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

ZERO TO ONE

Zero is One is about how to build companies that create new models, products or markets. It's about the questions you must ask and answer to success in the business of doing new things.

The Challenge of the Future

A contrarian question Peter Thiel likes to ask:

"What important truth do very few people agree with you on?"

Good answers bring us closer towards looking into the future.

Horizontal (Extensive)Progress: copying things that work - going from 1 to n.

Vertical (Intensive) Progress doing new things - going from 0 to 1.

Globalization is a form of horizontal progress, taking things that work somewhere and making them work everywhere.

Technology, not limited to computers, is a form of vertical progress, it creates new possibilities.

Progress is not automatic.

"The smartphones that distract us from our surrounds also distract us from the fact that our surroundings are strangely old: only computers and communications have improved dramatically since midcentury."

Startups are better prepared to build new things as it's their main differentiator from incumbent large companies, who are slower to act and are more incentivized to protect the old.

Party like it's 1999

"Companies exist to make money, not to lose it."

"The first step to thinking clearly is to question what we think we know about the past."

The Mosaic browser was released in 1993, which enabled people to get online. It was soon renamed to Netscape and the company had grow internet adoption and led a successful IPO. Other tech companies like Yahoo and Amazon also went public around this time along with a swarm of other tech companies. The stock prices of these companies were skyrocketing. The only problem.. they weren't much or any money. Global unrest in Russia and parts of Asia made American Investors nervous about the worlds global economic stability. Many were looking for growth potential and saw tech companies enormous growth potentials and investment opportunities.

"Dot-com mania was intense but short - 18 months of insanity from September 1998 to March 2000. It was a Silicon Valley gold rush: there was money everywhere, and no shortage of exuberant, often sketchy people to chase it."

"The Nasdaq reached 5,048 at its peak in the middle of March 2000 and then crashed to 3,321 in the middle of April. By the time it bottomed out at 1,114 in October 2002, the country had long since interpreted the markets's collapse as a kind of divine judgment against the technological optimism."

Four Lessons from the dot-com crash

1. Make Incremental Advances Big plans don't fit at the starting line. Small, incremental steps are the only safe path forward.
2. Stay lean and flexible Iterate and learn about the business; treat it like an experiment. Lean is code for unplanned.
3. Improve on the competition "Don't try to create a new market prematurely." Use proven patterns to acquire existing customers and build from there.
4. Focus on product, not sales "Technology is primarily about product development not distribution."

Four additional lessons opposition of the prior

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 a product.

All Happy Companies are different

"What valuable company is nobody building?"

A company can create a lot of value without capturing enough of it.

In 2012 when the average airfare was $178, U.S airline companies were making about 37 cents per passenger trip. The total revenue for airlines was 160 million. Google brought in $50 billion in 2012 and capture 21% of that as profit, over 100 times the profit of all airlines combined.

Perfect competition vs Monopoly.

In Perfect competition, the price is determined by the market as too much competition commoditizes the market and brings down the price.

A monopoly owns its market, so it can set its own prices.

"The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don't build an undifferentiated commodity business."

"Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked."

They conceal their monopoly by exaggerating the power of their (nonexistent) competition.

Monopolists also conceal their monopoly by framing their market as the union of several large markets.

i.e Google's case: Search Engine + Mobile Phones + Wearable Computers + Self-Driving Cars

A monopolistic company can think about other things can money; non-monopolists can't. This has significant business implications.

Monopolies drive progress from the monopolist profits that they gain which allow them buffer to invest in long-term plans and finance ambitious research projects.

"In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every success business."

"All failed companies are the same: they failed to escape competition."

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."

Thiel believes competition is an ideology that distorts our thinking.

"Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past."

The Last Mover Advantage

A great business is defined by its ability to generate cash flows in the future.

"Most of the value of low-growth business is in the near term."

Technology comes often lose money in the first few years as it takes time to build the product and scale.

"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?"

Characteristics of Monopoly

1. Proprietary Technology

"Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate."

"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."

1. Network Effects

"Network effects make a product more useful as more people use it."

1. Economies of Scale

"A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can spread out over ever great quantities of sales."

1. 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

"It's easier to dominate a small market than a large one."

"The perfect target market for a startup is a small group of particular people concentrated together and served be few or no competitors."

Scaling Up

"Once you create and dominate a niche market, then you should gradually expand into related and slight broader markets."

Don't Disrupt

Disruption has become shallow and a self-congratulatory buzzword for anything trendy and new. The underdog taking on the big guys.

"If you think of yourself as an insurgent battling dark forces, it's easy to become unduly fixated on the obstacles in your path. But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create."

The Last Will Be First

Moving first is a tactic, not a goal. If you are the first mover and someone still grabs most of the market share, you first mover advantage didn't matter. It's better to be the last mover - the one to make the last great development in a specific market, that no one tops for a while allowing you to enjoy the profits for years or even decades.

You are not a lottery ticket

How you view the future can dictate your outcome.

In a definite view of the future, you believe you can work to understand it and shape it. In an indefinite view, you believe the future is mostly ruled by randomness and you don't try to change it.

Optimists tend to welcome the future; pessimists tend to fear it.

Indefinite Pessimism

"An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it."

Definite Pessimism

"A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it."

Definite Optimism

"To a definite optimist, the future will be better than the present if he plans and works to make it better."

Indefinite Optimism

"To an indefinite optimist, the future will be better, but he doesn't know exactly, so he won't make any specific plans."

