Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel

Tons of interesting takeaways from Peter Thiel about building businesses that create things that have never existed before, rather than interating on something that already exists. Especially helpful to think through these concepts at the beginnings of new projects.


– The next Bill Gates won’t build an operating system. The next Larry Page and Sergey Brin won’t create a search engine. The next Mark Zuckerberg won’t create a social network. Don’t try to copy these guys, learn from them instead. Find new and untried paths.

– Rather than copying a model of what other people have already done or doing more of what we already know how to do (going from 1 to n), invest in the difficult task of creating new things (going from 0 to 1). Build companies that create new things. This kind of progress is difficult to imagine because it requires doing something nobody else has ever done.

– Stop looking for a formula for success or innovation, it doesn’t exist. Think about business from first principles instead of formulas. This will help you find value in unexpected places.

The Challenge of the Future

– Ask the question: What important truth do very few people agree with you on? A good answer takes the following form: “Most people believe in x, but the truth is the opposite of x”. Start with a preliminary question: “What does everybody agree on?” If you can identify a delusional popular belief, you can find what lies hidden behind it – the contrarian truth

– You need to work with other people to imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th – it’s hard to do it by yourself. But you also need to stay small enough so that you don’t get stuck in a bureaucratic hierarchy that moves slowly, and which has entrenched interests that cause it to shy away from risk. Stay as small as is needed to stay nimble. A new company’s most important strength is new thinking. And small size affords space to think. Take advantage of these strengths. Question received ideas and rethinking business and industries from scratch.

Party like it’s 1999

– Question what you think we know about the past. This is the first step to thinking clearly

– False startup dogma:

<ol>
 <li>Make incremental advances – Small, incremental steps are the only safe path forward</li>
 <li>Stay lean and flexible – You should not know what your business will do. Instead you should try things out, “iterate”, and treat entrepreneurship as agnostic experimentation</li>
 <li>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</li>
 <li>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. The only sustainable growth is viral growth</li>
</ol>

– The opposite principles are probably more correct:

<ol>
 <li>It’s better to risk boldness than triviality</li>
 <li>A bad plan is better than no plan</li>
 <li>Competitive markets destroy profits</li>
 <li>Sales and distribution matters just as much as product</li>
</ol>

– Ask yourself: How much of what you know about business is shaped by mistaken reactions to past mistakes?

All Happy Companies Are Different

– What valuable company is nobody building?

– Don’t build an undifferentiated commodity business. Avoid entering competitive markets where every firm is undifferentiated and sells the same homogenous products. Instead, build a monopoly: the kind of company that’s so good at what it does that no other firm can offer a close substitute

– Instead of spending your time trying to convince people that your company is exceptional, seriously consider whether that’s true. If you lose sight of competitive reality and focus on trivial differentiating factors, your business is unlikely to survive

Last Mover Advantage

– Beware focusing 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?”

– Characteristics of a monopoly

<ol>
 <li>Proprietary technology – As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. The clearest way to make a 10x improvement is to invent something completely new. Or you can radically improve an existing solution (i.e. Paypal made buying and selling on eBay at least 10x better, Amazon launched with at least 10x as many books as any other bookstore)</li>
 <li>Network effects – Network effects make a product more useful as more people use it, but you’ll never reap the benefits of a network effect unless your product is valuable to its very first users when the network is necessarily small. These businesses must start with especially small markets, so small that they often don’t even appear to be business opportunities at all</li>
 <li>Economies of scale – The business gets stronger as it gets bigger and the fixed costs of creating a product (engineering, management, office space) can be spread out over even greater quanitities of sales. A good startup should have the potential for great scale built into its first design</li>
 <li>Branding – Creating a strong brand is a powerful way to claim a monopoly, but beginning with brand rather than substance is dangerous. The big question is what products will you create? No technology company can be built on branding alone</li>
</ol>

– Start small and monopolize. Every startup should start with a very small market that it can dominate. Always err on the side of starting too small. It’s much easier to reach a few thousand people who really need your product than to try to compete for the attention of millions of scattered individuals. If you think your initial market might be too big, it almost certainly is. But small doesn’t mean non-existant. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors

– Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. For example, Amazon went from books > CD’s > videos > software > and then continued adding categories until it had become the world’s general store. Facebook started with just Harvard students, then expanded one school at a time until it had every college, then expanded beyond colleges. eBay started with Beanie Baby obsessives > small-time hobbyists > and expanded one category at a time.

