Zero to One by Peter Thiel
These are the notes I took while reading Zero to One by Peter Thiel and Blake Masters. I had initially read Blake’s notes from Peter Thiel teaching CS183 at Stanford.
Additional notes I’ve taken while reading other books can be found here.
Zero to One
Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
It’s easier to copy than to make something truly new. Doing something we already know and improving it takes the world from 1 to n (adding more of something familiar). But every time we create something new, we go from 0 to 1.
One of Peter Thiel’s favorite interview questions: "What important truth do very few people agree with you on?"
A good answer takes the format of “most people believe in X, but the truth is the opposite of X.”
A new company’s most important strength is new thinking, even more important than nimbleness. Small size affords space to think.
All Happy Companies are Different
The business version of the contrarian question: “what valuable company is nobody building?”
It’s possible to create a lot of value without becoming valuable yourself. You need to capture some of the value you create.
Airlines serve millions of passengers each year and create hundreds of billions in value. In 2012, the average airfare was $178, but the airlines only made $.37 per passenger.
Google’s 2012 revenue was $50 billion (versus $160 billion for the airlines) but kept 21% of that revenue as profit. That’s more than 100x the airlines’ profit margin that year. Google is now worth 3x more than every US airline combined.
Competition
Monopoly means products that benefit everyone and sustainable profits for the creator. Competition means no profits for anyone, no meaningful differentiation and a struggle for survival. Why do people believe that competition is healthy?
The Online Pet Store Market
Amid all the tactical questions - Who could price chewy dog toys most aggressively? Who could create the best super bowl ads? - these companies totally lost sight of the wider question whether the online pet supply market was the right space to be in. Winning is better than losing but everybody loses when the war isn’t one worth fighting.
Oracle intentionally accumulated enemies. Larry Ellison’s theory is that it’s always good to have an enemy as long as the enemy is large enough to appear threatening but large enough to actually threaten the company.
Last Mover Advantage
Escaping competition will give you a monopoly, but even a monopoly is only a great business if it can endure in the future.
A great business is defined by its ability to generate cash flows in the future (e.g. how investors expect Twitter to generate profits versus newspapers).
Any company with close substitutes will see its profits competed away. Nightclubs and restaurants are prime examples.
Valuable companies must grow and endure. Growth is easy to measure. Durability isn’t. You should be asking “will this business be around a decade from now?” Zynga and Groupon are two examples of short term growth distracting management from long term challenges and durability.
Characteristics of Monopolies
Monopolies have a combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.
Proprietary Technology
Proprietary technology is the most substantive advantage a company can have (e.g. Google’s search algorithms).
As a rule of thumb, proprietary technology must be 10x better than its closest substitute to lead to real monopolistic advantage. Anything less than an order of magnitude will probably be perceived as a marginal improvement.
The easiest way to 10x improve is to make something new. If there was nothing there before, the increase in value is theoretically infinite.
PayPal made buying and selling at least 10x better. Instead of making a check and waiting for it to clear, buyers could now pay as soon as the auction ended. Sellers received funds immediately and knew they were good.
Amazon’s first 10x improvement was offering at least 10x as many books as any other bookstore.
Network Effects
Paradoxically, network effects businesses must start with especially small markets. Facebook started with just Harvard students - designed to get all of Mark Zuckerberg’s classmates to sign up, not to sign up all the people on earth.
Economies of Scale
As businesses get larger, the fixed costs of creating a product (engineering, management, etc.) can be spread over even greater quantities of scale.
Start Small & Monopolize
Every monopoly dominates a large share of its market. Therefore every startup should start with a very small market. Always err on the side of starting too simple. The reason is simple: it’s easier to dominate a small market than a large one.
PayPal focused on a few high volume eBay “PowerSellers” - it’s easier to reach a few thousand people who really needed their product versus trying to compete for the attention of millions of scattered individuals.
The perfect target market for a startup is a small group of people concentrated together and served by few or no competitors.
1% of a $100 billion market is a red flag. Large markets lack a good starting point or are open to competition.
Scaling Up
Amazon faced two options when scaling up - expand the number of people who read books or expand to adjacent markets.
eBay initially worked well for intense interest groups, like Beanie Baby obsessives. Once it monopolized the Beanie Baby trade, eBay continued to cater to small time hobbyists until it became the most reliable marketplace for people trading online.
The Last Mover
It’s better to be the last mover - to make the last great development in a specific market and enjoy years or decades of monopoly profits.
Follow the Money
We don’t live in a normal world. We live under a power law.
A small handful of companies outperform all others. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies in the first place.
The biggest secret in VC is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
Therefore, VC’s should only invest in companies that have the potential to return the value of the entire fund.
The dozen largest tech companies were all ventured backed. Together those 12 companies are worth more than $2 trillion - more than all other tech companies combined.
