Zero To One

For a quite a while, the book Zero to One by Peter This (with Blake Masters) has been covering dust in the “to-read” section of my bookshelf. That would probably not have changed, had I not discovered the Business Book Club Cologne on I liked the idea of the meetup and as chance would have it, Zero to One was the book that was discussed at the inaugural meetup, so I finally had a good reason to read it. I kind of rushed through the book to finish it in time for the meetup, but I was so impressed by the notes other folks had taken, so I decided to give it a second read and take some notes and form a better opinion, which I want to share here.

Zero to One is based on class notes taken during a course about startups taught by Thiel at Stanford in 2012. I was a bit skeptical because books that didn’t start out as books, but are a mere collection of essays (i.e. blog posts) are often lacking a red thread. In this case, my skepticism was unwarranted. Some chapters seem a bit unrelated at first, but in the end, all of them fit into the big picture.

Peter Thiel is a celebrity in the startup world. He has founded and invested in several successful companies that have actually changed the world: PayPal, Palantir, Facebook, LinkedIn, SpaceX. Despite (or maybe because of) his success, he is a controversial figure. The most recent controversy was his support for Donald Trump. He is also quite a bit of an eccentric. There are rumors that he receives regular transfusions of blood from young people to prevent aging.

This book contains two central ideas. The first is, unsurprisingly, going from Zero to One, creating something from nothing. It is about big, revolutionary ideas, a manifest against incrementalism.

The second is contrarianism: being different, thinking different, doing things differently than the masses. I think this is the most valuable takeaway from this book: becoming aware of whether you are thinking for yourself or if you are just following conventional wisdom.

It is important to keep in mind that this is a book about VC-backed startups written by a venture capitalist. If you want to play the VC-funded startup game, this book can provide valuable insight. But it won’t help you decide if for you, as an individual, the game is worth playing at all.

Notable quotes and ideas

Everything in quotation marks is quoted verbatim, everything else is synthesized by me.

Chapter 1: The Challenge of the Future

“What important truth do very few people agree with you on?”
His answer: “most people think the future of the world will be defined by globalization, but the truth is that technology matters mode.”

Going from 1 to n: copying/improving what works
Going from 0 to 1: creating something new

“Spreading of ways of creating wealth around the world will result in devastation, not riches.”

“In the long run [our ancestors] could never create enough [new sources of wealth] to save the average person from an extremely hard life.”

“[…] our surroundings are extremely old: only computers and communications have improved dramatically since midcentury.”

“A Startup is the largest group of people you can convince of a plan to build a different future”

“[Startups] question ideas received and rethink business from scratch.”

Chapter 2: Party like it’s 1999

Lived through the Dot Com mania “acting sanely began to seem eccentric”

Contrarian principles for startups

  1.  It’s 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

Peak of market in 2000 was a moment of clarity because people looked in the future a saw a need for valuable technology. They just weren’t able to get there, resulting in the crash.

Chapter 3: all happy companies are different

“What valuable company is nobody building?”

Big business can be bad businesses
E.g. airlines: provide huge value, create tiny profit (37c profit on average airfare of $178)
Google: 21% profit margin

Perfect competition vs. monopoly

In a perfect competition, all profits get competed away
The good kind of monopoly: a company that’s so good that nobody can offer a close substitute

“If you want to create and capture lasting value, don’t build an undifferentiated commodity business”

“Non-monopolists try to exaggerate their distinction by defining their market as an intersection of various smaller markets.”

“Monopolists […] disguise their monopoly by framing their market as the union of several large markets.

“In business, money is either an important thing, or it is everything.”

“Monopolies drive progress because the promise of years or even decades of monopoly profits provide a powerful incentive to innovate.”

Chapter 4: The Ideology of Competition

“[…] the more we compete, the less we gain.”

Companies become obsessed with their competitors.

While Microsoft and Google competed, Apple overtook both.

Don’t take your personal honor so seriously that you will fight over things that don’t matter.

Recognize competition as a destructive force.

Chapter 5: Last Mover Advantage

Cash flow of a high-growth technology company follows the opposite trajectory than cash flow of a low-tech Old Economy company.

“Most important question you should ask [about your business]: will [it] still be around a decade from now?”

4 characteristics of monopoly

  1. Proprietary technology that is at least 10 times better than its closest substitute in some important dimension
  2. Network effects that make a product more useful as more people use it. Paradoxically, you must start with especially small markets (e.g. Facebook starting with just Harvard students)
  3. Economies of scale. Build potential for scale in the first design, avoid business were margin stay low as you grow.
  4. Brand is a factor, but it needs the other factors to support it. It cannot be the only one and shouldn’t be the first one to focus on.

How to build a monopoly

  1. Start in a small (but not non-existant) market
  2. Scale up
  3. Don’t disrupt for the sake of disruption

Chapter 6: You Are Not a Lottery Ticket

The debate how much of success can be attributed to luck cannot be settled objectively because companies are not experiments.

“Shallow men believe in luck, believe in circumstances… Strong men believe in cause and effect” — Ralph Waldo Emerson
“Victory awaits him who has everything in order – luck, people call it” — Roald Amundsen in 1912, after being the first explorer to reach the South Pole

Four worldviews:

  • Indefinite Pessimism: waits for a bleak future (Europe)
  • Definite Pessimism: prepares for a bleak future (China)
  • Definite Optimism: plans and works towards a better future (Western world until the 1960s)
  • Indefinite Optimism: expects a better future, but doesn’t work towards it (USA since the 80s)

Indefinite Optimism is not sustainable, someone has to build the future.

Design must return. Not just aesthetics, but business design

“We have to find our way back to a definite future”, but it is extremely hard to change philosophy and politics.
“A startup is the largest endeavor over which you can have definite mastery.”

