Zero to One – Peter Thiel

Here are 16 key takeaways from Peter Thiel’s book – Zero to One. The book has a ton of insights for those looking to start up their own business or even those who operate a business in a corporate setup.

1. Zero to One means doing something that nobody has done before – driving progress in previously unimagined ways.

Progress can take one of two forms. Horizontal or extensive progress means copying things that work – going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things – going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. If you take one typewriter and build 100, you have made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.

2. A startup allows new thinking and space to get things done

New technology tends to come from new ventures – startups. The easiest explanation for this is negative: it’s hard to develop new things in big organizations, and it’s even harder to do it by yourself. Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk. In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work. At the other extreme, a lone genius might create a classic work of art or literature, but he could never create an entire industry. Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can. Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.

3. Think for yourself – draw your own conclusions instead of following crowd wisdom.

Several lessons could be drawn from the 90s dot-com crash, for example:

make incremental advances, stay lean, improve on the competition, focus on product not sales. However, the exact opposite lessons seem more correct: it is better to risk being bold rather than trivial (think big), a bad plan is better than no plan, competitive markets destroy profits, sales are as important as product. To build the next generation of companies, we must abandon the beliefs created after the crash. That doesn’t mean the opposite ideas are automatically true: you can’t escape the madness of crowds by dogmatically rejecting them. The most contrarian thing of all is not to oppose the crowd but to think for yourself.

4. Creating value is not enough – you have to capture some of the value you create. The more differentiated your product, the higher your chances to build and capture value.

Creating value is not enough – you also need to capture some of the value you create. Even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012 the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits – more than 100 times the airline industry’s profit margin that year. Google makes so much money that it’s now worth three times more than every U.S. airline combined. If you want to create and capture lasting value, don’t build an undifferentiated commodity business.

5. Monopoly profits (from highly differentiated offerings) allow for not just value capture but also the ability to transcend the daily brute struggle for survival.

If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you’ll need to squeeze out every efficiency: that’s why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. The competitive ecosystem pushes people toward ruthlessness or death.
A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world. Google’s motto—“Don’t be evil”—is in part a branding ploy, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

6. Tech companies that can take time (and investment) to build but can capture monopolistic profits in future are favored by investors (hence high valuations).

Escaping competition will give you a monopoly, but even a monopoly is only a
great business if it can endure in the future. Compare the value of the New York Times Company with Twitter. Each employs a few thousand people, and each
gives millions of people a way to get news. But when Twitter went public in 2013, it was valued at $24 billion—more than 12 times the Times’s market capitalization even though the Times earned $133 million in 2012 while Twitter lost money. What explains the huge premium for Twitter? The answer is cash flow. A great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade. Simply stated, the value of a business today is the sum of all the money it will make in the future. An Old Economy business (like a newspaper) might hold its value if it can maintain its current cash flows for five or six years, but their cash flows will probably dwindle over the next few years when customers move on to newer and trendier alternatives. Technology companies follow the opposite trajectory. They often lose money for the first few years: it takes time to build valuable things, and that means delayed revenue. Most of a tech company’s value will come at least 10 to 15 years in the future.

If you focus on near-term growth above all else, you miss the most important
question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.

7. Proprietary technology, network effects, economies of scale and branding – these drive monopoly effects.

Analyzing your business according to a few characteristics can help you think about how to make it durable.

1) 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 10X better than its closest substitute in some important dimension to lead to a real monopolistic advantage.

2) Network effects make a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too.
3) Scale A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero. Service businesses are difficult to make monopolies.

4) Branding: A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.

8. Start small – dominate a niche market before expanding.

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. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. Any big market is a bad choice, and a big market already served by competing companies is even worse. Even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero. Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. Amazon shows how it can be done. Jeff Bezos very deliberately started with books. Amazon became the dominant solution for anyone located far from a bookstore or seeking something unusual. Amazon then had two options: expand the number of people who read books, or expand to adjacent markets. They chose the latter, starting with the most similar markets: CDs, videos, and software. Amazon continued to add categories gradually until it had become the world’s general store. Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets- a part of their founding narrative.

9. Focus on cash flows into the future

You’ve probably heard about “first mover advantage”: if you’re the first entrant into
a market, you can capture significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. 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.

