Zero to One

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

Table of contents:

1 The Challenge of the Future    
2 Party Like It’s 1999    
3 All Happy Companies Are Different    
4 The Ideology of Competition    
5 Last Mover Advantage    
6 You Are Not a Lottery Ticket    
7 Follow the Money    
8 Secrets    
9 Foundations  
10 The Mechanics of Mafia  
11 If You Build It, Will They Come?  
12 Man and Machine  
13 Seeing Green  
14 The Founder’s Paradox Conclusion: Stagnation or Singularity?
loc 53
But while I have noticed many patterns, and I relate them here, this book offers no formula for success. The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative. 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.
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WHENEVER I INTERVIEW someone for a job, I like to ask this question: “What important truth do very few people agree with you on?”
How many is 'very few'. My views on personal freedom are probably radical compared to the man on the street in the UK, but shared by quite a few people. I could say something like "signaling has a huge impact on peoples actions, and causes them to make seemingly irrational decisions", but that is also a common belief in some circles. Vegetarianism is maybe 2% of the UK population, does that count? I'm not sure if I have any unique, personal beliefs I could answer with.
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When we think about the future, we hope for a future of progress. That 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.
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in the late 1960s, they expected this progress to continue. They looked forward to a four-day workweek, energy too cheap to meter, and vacations on the moon. But it didn’t happen. The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old: only computers and communications have improved dramatically since midcentury. That doesn’t mean our parents were wrong to imagine a better future—they were only wrong to expect it as something automatic. Today our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th.
To be fair, it is possible to have a four-day workweek. Our standard of living has simply increased to fill the hole. If you accept a slightly lower standard of living, it is very easy these days (assuming a 'decent' salary) to retire early, or work 3 days a week, etc. You simply need to ignore certain common expenses, such as new cars, package holidays, diamond rings, large weddings, etc.
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In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now).
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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.
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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 market’s collapse as a kind of divine judgment against the technological optimism of the ’90s. The era of cornucopian hope was relabeled as an era of crazed greed and declared to be definitely over. Everyone learned to treat the future as fundamentally indefinite, and to dismiss as an extremist anyone with plans big enough to be measured in years instead of quarters. Globalization replaced technology as the hope for the future. Since the ’90s migration “from bricks to clicks” didn’t work as hoped, investors went back to bricks (housing) and BRICs (globalization). The result was another bubble, this time in real estate.
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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.
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THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value is not enough—you also need to capture some of the value you create.
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PayPal was at that time the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all of those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.
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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.
ie. the ability for google to invest in moonshot research
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But the world we live in is dynamic: it’s possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better. Even the government knows this: that’s why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases).
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Elite students climb confidently until they reach a level of competition sufficiently intense to beat their dreams out of them. Higher education is the place where people who had big plans in high school get stuck in fierce rivalries with equally smart peers over conventional careers like management consulting and investment banking. For the privilege of being turned into conformists, students (or their families) pay hundreds of thousands of dollars in skyrocketing tuition that continues to outpace inflation. Why are we doing this to ourselves?
Signaling? Education is a positional good, ie. no reason to expect it to get cheaper with increases in productivity.
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The hazards of imitative competition may partially explain why individuals with an Asperger’s-like social ineptitude seem to be at an advantage in Silicon Valley today. If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you. If you’re interested in making things or programming computers, you’ll be less afraid to pursue those activities single-mindedly and thereby become incredibly good at them. Then when you apply your skills, you’re a little less likely than others to give up your own convictions: this can save you from getting caught up in crowds competing for obvious prizes.
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What does a company with large cash flows far into the future look like? Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding. This isn’t a list of boxes to check as you build your business—there’s no shortcut to monopoly. However, analyzing your business according to these characteristics can help you think about how to make it durable.
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Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. This is why successful network businesses 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.
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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. If you think your initial market might be too big, it almost certainly is.
Start by monopolizing a tiny niche!
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In 1912, after he became the first explorer to reach the South Pole, Roald Amundsen wrote: “Victory awaits him who has everything in order—luck, people call it.”
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A definite view, by contrast, favors firm convictions. Instead of pursuing many-sided mediocrity and calling it “well-roundedness,” a definite person determines the one best thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one. This is not what young people do today, because everyone around them has long since lost faith in a definite world. No one gets into Stanford by excelling at just one thing, unless that thing happens to involve throwing or catching a leather ball.
Be very good at one thing, or maybe an unusual combination of two things, so that you are unique. 
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Every senior Chinese leader experienced famine as a child, so when the Politburo looks to the future, disaster is not an abstraction. The Chinese public, too, knows that winter is coming. Outsiders are fascinated by the great fortunes being made inside China, but they pay less attention to the wealthy Chinese trying hard to get their money out of the country. Poorer Chinese just save everything they can and hope it will be enough. Every class of people in China takes the future deadly seriously.
Indeed, very different mindset to Europe where people are used to there being a safety net, and seem to feel that 'everything will be fine'. Savings rates reflect this.
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While a definitely optimistic future would need engineers to design underwater cities and settlements in space, an indefinitely optimistic future calls for more bankers and lawyers. Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.
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The other three views of the future can work. Definite optimism works when you build the future you envision. Definite pessimism works by building what can be copied without expecting anything new. Indefinite pessimism works because it’s self-fulfilling: if you’re a slacker with low expectations, they’ll probably be met. But indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it?
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Apple imagined and executed definite multi-year plans to create new products and distribute them effectively. Forget “minimum viable products”—ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.
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we have to find our way back to a definite future, and the Western world needs nothing short of a cultural revolution to do it. Where to start? John Rawls will need to be displaced in philosophy departments. Malcolm Gladwell must be persuaded to change his theories. And pollsters have to be driven from politics. But the philosophy professors and the Gladwells of the world are set in their ways, to say nothing of our politicians. It’s extremely hard to make changes in those crowded fields, even with brains and good intentions.