– Sequencing markets correctly is underrated, and it takes discipline to make the core progression – first to dominate a specific niche and then to scale to adjacent markets – part of their founding narrative. As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible

Create a concrete plan for the future

– Avoid conventional wisdom that says to keep your options open and get good at a large number of skills. Instead, devote yourself single-mindedly to one thing of substance.

– Favor firm convictions and concrete plans to carry out. Avoid allowing process to trump substance. Instead of pursuing many-sided mediocrity and calling it “well-roundedness” (and come what may, being ready – for nothing in particular), determine the one best thing to do and then do it. Instead of working tirelessly to make oneself indistinguishable, strive to be great at something substantive — to be a monopoly of one.

– An indefinite optimist expects the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely. Instead, he chooses to keep his options open. But how can the future get better if no one plans for it? Find your way back to a definite future, with concrete plans to create new value.

The power law

– Think in power law terms: a small few radically out-strip all rivals. You can’t afford not to think hard about where your actions will fall on the curve.

– Think of yourself as an investor. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now. Conventional wisdom tells says: “Don’t put all your eggs in one basket.” Diversification is regarded as a source of strength. The more you dabble, the more you are supposed to have hedged against the uncertainty of the future. But life is not a portfolio. You can’t run dozens of companies at the same time and then hope that one of them works out well. You can’t keep dozens of equally possible careers in ready reserve. And the education system reassure you that “it doesn’t matter what you do, as long as you do it well.” That is completely false. It does matter 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 best investment in a successful venture fund equals or outperforms the entire rest of the fund comnined. This is a good metaphor for one’s career. Only invest in things that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. Every single company in a good venture portfolio must have the potential to succeed at vast scale.

– Investors who understand the power law should make as few investments as possible. People who understand the power law should 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

– If you do start your own company, you must remember the power law to operate it well. The most important things are singular: One market will probably be better than all others. One distribution strategy usually dominates all others, too. Time and decision-making themselves follow a power law, and some moments matter far more than others. However, you can’t trust a world that denies the power law to accurately frame your deciions for you. It might even be secret.

How to find secrets

– Avoid the following four dynamics, all of which will prevent you from even looking for secrets:

<ol>
 <li>Incrementalism – The right way to do things is to proceed one very small step at a time, day by day, grade by grade. If you over-achieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange for doing exactly what’s asked of you (and for doing it just a bit better than your peers), you’ll get an A</li>
 <li>Risk aversion – People are scared of being wrong. By definition, a secret hasn’t been vetted by the mainstream. If your goal is to never make a mistake in your life, you won’t look for secrets.</li>
 <li>Complacency – Why search for a new secret if you can comfortably collect rents on everything that has already been done?</li>
 <li>Flatness – 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?” The world seems to big for any individual to contribute something unique</li>
</ol>

– Remember: a world without secrets would enjoy a perfect understanding of justice. Every injustice necessarily involves a moral truth that very few people recognize early on. In economics, disbelief in secrets leads to faith in efficient markets. But the existence of financial bubbles shows that markets can have extraordinary inefficiencies. Don’t stop believing in secrets.

– You can’t find secrets without looking for them. There are many more secrets left to find, but they will yield only to relentless searchers. There is more to do in science, medicine, engineering, and in technology of all kinds. We could cure cancer, dementia, and all the diseases of age and metabolic decay. We can find new ways to generate enegy that free the world from conflict over fossil fuels. We can invent faster ways to travel from place to place over the surface of the planet. We can even learn how to escape it entirely and settle new frontiers. But we will never learn any of these secrets unless we demand to know them and force ourselves to look. The same is true of business. Great companies can be built on open but unsuspected secrets about how the world works.

– There are two kinds of secrets: secrets of nature and secrets about people. Natural secrets exist all around us. To find them, one must study some undiscovered aspect of the physical world. 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 distict questions to ask: (1) What secrets is nature not telling you? (2) What secrets are people not telling you? What are people not allowed to talk about? What is forbidden or taboo?