10. Do not be a hostage to “luck” – you can control your own (and your startup’s) destiny

The most contentious question in business is whether success comes from luck or skill. You can expect the future to take a definite form or you can treat it as hazily
uncertain. If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it. When people lack concrete plans to carry out, they use formal rules to assemble a portfolio of options. A definite view, by contrast, favors firm convictions. A definite person determines the one best thing to do and then does it. A business with a good definite plan will always be underrated in a world where people see the future as random. A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.

11. A few big bets produce the biggest outcomes – spraying and praying is suboptimal when aiming for outsized returns and domination.

The power law – so named because exponential equations describe severely unequal distributions – is the law of the universe (for example, a small number of objects in the solar system comprise a vast majority of its mass). Venture returns follow a power law: a small handful of companies radically 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. VCs must find the handful of companies that will successfully go from 0 to 1. An entrepreneur makes a major investment just by spending her time working on a startup. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now. Investors who understand the power law make as few investments as possible. People who understand the power law will hesitate more than others when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast. You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing). Time and decision-making themselves follow a power law, and some moments matter far more than others. In a power law world, you can’t afford not to think hard about where your actions will fall on the curve.

12. Opportunities present themselves to those who actively seek them

You can’t find secrets without looking for them. The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers. The same is true of business. Great companies can be built on open but unsuspected secrets about how the world works. Consider the Silicon Valley startups that have harnessed the spare capacity that is all around us but often ignored. Before Airbnb, travelers had little choice but to pay high prices for a hotel room, and property owners couldn’t easily and reliably rent out their unoccupied space. Airbnb saw untapped supply and unaddressed demand where others saw nothing at all. The same is true of private car services Lyft and Uber. 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.

13. Build your business on solid foundations – a startup with a bad foundation cannot be fixed

A startup messed up at its foundation cannot be fixed. Bad decisions made early on – if you choose the wrong partners or hire the wrong people, for example—are very hard to correct after they are made. It may take a crisis on the order of bankruptcy before anybody will even try to correct them. 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.

As a general rule, everyone you involve with your company should be involved fulltime. Anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day. If you get the founding moment right, you can do more than create a valuable company: you can steer its distant future toward the creation of new things instead of the stewardship of inherited success. You might even extend its founding indefinitely.

14. Equity ownership creates better aligned incentives than salary

A company does better the less it pays the CEO. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive will focus on increasing the value of the company as a whole. Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself. Equity is the one form of compensation that can effectively orient people toward creating value in the future. Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself. Equity is the one form of compensation that can effectively orient people toward creating value in the future. Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret. 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. Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.

14. Recruit people who are similar in their belief in the startup and aligned to its core values – but bring in complementary skillsets and have clearly defined roles

Recruiting is a core competency for any company. It should never be outsourced.
You need people who are not just skilled on paper but who will work together cohesively after they’re hired. You’ll attract the employees you need if you can explain why your mission is compelling. However, even a great mission is not enough. The kind of recruit who would be most engaged as an employee will also wonder: “Are these the kind of people I want to work with?” You should be able to explain why your company is a unique match for him personally. 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. On the inside, every individual should be sharply distinguished by her work. Every employee’s one thing should be unique, and should be evaluated only on that one thing – defining roles reduces conflict.

15. Customers will not come just because you build it – you have to drive sales

Customers will not come just because you build it. 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. Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. Two metrics set the limits for effective distribution. 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). In general, the higher the price of your product, the more you have to spend to make a sale. In between personal sales (salespeople required; high value products) and traditional advertising (no salespeople required) there is a dead zone. Suppose you create a software service that helps convenience store owners track their inventory and manage ordering. For a product priced around $1,000, there might be no good distribution channel to reach the small businesses that might buy it. Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution. Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical. A product is viral if its core functionality encourages users to invite their friends to become users too: 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.

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. This is counterintuitive for most entrepreneurs, who assume that more is more. But the kitchen sink approach—employ a few salespeople, place some magazine ads, and try to add some kind of viral functionality to the product as an afterthought—doesn’t work. Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure. 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.

16. Summary – the 7 questions every startup must answer
  1. The Engineering Question: Can you create 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?

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