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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.
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But this “spray and pray” approach usually produces an entire portfolio of flops, with no hits at all. This is because venture returns don’t follow a normal distribution overall. Rather, they 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.
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This implies two very strange rules for VCs. First, only invest in companies 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. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.
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But life is not a portfolio: not for a startup founder, and not for any individual. An entrepreneur cannot “diversify” herself: you cannot run dozens of companies at the same time and then hope that one of them works out well. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve. Our schools teach the opposite: institutionalized education traffics in a kind of homogenized, generic knowledge. Everybody who passes through the American school system learns not to think in power law terms. Every high school course period lasts 45 minutes whatever the subject. Every student proceeds at a similar pace. At college, model students obsessively hedge their futures by assembling a suite of exotic and minor skills. Every university believes in “excellence,” and hundred-page course catalogs arranged alphabetically according to arbitrary departments of knowledge seem designed to 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.
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Why has so much of our society come to believe that there are no hard secrets left? It might start with geography. There are no blank spaces left on the map anymore. If you grew up in the 18th century, there were still new places to go. After hearing tales of foreign adventure, you could become an explorer yourself. This was probably true up through the 19th and early 20th centuries; after that point photography from National Geographic showed every Westerner what even the most exotic, underexplored places on earth look like.
Space, the next frontier?
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As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace: the world is “flat.” Given that assumption, 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? This voice of doubt can dissuade people from even starting to look for secrets in a world that seems too big a place for any individual to contribute something unique.
I definitely suffer from this.
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Why work with a group of people who don’t even like each other? Many seem to think it’s a sacrifice necessary for making money. But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational. 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
Also trust reduces transaction costs, making it more efficient than a purely transactional freelancer-type setup.
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everyone at your company should be different in the same way—a tribe of like-minded people fiercely devoted to the company’s mission. Max Levchin, my co-founder at PayPal, says that startups should make their early staff as personally similar as possible. 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. The early PayPal team worked well together because we were all the same kind of nerd.
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The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing. I had started doing this just to simplify the task of managing people. But then I noticed a deeper result: defining roles reduced conflict.
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In between personal sales (salespeople obviously required) 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. Even if you have a clear value proposition, how do you get people to hear it? Advertising would either be too broad (there’s no TV channel that only convenience store owners watch) or too inefficient (on its own, an ad in Convenience Store News probably won’t convince any owner to part with $1,000 a year). 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. This is why so many small and medium-sized businesses don’t use tools that bigger firms take for granted. It’s not that small business proprietors are unusually backward or that good tools don’t exist: distribution is the hidden bottleneck.
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A product is viral if its core functionality encourages users to invite their friends to become users too. This is how Facebook and PayPal both grew quickly: 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. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth.
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by directly paying people to sign up and then paying them more to refer friends, we achieved extraordinary growth. This strategy cost us $20 per customer, but it also led to 7% daily growth, which meant that our user base nearly doubled every 10 days. After four or five months, we had hundreds of thousands of users and a viable opportunity to build a great company by servicing money transfers for small fees that ended up greatly exceeding our customer acquisition cost.
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Neither side questions the premise that better computers will necessarily replace human workers. But that premise is wrong: 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.
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The fraudsters’ adaptive evasions fooled our automatic detection algorithms, but we found that they didn’t fool our human analysts as easily. So Max and his engineers rewrote the software to take a hybrid approach: the computer would flag the most suspicious transactions on a well-designed user interface, and human operators would make the final judgment as to their legitimacy. Thanks to this hybrid system—we named it “Igor,” after the Russian fraudster who bragged that we’d never be able to stop him—we turned our first quarterly profit in the first quarter of 2002 (as opposed to a quarterly loss of $29.3 million one year before).
Humans augmented by computers
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continued to think about this after we sold PayPal in 2002: 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?
For example, humans with access to a chess computer tend to beat chess computers!
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We have let ourselves become enchanted by big data only because we exoticize technology. We’re impressed with small feats accomplished by computers alone, but we ignore big achievements from complementarity because the human contribution makes them less uncanny. Watson, Deep Blue, and ever-better machine learning algorithms are cool. But the most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?
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Most cleantech companies crashed 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?
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Companies must strive for 10x better because merely incremental improvements often end up meaning no improvement at all for the end user. Suppose you develop a new wind turbine that’s 20% more efficient than any existing technology—when you test it in the laboratory. That sounds good at first, but the lab result won’t begin to compensate for the expenses and risks faced by any new product in the real world. And even if your system really is 20% better on net for the customer who buys it, people are so used to exaggerated claims that you’ll be met with skepticism when you try to sell it. Only when your product is 10x better can you offer the customer transparent superiority.
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The most obvious clue was sartorial: cleantech executives were running around wearing suits and ties. This was a huge red flag, because real technologists wear T-shirts and jeans. So we instituted a blanket rule: pass on any company whose founders dressed up for pitch meetings.
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The best sales is hidden. There’s nothing wrong with a CEO who can sell, but if he actually looks like a salesman, he’s probably bad at sales and worse at tech.
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Doing something different is what’s truly good for society—and it’s also what allows a business to profit by monopolizing a new market. 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 tries to solve.
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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 insight unless his own plans begin at the micro-scale. Cleantech companies faced the same problem: no matter how much the world needs energy, only a firm that offers a superior solution for a specific energy problem can make money. No sector will ever be so important that merely participating in it will be enough to build a great company.
See: blockchain
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Apple’s value crucially depended on the singular vision of a particular person. This hints at the strange way in which the companies that create new technology often resemble feudal monarchies rather than organizations that are supposedly more “modern.” A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.
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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. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.