Every individual is also an investor. When you choose a career, act on your belief that the work you do will be valuable decades from now.
Secrets
What valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable.
As globalization advances, people perceive the world as one homogenous, highly competitive marketplace: the world is “flat.” Given that assumption, anyone who might have had the ambition to look for a secret will first ask himself: 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 can dissuade people from even starting to look for secrets in a world that seems too big a place for any individual to contribute something unique.
A disbelief in secrets leads to a belief in an efficient market, but the existence of financial bubbles shows that markets can have extraordinary inefficiencies.
Great companies can be built on unsuspected secrets about how the world works - Airbnb has harnessed the spare capacity that is all around us but often ignored.
Competition and capitalism are opposites. Monopolies play down their monopoly status to avoid scrutiny while competitive firms play up their uniqueness.
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.
Foundations
Thiel’s Law: A startup messed up at its foundation cannot be fixed.
Bad decisions made early on - like choosing the wrong partners or hiring the wrong people - are very hard to correct after they are made.
Now when I consider investing in a startup, I study the founding teams.s Technicial abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they start a company together - otherwise they’re just rolling the dice.
Ownership, Possession and Control
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?
On The Bus or Off the Bus
Hiring consultants doesn’t work. Part time employees don’t work. Even working remotely should be avoided. Misalignment can creep in whenever colleagues aren’t together full time, in the same place, every day.
Cash is Not King
A company does better the less it pays the CEO - that’s one of the clearest patterns I’ve noticed from investing in hundreds of startups.
Low CEO pay sets the standard for everyone else. Aaron Levie was always careful to pay himself less than everyone else in the company. Four years after he started Box, he was still living two blocks away from HQ in a one bedroom apartment with no furniture except a mattress.
Cash offers pure optionality. Once you get your paycheck, you can do anything you want with it.
However, high cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future.
Granting different amounts of stock up front is sure to seem unfair. Resentment at this stage can kill a company, but there’s no perfect formula.
Early employees get the most equity because they take the most risk even if later employees end up being more crucial to the company’s success (e.g. the graffiti artist who painted the office walls in 2005 got stock eventually worth $200mm versus the talented engineer who joined in 2010 and maybe got $2mm in stock).
Stock isn’t liquid like cash. It’s tied to one specific company. And if that company doesn’t succeed - it’s worthless. Equity is powerful precisely because of these limitations. It’s a preference for the long term and a commitment to increasing your company’s value in the future.
The Mechanics of Mafia
What would the ideal company culture look like? Employees should love their work. They should enjoy going to the office so much that formal business hours become obsolete and nobody watches the clock. The workspace should be open, not cubicle, and workers should feel at home: beanbag chairs and Ping-Pong tables might outnumber file cabinets.
Since time is your most valuable asset, it’s odd to spend it working with people you don’t envision a long term future with tougher. If`you can’t count durable relationships among the fruits of your time at work - you haven’t invested your time well.
From the start, I wanted PayPal to be tightly knit instead of transactional. I thought stronger relationships would make us not just happier and better at work but also more successful in our careers even beyond PayPal. ``So we set out to hire people who would actually enjoy working together. 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`.
Talented people don’t need to work for you. They have plenty of options. Why would someone be engineer #20 at your company versus going to work at Google for more $$$ and prestige?
The only two good answers are (1) about your mission and (2) answers about your team. PayPal rallied around the idea of creating a new digital currency to replace the US Dollar.
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.
Cults & Consultants
The opposite of a cult is a consulting firm like Accenture. It lacks a distinctive misson of its own. Individual consultants are regularly dropping in and out of companies they have no long term connection whatsoever.
If you build it, will they come?
If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business - no matter how good the product.
PayPal wanted the most valuable users first. The most obvious segment in email based payments was the millions of emigrnts still using Western Union to wire money back home, but their transactions were too infrequent, hence the focus on the smaller niche of 20,000 eBay PowerSellers.
Man and Machine
Computers are efficient at data processing but struggle to make basic judgements that would be simple for any human. For example, one of Google’s super computers made headlines in 2012 when, after scanning 10 million YouTube thumbnails, it learned to identify a cat with 75% accuracy. It seems impressive up until realizing a four year old courld do the task flawlessly.
This premise is what led to PayPal’s hybrid approach to identifying bogus transactions. The computer would flag the most suspictious transcations and human operators would make the final judgement of their legitimacy. Humans and machines together achived dramatically better results than either could do on their own.
Why do so many people miss out on complimentarity?
Don’t ask what problems can be solved by computer alone. Instead ask “how can computers help humans solve hard problems?”
For example, LinkedIn set out to transform how recruiters do their jobs. If LinkedIn had attempted to replace recruiters with technology, they wouldn’t have a business today.
The Seven Questions 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?
Customers won’t care about any particular technology unless it solves a particular problem in a superior way.