In an indefinite world people prefer unlimited optionality; money is more valuable than anything you could possibly do with it.

"Long-term planning is often undervalued by our indefinite short-term world."

We need to move to a more definite world; don't overestimate chance. There are things we can do.

Follow the money

"Money makes money."

"Venture capitalists aim to identify, fund, and profit from promising early-stage companies."

"A venture fund makes money when the companies in its portfolio become more valuable and either go public or get bought by larger companies."

Venture returns don't follow a normal distribution, but a power law in which only a handful of companies outperform all others.

"The biggest secret in a venture capital is that the best investment in a successful fun equals or outperforms the entire rest of the fun combined."

Andreessen Horowitz invested $250,000 in Instagram in 2010 and when Facebook bought it for $1 billion, Andreessen made a 312x return, $78 million. That's amazing for a 2-year investment. However, the Andreessen Horowitz fund is $1.5 billion that they have to recover and make interest on for their investors. Investing at \$250,000 in companies would mean they would need to find 19 Instagrams just to break even.

A lot of Professional VCs don't see this power law because it only becomes clear over time when companies in the portfolio start to fail and the winners show to be very few.

"Every individual is unavoidable an investor too. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now."

Investors that understand the power law make as few investments as possible.

American School systems over-diversify on education spending 45mins on subjects that may or may not be relevant or useful in the future.

Secrets

Conventions [Easy] => Secrets [Hard] => Mysteries [Impossible]

"Today, explorers are found mostly in history books and children's tales."

Four Social Trends That Led Us Away from Searching for Secrets

1. Incrementalism Society has groomed us to follow a script and go through life in an organized pattern of steps.
2. Risk Aversion People are scared of secrets because they are afraid of putting in the effort only to discover they were wrong.
3. Complacency We are incentivized to set up shop on and collect profits on things that have already been created and mapped out for us.
4. Flatness Globalization has created a highly competitive environment and hyper-connectedness making the playing field more "flat", so we might rationalize ourselves into thinking someone in the global talent pool has already found the secret, so we see no need to search.

"The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers."

Two Kinds of Secrets

1. Secrets of Nature
2. 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."

Monopoly Secret: Competition and Capitalism are opposites.

About telling Secrets

"Unless you have perfectly conventional beliefs, it's rarely a good idea to tell everybody everything you know."

Foundations

Thiel's Law

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."

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

Questions to ask to help align trust:

• 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?

"In no case should a CEO of an early-stage, venture-backed startup receive more than \$150,000 per year in salary."

A preference for options, owning a part of the company, shows a more long-term commitment to helping to increase the companies value.

The Mechanics of Mafia

"Company culture doesn't exist apart from the company itself: no company has a culture; every company is a culture."

The PayPal Mafia

The early team members of PayPal who afterward went on to found many successful tech companies.

• Elon Musk - founded SpaceX and co-founded Tesla Motors
• Reid Hoffman - co-founded LinkedIn
• Steve Chen, Chad Hurley, Jawed Karim - founded YouTube
• Jeremy Stoppelman and Russel Simmons - founded Yelp
• David Sacks - co-founded Yammer
• Peter Thiel(author) - co-founded Palantir

Each of those companies is worth over \$1 billion.

Hire people who you'll actually enjoy working with.

If you Build It, Will They Come?

"In engineering disciplines, a solution either works or it fails. You can evaluate someone else's work with relative ease, as surface appearances don't matter much. Sales is the opposite: an orchestrated campaign to change surface appearances without changing the underlying reality."

"All salesmen are actors: their priority is persuasion, not sincerity."

"Like acting, sales works best when hidden."

"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 "politicians"."

"Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true."

Two Key Metrics:

1. Customer Lifetime Value (CLV): The total net profit that you can earn on average over the course of your relationship with a customer.
2. Customer Acquisition Cost (CAC): The amount you spend on average to acquire a new customer.

Complex Sales, seven figures or more, deeper relationships, few deals per year. CEO may have to get involved for the sale.

Personal Sales, average deal between 10,000 and 100,000. More focused on sales process to enable team to drive sales and move product to a wider audience.

Sales and distribution follows the power law.

"Selling your company to the media is a necessary part of selling it to everyone else."

"Everybody has a product to sell - no matter whether you're an employee, a founder, or an investor."

Man and Machine

"As mature industries stagnate, information technology has advanced so rapidly that it has now become synonymous with "technology" itself."

"Computers are complements for humans, not substitutes. The most valuable business of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete."

|Globalization (other humans)|Substitution: "The World is flat."|Mimetic consumer competition| |Technology (better computers)|Mostly complementary|Machines don't demand: all value goes to people|

Software Engineers are trained in school to think substitutionary instead of complementary, due to the reductionist and specialized nature of academia.

"The logical endpoint to this substitutionist thinking is called "strong AI": computers that eclipse humans on every important dimension."

Seeing Green

Most cleantech companies crashed (during cleantech bubble) because they neglected one or more of the seven questions that every business 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?

"Just as corporations tend to copy each other, nonprofits all tend to push the same priorities."

*The Book has a great series of points on how Tesla was able to succeed by getting these seven points right.

Startup founders seem to skew along the outliers of a normal distribution of traits for certain extreme personality traits.

"The most famous people in the world are founders, too: instead of a company, every celebrity founds and cultivates a personal brand."

"The single greatest danger for a founder is to become so certain of his own myth that he loses his mind."

"Our task today is to find singular ways to create the new things that will make the future not just different, but better - to go from 0 to 1."