Chapter 7: Follow the Money

“The power law is the law of the universe”

Most venture-backed companies fail. Venture returns don’t follow a normal distribution, they follow a power law: a small handful of companies radically outperform all others.

“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”

Ergo, a VC should only invest in companies that have the potential to return the entire fund. Are you founding such a company? Do you want to found such a company?

“Venture-backed companies create 11% of all private sector jobs”

You cannot diversify your life. Don’t just be good at something, be good at something that matters.

“The difference between companies will dwarf the difference in roles inside companies.”

100% of nothing is less than 0.01% of Google

Chapter 8: Secrets

Everything we know today was once unknown. New discoveries become a conventional truth Conventional truths can be important to know, but won’t give you an edge

“Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up.”

Why people are no longer looking for secrets:

  • our physical world is mostly explored, “the unknown seems less accessible than ever”
  • incrementalism: we are taught to do things one small step at a time
  • risk aversion: “if your goal is to never make a mistake in your life, you shouldn’t look for secrets”
  • complacency: the social elites who are most able to explore new thinking have the least incentive to do so
  • the assumption that the world is “flat”: everything that can be discovered must have been discovered by someone smarter and more creative

In a world without secrets, we would have answers to all the great questions. We would live in a world without hidden injustices and with efficient markets, but it is obvious that this is not the case.

“There are many more secrets left to find, but they will yield only to relentless searchers”
Not incremental improvements, but revolutionary discoveries

Two kinds of secrets: secrets of nature and secrets of people

The best place to look for secrets is where no one else is looking, i.e. fields that matter but haven’t been standardized and institutionalized.

“It’s rarely a good idea to tell everybody everything that you know.”

The golden mean between telling everybody and telling nobody is a company.

Chapter 9: Foundations

“Thiel’s Law”: “A startup messed up at its foundation cannot be fixed.”

Fundamental pillars:
– founding team
– ownership, possession, control
– commitment
– compensation

Founding a company is like marriage, the founding team should share a prehistory

Most potential for conflict between founders (ownership) and investors on the board (control)
A small board is an effective board

Everybody should be involved full-time and preferably on-site: no consultants, part-timers, remote workers

“A company does better the less it pays the CEO”
A CEO can set an example by taking the lowest or the highest salary in a company
High cash compensation does not encourage employees to invest in the future of the company

Startups can afford to pay poorly because they can offer equity
Perfectly fair distribution is impossible
Equity is a powerful tool because it can help keep people aligned with the long-term interest of the company

A company’s founding can be extended indefinitely by constantly creating new things

Chapter 10: The Mechanics of Mafia

Without substance, perks don’t work

A startup is a group of people on a mission

Your time is your most valuable asset, don’t spend it working with people you don’t envision a long future with

Hire talented people excited to work specifically for you

Ask yourself why a talented person should work for you. Good answers are specific to your company and are about your mission and your team

“everyone at your company should be different in the same way” – every hire should be equally obsessed about the same things

Have everyone do one thing: defining roles reduces conflict

The best startups might be considered slightly less extreme kinds of cults.

Chapter 11: If You Build It, Will They Come?

Don’t make the mistake of underestimating the importance of sales, especially if you have a technical background.

Good sales is hidden – everywhere.

Distribution is effective if the Customer Lifetime Value exceed Custome Acquisition Cost

Complex sales: 7+ figures
Personal sales: 5-6 figures
Deadzone: around $1000 -> no effective distribution channel (really?)
Marketing & Advertising: $100
Viral Marketing: $10

Power Law applied to Distribution: find one channel that works and focus on it

You are selling to everyone (customers, investors, employees) and everyone should be selling

Chapter 12: Man and Machine

Contrarian view: computers are complements for humans, not substitutes

Globalization means substitution, technology means complementarity: computers are far more different from people than any two people are different from each other

In a globalized world, people compete for the same jobs, driving down wages, and the same resources, making them more expensive. Computers do different jobs and don’t demand substantial resources.

Complementary businesses combine the strengths of humans and computers. Examples:

  • a hybrid approach to fraud-detection at PayPal
  • Palantir
  • LinkedIn

Computer science focuses on replacing humans with computers

It is unclear whether Strong AI that is better than humans in every important dimension will save humanity or doom it, but it is too early to worry about it.

Chapter 13: Seeing Green

The Greentech bubble popped because companies had zero answers to the seven essential questions:

  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 you 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?

Tesla is an example of a company that has good answers to all seven questions.

Social entrepreneurship aims to “do well by doing good”, but often fails at both. Is it good for society or is it just seen as good? If it is generally applauded it fails the secret question.

The macro need for clean energy is real, just like the big idea of the dot-com bubble that the internet will be big, but you can’t start with the macro need. “The challenge for the entrepreneurs who will create Energy 2.0 is to think small”

Chapter 14: The Founders’ Paradox

Personality traits of founders tend to follow an inverse normal distribution: they fall on the extreme ends of the spectrum.

It is unclear where this combination of traits comes from. From birth? From upbringing? Strategical exaggeration? Exaggeration by others?

Kings, celebrities, and tech founders have in common that they fly high and fall low. Compare Elvis, Michael Jackson and Britney Spears to Howard Hughes and Bill Gates.

A business needs strong founders, but there is the risk that the power goes to their head.

Conclusion: Stagnation or Singularity

Four patterns for the future by Nick Bostrom:

  • Recurrent collapse, a never-ending alternation between prosperity and ruin
  • Plateau, the whole world will look like the richest countries today
  • Extinction, a devastating collapse that humanity won’t survive
  • Takeoff into a much better future, that will be so different from today that we can’t imagine it

It doesn’t really matter because it won’t happen on its own. You should strive to make the future better. The first step is to think for yourself.

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