– The best place to look for secrets is where no one else is looking. Ask yourself: are there any fields that matter but haven’t been standardized and institutionalized? For example, physics is a real major at all major universities and it’s set in it’s ways. The opposite of physics is astrology, but astrology doesn’t matter. What about something like nutrition? Nutrition matters for everybody, but you can’t major in it at Harvard. Most top scientists go into other fields. Most of the big studies were done 30 or 40 years ago, and most are seriously flawed. There’s plenty more to learn. It won’t be easy, but it’s not obviously impossible: exactly the kind of field that could yield secrets.

– If you find a secret, do you tell anyone? It’s rarely a good idea to tell everyone. There’s a golden mean between telling nobody and telling everybody – and that’s a company. 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

– A startup messed up at its foundation cannot be fixed

– Beginnings are special. They’re qualatatively different from all that comes afterward. Fundamental questions are open for debate. After a certain point they’re hard to change. 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 job is to get the first things right, because you cannot build a great company on a flawed foundation.

– Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce. In choosing a founder, don’t settle on some random person you just met. Technical 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 pre-history before they start a company together.

– A company does better the less it pays its CEO. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary, or they risk becoming more like a politicial than a founder. 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 aggresively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.

– Low CEO pay also sets the standard for everyone else. If a CEO doesn’t set an example by taking the lowest salary in the company, he can do the same thing by drawing the highest salary. So long as that figure is still modest, it sets an effective ceiling on cash compensation.

– 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

– Perks without substance don’t work (i.e. ping pong tables, free food and snacks, yoga classes, massages, etc). You can’t accomplish anything meaningful by hiring an interior designer to beautify your office, an HR consultant to fix your policies, or a branding specialist to hone your buzzwords.

– You don’t assemble a mafia by sorting through resumes and simply hiring the most talented people. Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together. If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well — even in purely financial terms. Aim to have your company be tightly knit instead of transactional. Stronger relationships will make your team not just happier and better at work but also more successful in your careers even beyond this company. So set out to hire people who will actually enjoy working together. They have to be talented, but even more than that they have to be excited about working with the people on your team.

– 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 need to answer this question: Why should the 20th employee join your company? Talented people don’t need to work for you. They have plenty of options. Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige. General and undifferentiated pitches (i.e. your stock options will be worth more here, you’ll get to work with the smartest people in the world, you can help solve the world’s most challenging problems, etc) don’t say anything about why a recruit should join your company instead of many others. The only good answers are specific to your company, so you won’t find them in any book. 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 it’s importance unique (e.g. at PayPal, if you were excited by the idea of creating a new digital currency to replace the US dollar, they wanted to talk to you. If not, you weren’t the right fit).

– Even a great mission is not enough. The kind of recruit who would be the 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. And if you can’t do that, he’s probably not the right match.

– Don’t fight the perk war. Anybody who would be more powerfully swayed by free laundry pickup or pet day care would be a bad addition to your team. Just cover the basics like health insurance and then promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.

– Startups have limited resources and 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. It doesn’t matter what people look like or which countries they come from, but you need every new hire to be equally obsessed with what you’re trying to accomplish (e.g. creating digital currency that would be controlled by individuals instead of governments, in PayPal’s case)

– Defining roles reduces conflict between employees. Most fights inside a company happen when colleagues compete for the same responsibilities. Startups face an especially high risk of this since job roles are fluid at the early stages.

If you build it, will they come?

– In the startup world, we underestimate the importance of distribution (everything it takes to sell a product). People assume distribution should flow magically from the creation of a good product. But customers will not come just because you build it, you have to make that happen.

– It takes hard work to make sales look easy. There’s a wide range of sales ability. If you don’t know any grandmasters, it’s because their art is hidden in plain sight. Sales works best when hidden: none of us wants to be reminded when we’re being sold.

– Think of distribution as something essential to the design of your product. 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 it not true.

