Zero To One

Cover
Cover

Introduction

Peter taught a startup course at Stanford in 2012. The goal of the course was to teach the students to “see beyond the tracks laid down by academic specialties”. In simple terms, get the students to think outside the box and come up with truly innovative ideas. Blake Masters was a student in Peter’s class. He took detailed notes that drew a lot of attention which led to the collaboration between the two. This book is the result of the cleaned-up notes from Blake and the brilliance of Peter.

The Author

Peter Thiel is a co-founder of PayPal, Palantir Technologies and Founders Fund. He was the first outside investor in Facebook. He is on the board of many companies including Facebook. He was a partner for Y Combinator. He created the Thiel Fellowship. His current net worth is estimated at 2.5 billion. He crated majority of his fortune through starting and investing in great businesses.

The Verdict

I borrowed the book from my friend since I had this book on my to read list for more than two years. I finally got to it three years too late! If you are ever thinking of starting a business or are interested in how to build a successful business this is a must read.

The book is full of great lessons, tips, tricks, information and notes. I can NOT give it justice with my notes. The entire book is full of valuable content, I had a really hard time trying to not copy the entire book down.

Additionally, this book has been extremely helpful to take a step back and compare CourseKey against the content in this book. A lot of what Thiel mentions in this book applies directly to things we have done, are doing and will be doing.

The Summary

What does zero to one mean?

Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.

Think about operating systems for example. Bill Gates created the first GUI operating system, he created something new, something that did not exist before. The next Bill Gates will not be building an operating system. There have been many additions to operating systems by others (Linux/Mac and so on...) but none of them have been as revolutionary as the first one.

The Future of Progress

Progress can be Horizontal or Vertical. Horizontal progress is simple and easy to imagine. Think of it as copying the things that work with some improvements. At the macro level it can be summed up as globalization. On the other hand, vertical progress is more difficult since it is coming up with new things going from 0 to 1. At the macro level it is summed up as new innovative technology.

In the future, globalization is not sustainable! This is due to the reality and constraints of technology. For example, if everyone in the world lived like the American household, we would deplete all of our planet’s resources and increase pollution to unsustainable levels. To be able to maintain globalization we must develop new technology.

Startups are the answer to the problem. Big companies are bureaucratic hierarchies that move too slow and they avoid risks. On the other hand, lone geniuses can not create new technology. Startups run on the principle that you need others to get things done, but you need to be small enough to get things actually done.

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

— Pg.13

Lessons learned from dot-com crash

  1. Make incremental advances: small incremental steps are the best approach.
  2. Stay lean and flexible: Be flexible, adapt for unplanned events and iterate on things.
  3. Improve on the competition: To have a real business, must start with existing market and customers. Improve on existing products then introduce the new technology.
  4. Focus on product, not sales: Technology is about product development not distribution. produce should not require advertising or sales.

Successful businesses

When coming up with a business idea one must answer the business version of the contrarian question. “What valuable company is nobody building?” (Pg. 23) Any business can create a lot of value but not be valuable. Creating value is not enough, it must be valuable and allow you to capture that value. If you want to create and capture lasting value, don’t build an undifferentiated commodity business. (Pg. 25)

Running a business is ruthless, and everything is affected by the money. In business, money is either an important thing or it is everything. (Pg.31) The easiest way to ensure a business survives is for it to be a monopoly. Monopoly is the condition of every successful business. (Pg.34) 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. (Pg.34)

The value of a business today is determined by the sum of all the money it will make in the future. (Pg. 44) For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth. (Pg. 47)

Characteristics of Monopoly

  1. Proprietary Technology: The biggest advantage that a business that can have. Can be achieved by creating something new where nothing before existed or making a 10x improvement to existing technology.
  2. Network Effects: Extremely powerful and equally difficult to acquire. The network effect will never happen if the product is not valuable to the first users when the network is small.
  3. Economics of Scale: As the business grows, the costs remain fixed leading to greater profits.
  4. Branding: Every business has a monopoly on its own brand by definition. Having a brand that is recognizable and big (Apple!) can be a form of Monopoly.

How to build a monopoly

  1. Start small: Focus on a niche market and monopolize it. Start with a very small market.
  2. Scale up: scale up to adjacent markets.
  3. Don’t disrupt: Don’t pick a fight or get distracted in one. Avoid competition as much as possible. Focus on your own business.
  4. The last will be first: Don’t seek to be the first mover, people can come in after and steal the market share advantage. However, coming into a market with competitors can allow you to learn from their mistakes. Business is like chess: you must study the endgame before everything else (Pg. 58).

Every company starts in unique circumstances, and every company starts only once.

— Pg. 60


Having a plan in business

A big reason to why most businesses fail is because they don’t have a clear vision and not following the money. Coming up with a plan is difficult, that is why many companies iterate and lay the tracks as they are going. That may work however iteration without a bold plan won’t take you from 0 to 1. (Pg. 78–79)

In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future. (Pg. 73–74) As a society, we have become short sighted. We are more fascinated today by statistical predictions of what the country will be thinking in a few weeks’ time than by visionary predictions of what the country will look like 10 or 20 years from now. (Pg. 71) We are no longer looking for or coming up with any bold ideas.

What do people do with money in the financial world?

  • The founders don’t know what to do with it, so they give it to a large bank.

  • The bankers don’t know what to do with it, so they diversify by spreading it across a portfolio of institutional investors.

  • Institutional investors don’t know what to do with their managed capital, so they diversify by amassing a portfolio of stocks.

  • Companies try to increase their share price by generating free cash flows. If they do, they issue dividends or buy back shares and the cycle repeats.

