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Zero to One: Notes on Startups, or How to Build the Future - Peter Thiel, Blake Masters

books, business20 min read

About the book



Some random quotes from beginning to end order. For the full context, please buy and read the book. I do this to help myself to quickly get the main ideas of the book.

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.

Technology is miraculous because it allows us to do more with less, ratcheting up our fundamentals capabilities to a higher level

Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.

1. The Challenge of The Future

Whenever I interview someone for a job, I like to ask this question: "What important truth do very few people agree with you on?"

When we think about the future, we hope for a future of progress. That progress can take 1 or 2 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.

2. Party Like It's 1999

The entrepreneurs who stuck with Silicon Valley learned 4 big lessons from the dot-com crash that still guide business thinking today:

  1. Make incremental advances: grand visions inflated the bubble, so they should not be indulged. Anyone who claims to be able to do something great is suspect, and anyone who wants to change the world should be more humble. Small, incremental steps are only safe path forward.
  2. Stay lean & flexible: all companies must be "lean", which is code for "unplanned". You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, "iterate", and treat entrepreneurship as agnostic experimentation.
  3. 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.
  4. 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. Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth.

And yet the opposite principles are probably more correct:

  1. It is better to risk boldness than triviality.
  2. A bad plan is better than no plan.
  3. Competitive markets destroy profits.
  4. Sales matters just as much as product.

3. All Happy Companies Are Different

If you want to create and capture lasting value, don't build an undifferentiated commodity business.

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.

Monopoly is the condition of every successful business.

"All happy families are alike, each unhappy family is unhappy in its own way." Business is the opposite. 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.

4. The Ideology of competition

Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival

Sometimes you do have to fight. Where that's true, you should fight and win. There is no middle ground: either don't throw any punches, or strike hard and end it quickly.

If you can recognize competition as a destructive force instead of a sign of valye, you're already more sane than most.

5. Last Mover Advantage

Simply stated, the value of a business today is the sum of all the money it will make in the future.

Characteristics of monopoly:

  • 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. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market. The clearest way to make a 10x improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite. Or you can radically improve an existing solution: once you're 10x better, you escape competition.
  • Network Effects: network effects make a product more useful as more people use it.
  • Economies of Scale: a monopoly business gets stronger as it gets bigger: the fixed costs of creating a product 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. A good startup should have the potential for great scale built into its first design.
  • 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.

Building a monopoly:

  • Start Small and Monopolize: every startup should start with a small market. It's easier to dominate a small market than a large one.
  • Scaling Up: once you create and dominate a niche market, then you should gradually expand into related and slight broader markets.
  • Don't Disrupt: avoid competition as much as possible.

The last will be the first:

  • 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.
  • It's much better to be the last mover - that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.
  • The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision.

6. You Are not a Lottery Ticket

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.

You can also expect the future to be either better or worse than the present. Optimists welcome the future; pessimists fear it.

  • Indefinite Pessimism: an indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it. The indefinite pessimist can't know whether the inevitable decline will be fast or slow, catastrophic or gradual.
  • Definite Pessimism: a definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.
  • Definite Optimism: the future will be better than the present if he plans and works to make it better.
  • Indefinite Optimism: 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 reasons to design it concretely. Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones.

7. Follow the Money

Never underestimate exponential growth.

Facebook bought instagram in 2012 for $1 billion. $250,000 in 2010 became $78 million in 2012 - a 312x return in less than 2 years.

Venture capitals must find the handful of companies that will successfully go from 0 to 1 and then back them with every resource. Every single company in a good venture portfolio must have the potential to succeed at vast scale.

The biggest secret in VC is that the best investment in a successful fund outperforms the entire rest of the fund combined.

Only invest in companies that have the potential to return the value of the entire fund.

8. Secrets

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

You cant find secrets without looking for them. Great companies can be built on open but unsuspected secrets about how the world works.

The best place to look for secrets is where no one else is looking. Most people think only in terms of what they've been taught; schooling itself aims to impart conventional wisdom.

9. Foundation

A startup messed up at its foundation cannot be fixed.

Bad decisions made early - if you choose the wrong partners or hire the wrong people, for example - are very hard to correct after they are made.

Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.

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 prehistory before they start a company together - otherwise they're just rolling dice.

-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?

High pay incentivizes CEO 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, by contrast, will focus on increasing the value of the company as a whole.

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.

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. A cash bonus is slightly better than a cash salary - at least it's contingent on a job well done. But even so-called incentive pay encourages short-term thinking and value grabbing. Any kind of cash is more about the present than the future.

Early employees usually get the most equity because they take more risk, but some later employees might be even more crucial to a venture's success. Since it's impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret.

Most people don't want equity at all. People often find equity unattractive. It's not 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. Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and 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.

It lasts as long as a company is creating new things, and it ends when creation stops. 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.

10. The Mechanics of Mafia

No company has a culture; every company is a culture. A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.

The first team that I built has become known in Silicon Valley as the "PayPal Mafia" because so many of my former colleagues have gone on to help each other start and invest in successful tech companies: we sold PayPal to eBay for $1.5 billion in 2002; Elon Musk founded 1.2 SpaceX & 2. Tesla, Reid Hoffman co-founded 3. LinkedIn; Steve Chen, Chad Hurley & Jawed Karim founded 4. Youtube; Jeremy Stoppelman & Russel Simmons founded 5. Yelp; David Sacks co-founded 6. Yammer; I co-founded 7. Palantir. Today all 7 companies are worth more than $1 billion each. The culture was strong enough to transcend the original company.

We didn't assemble a mafia by sorting through résumé and simply hiring the most talented people. 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 career 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 exited about working specially with us. That was the start of the PayPal Mafia.