– Distribution methods:

<ul>
 <li>Complex sales – Average sale is seven figures or more. Every detail of every deal requires close personal attention. It might take months to develop the right relationships. You might make a sale only once every year or two. Then you’ll usually have to follow up during installation and service the product long after the deal is done. Works best when you don’t have “salesmen.” At this price point, buyers want to talk to the CEO, not the VP of Sales.</li>
 <li>Personal sales – Average deal size between $10,000 and $100,000. Usually the CEO won’t have to do all the selling herself. The challenge here isn’t about how to make any particular sale, but how to establish a process by which a sales team of modest size can move the product to a wide audience. </li>
 <li>Distribution doldrums – Inbetween personal sales and traditional advertising there is a dead zone. At lower price points there might be no good distribution channel to reach the customers that might buy it. Even if you have a clear value proposition, how do you get people to hear it? Advertising would be too broad or too inefficient. The product needs a personal sales effort, but at that price point, you simply don’t have the resources to send an actual person to talk to every prospective customer. Distribution is the hidden bottleneck for many SMB’s.</li>
 <li>Marketing and advertising – Work for relatively low-priced products that have mass appeal but lack any method of viral distribution. It can work for startups too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.</li>
 <li>Viral marketing – A product’s core functionality encourages users to invite their friends to become users too. Every time someone shares with a friend on Facebook or makes a payment using PayPal, they naturally invite more and more people into the network. Whoever is the first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.</li>
</ul>

– 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. Most businesses get zero distribution channels to work. 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.

Man and machine

– Computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empowe people rather than try to make them obsolete. People have intentionality — we form plans and make decisions in complicated situations. We’re less good at making sense of enourmous amounts of data. Computers are exactly the opposite: they excel at efficient data processing, but they struggle to make basic judgements that would be simple for any human.

– Example: PayPal was losing $10+ million each month to credit card fraud. They were processing thousands of transactions per minute, no human could review each one for quality control. They tried to automate a solution with software that automatically identified and cancelled bogus transactions in real time. But thieves would quickly catch on and change their tactics – the PayPal team was dealing with an adaptive enemy, and software can’t adapt in response. They took a new approach: the computer would flag the most suspicious transactions on a well-designed user interface, and human operators (who were much more difficult to fool) would make the final judgement as to their legitimacy. It worked.

– If humans and computers together could achieve dramatically better results than either could attain alone, what other valuable businesses could be built on this core principle? Palantir uses the same human-computer hybrid approach from PayPal’s security system to identify terrorist networks and financial fraud for government organizations. Software analyzes the data the government feeds it and flags suspicious activities for a trained analyst to review. LinkedIn has done the same thing for recruiters.

Seven questions that every business must answer

– The engineering question – Can you create breakthrough technology instead of incremental improvements? A great technology company should have proprietary technology an order of magnitude better than its nearest substitute. Merely incremental improvements often end up meaning no improvement at all for the end user.

– 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? 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 viscious competition. Exaggerating your own uniqueness is an easy way to botch the monopoly question.

– The people question – Do you have the right team? If it’s an engineering problem, are nerds running the company? Real technologists wear T-shirts and jeans. Pass on any technology company whose founders dress up for pitch meetings.

– The distribution question – Do you have a way to not just create but deliver your product? Selling and delivering the product is at least as important as the product itself.

– The durability question – Will your market position be defensible 10 and 20 years into the future? What will the world look like in 10-20 years, and how will your business fit in.

– The secret question – Have you identified a unique opportunity that others don’t see? Be wary of justifying your company’s existence with conventional truths (e.g. cleantech companies noting the need for a cleaner world, edtech companies saying the education system is broken, etc). Don’t delude yourself into believing that an overwhelming social need for (alternative energy) solutions implies an overwhelming business opportunity for (cleantech) companies of all kinds. Avoid describing your bright future using broad conventions on which everybody agrees. Great companies have secrets: specific reasons for success that other people don’t see.

– The best projects are likely to be overlooked, not trumpeted by a crowd. The best problems to work on are often the ones nobody else even tried to solve.

– The 1990s had one big idea: The internet is going to be big. But too many internet companies had exactly that same idea and no others. An entrepreneur can’t benefit from macro-scale insights unless his own plans begin at the micro-scale. No sector will ever be so important that merely participating in it will be enough to build a great company.

– A valuable business must start by finding a niche and dominating a small market. Paradoxically, the challenge for entrepreneurs is to think small.