will your market position be defensible 10 and 20 years into the future?
  7. The Secret Question – Have you identified a unique opportunity that others don’t see?

 Conclusions

So let’s put it all together:

  1. Be bold and challenge the status-quo: “So what?”, “What if?”, “Why is that?”, “What important truth do very few people agree with you on?”;
  2. Think vertically (0→1), not horizontally (1→n).
  3. Instead of doing the opposite of something that didn’t work in the past, think for yourself, and formulate an informed hypothesis of whether it might work in your own particular situation.
  4. Develop a 0→1 offering (product or service) for a niche market that improves by 10X (e.g. in performance/convenience) over the status-quo so that it gets noticed and shifts consumer behavior. Then scale up, and only then expand to adjacent markets;
  5. Do not disrupt. Avoid competing;
  6. Make sure it is scalable, can benefit from network effects and is is highly brandable.
  7. Figure out what you want and why you want it;
  8. Develop a long term plan for the future;
  9. Execute against it strategically;
  10. Be laser-focused in your skills so that you excel at a few things, instead of average at many.
  11. Hire people that want to work for you because they believe in what you and the organization believes;
  12. Make everyone focus on just one big thing;
  13. Eliminate competition, have people working on distinct things;
  14. Advertise, virally if possible, and avoid competing;
  15. Nail at least one distribution channel.

I’ve read hundreds of books, but I’ve got to admit this was definitely one of the best. I hope you enjoyed reading this as much as I did writing it. If you can please take the time to share, I actually think people should know about this book.

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