At no point does anyone in the chain knows what to do with money in the real economy. (Pg. 70–71)


The power law

The power law is similar to the 80/20 rule. Eighty percent of value comes from twenty percent work you do. This applies to many things including to the venture capital world. The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. (Pg. 86)

Contrary to the common believe diversifying is not the answer. According to the power law, one thing could have all the impact you want. 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. (Pg. 91)

Secrets

Our world is full of secrets: deep sea, physics, space and many other things. These secrets extend to business as well. Every great business is built around a secret that’s hidden from the outside. (Pg. 106) In business, generally what’s most important is rarely obvious. (Pg. 92) That's why we have to dig deeper and investigate the hidden secrets in the market that will lead to creating a great business.

We have given up our sense of wonder at secrets left to be discovered

— Pg. 99

Why are we not looking for secrets?

  1. incrementalism: we are taught that the right way to do things is to proceed one very small step at a time. If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it.
  2. risk aversion: The prospect of being lonely and wrong can be unbearable.
  3. complacency: Every fall, the deans at top law schools and business schools welcome the incoming class with the same implicit message: “You got into this elite institution. Your worries are over. You’re set for life.” But that’s probably the kind of thing that’s true only if you don’t believe it.
  4. flatness: 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? (Pg. 97–98)

Business foundation

The most critical time in a business life is its inception. The way a business starts and how it evolves in the first months will determine how successful it will be. That also includes the most crucial decision you will ever make which is whom to start it with. Thiel created a law based on this idea named the “Thiel’s law”: a startup messed up at its foundation cannot be fixed (Pg. 107)

There are many foundations for a successful business

Alignment

To ensure the business foundation is right everyone in the company must be aligned. To understand how to keep everyone aligned, first we must understand how a misalignment happens. To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts:

  • 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?

A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control. (Pg. 110)

One source of misalignment is when the three groups of people are not communicating or have different visions and goals.

Another misalignment source is not having the team together full time. To avoid that, ensure everyone in the company is fully invested. Try to avoid contract and working remotely as much as possible since this can lead to misalignment creep. Company employees are either on the bus or off the bus (Pg. 113)

Culture

Another foundation for a business is its culture. Culture is critical for company’s success and Thiel phrases it nicely.

Company has no culture; every company is a culture.

— Pg.119

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. 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. (Pg. 119–120)

Recruiting

Why would someone join your company as its 20th engineer when he or she could go work at Google for more money and more prestige? There are two general kinds of good answers: answers about your mission and answers about your team. Most importantly, 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 (Pg. 121–122).

Sales

In tech businesses, many good ideas end up failing because they neglect sales. This is because “nerds” miss that it takes hard work to make sales look easy (Pg. 128) 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. (Pg. 130) Superior sales and distribution by itself can create a monopoly, even with no product differentiation (Pg. 130)

Complex sales

Complex sales are selling to organizations where multiple parties are involved. Politics matters in big deals just as much as technological ingenuity (Pg. 131) 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 (Pg. 132)

Personal sales

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 (Pg. 132)

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. (Pg. 138)

Marketing

Selling your company to the media is a necessary part of selling it to everyone else. (Pg. 138) Any prospective employee worth hiring will do his own diligence; what he finds or doesn’t find when he googles you will be critical to the success of your company. (Pg. 139)

Everybody sells. Look around. If you don’t see any salespeople, you’re the salesperson. (Pg. 139) 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. (Pg. 160)


Man Vs Technology

Tech is complementary for humans. However, many people are afraid of machines taking over. In reality, better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more. (Pg. 148)

Computers can find patterns that elude humans, but they don’t know how to compare patterns from different sources or how to interpret complex behaviors. Actionable insights can only come from a human analyst (or the kind of generalized artificial intelligence that exists only in science fiction). (Pg. 149)

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? (Pg. 150)

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. (Pg. 151)


Seven questions

The seven questions that every business must answer: (Pg. 153–154)

  1. The Engineering Question: Can you create breakthrough technology instead of incremental improvements? Any product built should be 10x better for what the customer currently has access to.

  2. The Timing Question: Is now the right time to start your particular business? Make sure that you have a realistic plan and good strategy and you are not jumping into a market too soon.

  3. The Monopoly Question: Are you starting with a big share of a small market? Don’t exaggerate your own uniqueness by carving a small market out of a bigger market.

  4. The People Question: Do you have the right team? The most important part of business is the team and making sure the right people are in the right place is crucial.

  5. The Distribution Question: Do you have a way to not just create but deliver your product? As previously mentioned, no matter how great the product is, if it cannot be sold the business will fail!

  6. The Durability Question: Will your market position be defensible 10 and 20 years into the future? Make sure what you are building will exist in the future.

  7. The Secret Question: Have you identified a unique opportunity that others don’t see? The best problems to work on are often the ones nobody else even tries to solve (Pg. 166)


Key sentences

  • How much of what you know about business is shaped by mistaken reactions to past mistakes? (Pg. 22)
  • The most contrarian thing of all is not to oppose the crowd but to think for yourself. (Pg. 22)
  • Founders only sell when they have no more concrete visions for the company (Pg. 80)
  • You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of 2014) (Pg. 91–92)
  • Kaczynski claimed that in order to be happy, every individual “needs to have goals whose attainment requires effort, and needs to succeed in attaining at least some of his goals.” (Pg. 95)
  • Less than 1% of new businesses started each year in the U.S. receive venture funding (Pg. 89)
  • The most important task in business—the creation of new value— cannot be reduced to a formula and applied by professionals (Pg. 188)
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