By Charles in Startups — Jun 14, 2015

Zero to One (Peter Thiel)

The great secret of our time is that there are still uncharted frontiers to explore and new inventions to create. In Zero to One, legendary entrepreneur and investor Peter Thiel shows how we can find singular ways to create those new things.

All errors, omissions, and misrepresentations are mine.

Introduction

0 to 1 is the act of creation, resulting in something new, fresh, and strange. Getting there requires both brilliant thinking and the courage to push forward against the current, sticking to your guns when no one seems to be on your side.

Secrets. Answer the contrarian question: "What important truth do very few people agree with you on?" The best answers aren't just different ways of seeing the present, but the closest we can come to looking into the future. You can find value in unexpected places by thinking about business from first principles instead of formulas.

Globalization vs. technology. Globalization is 1 to n; technology is 0 to 1. Globalizing old ways to create wealth results in devastation due to scarce resources — the tragedy of the commons. Create technology to create new value. Just make sure you are able to capture some of the value as well.

Startups. A startup gives you mastery not just over your own life, but over a small and important part of the world. Work with other people to get stuff done, but stay small enough so that you actually can.

Themes

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.

Monopoly

Under perfect competition, producer supply equilibrates with consumer demand, and every firm is undifferentiated and sells the same homogeneous commodity products. No one makes an economic profit, and businesses are all subject to a daily brutal struggle for survival.

The best companies, on the other hand, are monopolists: they are so good at what they do that no one else can offer a close substitute. A monopoly owns its market, can set its own prices, and can produce at the quantity and price combination that maximizes its profits. Monopoly is the condition of every successful business.

Monopolists tell lies to protect themselves, concealing their monopoly by exaggerating the power of their (nonexistent) competition. They frame their market as the union of several large markets so no one things they have a monopoly.

Non-monopolists lie by saying they're in a league of their own. They describe their markets extremely narrowly (as the intersection of various smaller markets) so they dominate by default, losing sight of competitive reality in favor of trivial differentiating factors.

This kind of focus on competition is destructive. It can make people hallucinate opportunities where none exist and copy others' successes (which only worked in the past) instead of carefully planning your own. However, when you have to fight, strike hard and end it quickly.

A great business is defined by its ability to generate cash flows in the future. Most of a tech company's value will come in 10 to 15 years — don't just focus on short-term growth; focus on durability and future cash flows.

Study the endgame before everything else — it's much better to be the last mover than the first; making the last great development in a specific market and enjoying years of monopoly profits.

Monopolies share some combination of four characteristics:

Proprietary technology. You can achieve a monopolistic advantage with proprietary technology that makes is difficult or impossible to replicate. Your product should be at least 10x better than its closest substitute in some important dimension — you can achieve this by inventing something completely new, radically improving an existing solution, or having superior integrated design.
Network effects. Network effects make your product more useful as more people use it. However, your product must deliver value to its very first set of users when the network is small — as a result, in most cases it's best to start with an especially small market.
Economies of scale. As you get bigger, your fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
Branding. A company has a monopoly over its own brand by definition. Create a strong brand to claim a monopoly.

Every startup should start with a very small market — the perfect target market is a small group of particular people, concentrated together, and served by few or no competitors. Once you create and dominate a niche market, gradually expand into related and slightly broader markets. Don't disrupt — avoid competition as much as possible.

All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.

Don't pursue many-sided mediocrity. Determine the best thing to do, then do it. Be great at something substantive — be a monopoly of one.

Power laws

Never underestimate exponential growth.

Venture returns follow a power law as well: a very small handful of companies radically outperform all others. The best investment in a successful fund will equal or outperform the entire rest of the fund combined, and good VCs single-mindedly pursue these companies that can become overwhelmingly valuable instead of focusing on diversification.

As a startup founder, it then matters what you do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.

The power law means that differences between companies will dwarf the differences in roles inside companies, and people who understand this will hesitate before founding a new venture. You could have 100% of the equity, but if it fails you’ll have 100% of nothing. On the other hand, you can become tremendously successful by joining the very best company while it's growing fast.

The power law applies to most things. One market will probably be better than all others. One distribution strategy usually dominates all others.

Secrets

What valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable.

Four social trends have conspired to root out belief in secrets:

Incrementalism. We are taught that the right way to do things is to proceed one very small step at a time, day by day.
Risk aversion. People are scared of secrets because they are scared of being wrong.
Complacency. Why search for a new secret if you can comfortably collect rent on everything that has already been done?
Flatness. Globalization leads to a perception of the world as one homogeneous, highly competitive marketplace — "new" isn't possible because someone smarter or more creative would have discovered it already.

The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers. Look where no one else is looking — are there any fields that matter but aren't taught, aren't standardized and institutionalized?

If you find a secret, tell only whomever you need to, and no more. You can only build a great company around a secret if it's hidden from the outside — anyone you share it with will become a fellow conspirator.

Hiring and culture

Every great company is unique, but there are a few things that every business must get right at the beginning. A startup messed up at its foundation cannot be fixed.

The first and most crucial decision is whom to start it with. Think soberly (however unromantic it is) about what could go wrong. Make sure you share a prehistory.

Think about three structural 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?

Stick to a board of 3. Make sure everyone is full-time. Favor equity versus cash compensation to incentivize the right things.

How do you recruit? Everyone claims to have valuable stock, smart people, or pressing problems. Stand out in two ways: your mission and your team. Explain not why it's important in general, but why you're doing something compelling and important that no one else is going to get done.

From the outside, everyone at your company should be different in the same way — a tribe of like-minded people fiercely devoted to the company’s mission. Hire people who actually enjoy working together and share an understanding of the world.

On the inside, every individual should be sharply distinguished by her work. Job assignments aren’t just about the relationships between workers and tasks; they’re also about relationships between employees. Defined roles reduce conflict — every employee should be evaluated only on one unique thing. Eliminating competition for the same responsibilities makes it easier for everyone to build long-term relationships that transcend mere professionalism.

Sales

Sales works best when hidden — we only react negatively to awkward, obvious salesmen. This is why people overestimate the relative difficulty of science and engineering — the challenges of those fields are obvious. It takes hard work to make sales look easy.

Always think of distribution as something essential to the design of your product. Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true — no matter how good the product, you have a bad business if you have no effective way to sell it.

The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC).

The higher the price of your product, the more you have to spend to make a sale, and the more it makes sense to spend it. Types of sales:

Complex sales. Average deal size is $1M or more. Every detail of every deal requires close personal (read: CEO) attention.

Personal sales. Less complex; $10k-$100k deal sizes. Establish a process by which a sales team of modest size can move the product to a wide audience.

Dead zone. In between personal sales (salespeople required) and traditional advertising (no salespeople required) the product needs a personal sales effort, but the price point cannot justify sending an actual person to every prospective customer.

Marketing and advertising. Good for relatively low-priced products that have mass appeal but no viral distribution. Think about advertising for your startup only when CAC and CLV make every other distribution channel uneconomical.

Viral marketing. Core functionality of the product encourages users to invite their friends to become users too. Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.

One of these methods is likely to be far more powerful than every other for any given business: distribution follows a power law of its own. If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.

Note that even if your particular product doesn't need media exposure to acquire customers because you have a viral distribution strategy, the press can help attract investors and employees.

Conclusion

Computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.

Technology is the one way for us to escape competition in a globalizing world. Better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more.

Main questions every business must answer:

The Engineering Question. Can you create breakthrough (10x better) 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 lesson for business is that we need founders. A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. A great founder can bring out the best work from everybody at his company.

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.