Zero to one by Peter Thiel
Notes on startups, or how to build the future.
(Book version of Theil’s famous CS183 course at Stanford. He is
one of the co-founders of PayPal. He implies the importance of building a
monopoly business)
Every moment in business happens only once. The art of creating a
singular, as is the moment of creation, and the result is something fresh and
strange.
Horizontal progress is easy to imagine because we already know
what it looks like. Vertical or intensive progress means during new things -
going from o to 1. Vertical progress is harder to imagine because it requires
doing something nobody else has ever done.
Nietzsche wrote, “Madness is rare in individuals - but in groups,
parties, nations and ages it is the rule. ‘Traitorous eight’ in business, small
group of people bound together by a sense of mission have changed the world for
the better. The ‘PayPal Mafia’ created unicorn business of their own, other
than PayPal as a group itself (YouTube, Spacex, for example). \\
The entrepreneurs who stuck with Silicon Valley learned four big
lessons from the dot-com crash that still guide business thinking today.
1, Make incremental advances - grand vision inflated the bubble,
so they should not be indulged. Small incremental steps are the only safe path
forward
2. Stay lean and flexible - You should try things out, ‘iterate’
and treats entrepreneurship as an agnostic experimentation.
3. Improve on the competition - 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 the product, not sales - technology is primarily about
product development, not distribution.
Opposite four principles are probably more correct:
- It is better to risk boldness than a triviality
- A bad plan is better than no plan
- Competitive markets destroy profits
- Sales matters just as much as the product.
‘Perfect competition’ is considered both the ideal and the default
state in Economics 101. However, under perfect competition, in the long run no
company makes an economic profit.
The lesson for entrepreneurs is clear: if you want to create and
capture lasting value, don’t build an indifferent commodity business.
During dot.com crash, both paypal and x.com(Elon’s similar
venture) made an mutual agreement to merge rather than compete head-on and thus
successfully survived the dot.com crash. Sometimes you do have to fight and
sometimes, you need to make mutual understanding to avoid losing on both side.
When there is to fight, you should fight and win.
This advice can be heard to follow because pride and honor can get
in the way. Hence Hamlet:
“Exposing what is mortal and unsure
To all that fortune, death and danger dare,
Even for an egg-shell. Rightly to be great
is not to stir without great argument,
But greatly to find quarrel in a straw
When honor’s at the stake.”
Characteristics of monopoly:
Proprietary technology:
Proprietary technology is the most substantive advantage a company
can have because it makes your product difficult or impossible to replicate.
(Google’s search, facebook’s social network for example). 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 easiest way to make a 10x improvement is to invent something
completely new.
Or you can radically improve an existing solution: once you are
10x better, you escape competition.
Network effects
Network effects make a product more useful as more people use it.
Initially when fax machine started to appear in the market, more people has fax
machine, the exponential was the network effect than only two people having it.
Paradoxically, then, network effects business must start with esp. small
markets. This is why successful network business rarely get started by MBA
types: the initial markets are so small that they often don’t even appear to be
business opportunities at all.
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.
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.
The perfect target market for a startup is a small group of
particular people concentrated together and served by few or no competitors. In
practice a large market will either lack a good starting point or it will be
open to competition, so it is hard to ever reach that 1%.
If anything, too many people are starting their own companies
today. 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 is growing fast. Even if
you are extraordinarily talented, you should not necessarily start your own
company.
Four social trends have conspired to root our )PayPal) belief in
secrets.
1. Incrementalism - start small was one of the success factors of
PayPal.
2. Risk aversion- People are scared of secrets because they are
scared of being wrong. By definition, a secret has not been vetted by the
mainstream.
3. Complacency - social elites have the most freedom and the ability
to explore new thinking, but they seem to be believe in secrets the least.
4. Flatness - people perceive the world is homogeneous - world is
flat.
How must you see the world if you don’t believe in secrets? If
today’s conventions are correct, we can afford to be smug and complacent:
“God's in his heaven — All's right with the world’ (In other words, God is in
heaven, separated from humanity, man is free to do as he pleases...All is right
with the world).
If you find a secret, you face a choice: do you tell anyone? or do
you keep it to yourself?
As Faust tells Wagner:
The few who knew what might be learned,
Foolish enough to put their whole heart on the show,
And reveal their feelings to the crowd below,
Mankind has always crucified and burned.
I beg you, friend, it’s now the dead of night,
We must break up this conversation.
Unless you have perfectly conventional beliefs it is rarely a good
idea to tell everybody everything that you know. A great company is a
conspiracy to change the world; when you share your secret, the recipient
becomes a fellow conspirator.
As Tolkien wrote in ‘The Land of the Rings:
‘The road goes ever on and on
Down from the door where it began”
Life is a long journey; the road marked out by the steps of
previous travelers has no end in sight. But later on in the tale, another verse
appears:
Still round the corner there may wait
A new road or a secret gate
And though I oft have passed them by
A day will come at last when I
Shall take the hidden paths that run
West of the Moon, East of the Sun.”
The road does not have to be infinite after all. Take the hidden
path.
Every company culture can be plotted on a linear spectrum:
Consultants at the extreme left and cult at the extreme right.
The best startups might be considered slightly less extreme kinds
of cults. The biggest difference is that cults tend to be fanatically wrong
about something important. People at a successful startup are fanatically right
about something those outside it have missed.
Sales
All salesmen are actors: their priority is persuasion, not
sincerity. That is why the word ‘salesman’. can be slur. Like acting, sales
works best when when hidden. This explains why almost everyone whose job
involves distribution has a job title that has nothing to do with those
things. People who sell advertising are called, account executives’. People who
sell customers work in ‘business development’. People who sell companies are
‘investment bankers’. And people who sell themselves are called, ‘politician’.
There is a reason for these redescriptions: none of us wants to be reminded
when we are being sold.
The most fundamental reason that even business people
underestimate the importance of sales the systematic effort to hide it at every
level of every field in a world of secretly driven by it.
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