You need people who are not just skilled on paper but who will work together cohesively after they're hired. The first 4 or 5 might be attracted by large equity stakes or high-profile responsibilities. More importantly than those obvious offerings is your answer to this question: Why should the 20th employee join your company?

Talented people don't need to work for you; they have plenty of options. You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?

There are 2 general good answers: your mission and 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 its importance unique.

However a great mission is not enough. The 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.

Above all, don't fight the perk war. 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. You probably can't be the Google of 2014 in terms of compensation or perks, but you can be like the Google of 1999 if you already have good answers about your mission and team.

From outside, everyone in your company should be different in the same way. On the inside, every individual should be sharply distinguished by her work.

In most intense kind of organization, members hang out only with other members. They ignore their families and abandon the outside world. In exchange, they experience strong feelings of belonging, and maybe get access to esoteric "truths" denied to ordinary people. We have a word for such organization: cults.

11. If You Build It, Will They Come?

There's a wide range of sales ability: there are many gradations between novices, experts, and masters. There are even sales grandmasters. If you don't know any grandmasters, it's not because you haven't encountered them, but rater because their art is hidden in plain sight.

Like acting, sales works best when hidden. None of us wants to be reminded when we're being sold.

2 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 it a sale - and the more it makes sense to spend it.

Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade. This will seem slow to any entrepreneur dreaming of viral growth. You might expect revenue to increase 10x as soon as customers learn about an obviously superior product, but that almost never happens.

Most sales are not particularly complex: average deal sizes might range between $10,000 and $100,000, and usually the CEO won't have to do all the selling himself. 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.

Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of rival distribution.

A product is viral if its core functionality encourages users to invite their friends to become users too.

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

Everybody has a product to sell - no matter whether you're an employee, a founder, or an investor. It's true even if your company consists of just you and your computer. Look around. If you don't see any salespeople, you're the salesperson.

12. Man and Machine

Everyone expects computers to do more in the future - so much more that some wonder: 30 years from now, will there be anything left for people to do? "Software is eating the world". "Will a machine replace you?"

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.

Men and machines are good at fundamentally different things. People have intentionality - we form plans and make decisions in complicated situations. We're less good at making sense of enormous 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.

When we design new computer technology to help solve problems, we get all the efficiency gains of a hyper-specialized trading partner without having to compete with it for resources. Properly understood, technology is the one way for us to escape competition in a globalizing world. As computers become more and more powerful, they won't be substitutes for humans: they'll be complements.

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? We would use the human-computer hybrid approach from PayPal's security system to identify terrorist networks and financial fraud. In 2004 we founded Palantir, a software company that helps people extract insight from divergent sources of information.

Think of what professionals do in their jobs today. Lawyers must be able to articulate solutions to thorny problems in several different ways - the pitch changes depending on whether you're talking to a client, opposing counsel, or a judge. Doctors need to marry clinical understanding with an ability communicate it to non-expert patients. And good teachers aren't just expert in their disciplines: they must also understand how to tailor their instruction to different individuals' interests and learning styles. Computers might be able to do some of these tasks, but they can't combine them effectively. Better technology in law, medicine, and education won't replace professionals; it will allow them to do even more.

Recruiting is part detective work and part sales: you have to scrutinize applicants' history, assess their motives and compatibility, and persuade the most promising ones to join you. Effectively replacing all those functions with a computer would be impossible. Instead, LinkedIn set out to transform how recruiters did their jobs. Today, more than 97% of recruiters use LinkedIn and its powerful search and filtering functionality to source job candidates, and the network also creates value for the hundreds of millions of professionals who use it to manage their personal brands. If LinkedIn had tried to simply replace recruiters with technology, they wouldn't have a business today.

Today's companies have an insatiable appetite for data, mistakenly believing that more data always create more value. But big data is usually dumb data. Actionable insights can only come from a human analyst.

There is room in between for sane people to build a vastly better world in the decades ahead. As we find new ways to use computers, they won't just get better at the kinds of things people already do; they'll help us to do what was previously unimaginable.

13. Seeing Green

  1. Engineering: can you create breakthrough technology instead of incremental improvements?
  2. Timing: is now the right time to start your particular business?
  3. Monopoly: are you starting with a big share or a small market?
  4. People: do you have the right team?
  5. Distribution: do you have a way to not just create but deliver your product?
  6. Durability: will your market position be defensible 10 and 20 years into the future?
  7. Secret: have you identified a unique opportunity that others don't see?

Whatever your industry, any great business plan must address every one of them. If you don't have good answers to these questions, you'll run into lots of "bad luck" and your business will fail. If you nail all 7, you'll master fortune and succeed.

Tesla is one of the few clean-tech companies that got the 7 questions right:

  • Technology: Tesla's technology is so good that other car companies rely on it
  • Timing: in January 2010 Tesla secured a $465 million loan from the U.S. It's unthinkable today. There was only 1 moment where that was possible, and Tesla played it perfectly.
  • Monopoly: Tesla started with a tiny submarket that it could dominate: the market for high-end electric sports cars. -Team: Elon describes his staff this way: "If you're at Tesla, you're choosing to be at the equivalent of Special Forces. There's the regular army, and that's fine but if you are working at Tesla, you're choosing to step up your game"
  • Distribution: Tesla decided to own the entire distribution chain.
  • Durability: unlike every other car company, at Tesla the founder is till in charge, so it's not going to ease off anytime soon.
  • Secrets: Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.

14. The Founders Paradox

The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.

The lesson for founders is that individual prominence and adulation can never be enjoyed except on the condition that it may be exchanged for individual notoriety and demonization at any moment - so be careful.

Above all, don't overestimate your own power as an individual. Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from everybody at his company. The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.