{"id":585,"date":"2017-11-02T18:20:28","date_gmt":"2017-11-02T17:20:28","guid":{"rendered":"http:\/\/daniel.hepper.net\/blog\/?p=585"},"modified":"2017-11-02T18:20:28","modified_gmt":"2017-11-02T17:20:28","slug":"zero-to-one","status":"publish","type":"post","link":"https:\/\/daniel.hepper.net\/blog\/2017\/11\/zero-to-one\/","title":{"rendered":"Zero To One"},"content":{"rendered":"

For a quite a while, the book Zero to One<\/a> 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 Meetup.com. 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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Notable quotes and ideas<\/h2>\n

Everything in quotation marks is quoted verbatim, everything else is synthesized by me.<\/p>\n

Chapter 1: The Challenge of the Future<\/span><\/p>\n

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

Going from 1 to n: copying\/improving what works
\nGoing from 0 to 1: creating something new<\/p>\n

“Spreading of ways of creating wealth around the world will result in devastation, not riches.”<\/p>\n

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

“[…] our surroundings are extremely old: only computers and communications have improved dramatically since midcentury.”<\/p>\n

“A Startup is the largest group of people you can convince of a plan to build a different future”<\/p>\n

“[Startups] question ideas received and rethink business from scratch.”<\/p>\n

Chapter 2: Party like it’s 1999<\/h3>\n

Lived through the Dot Com mania “acting sanely began to seem eccentric”<\/p>\n

Contrarian principles for startups<\/p>\n

    \n
  1. \u00a0It’s better to risk boldness than triviality<\/li>\n
  2. \u00a0A bad plan is better than no plan<\/li>\n
  3. Competitive markets destroy profits<\/li>\n
  4. Sales matters just as much as product<\/li>\n<\/ol>\n

    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.<\/p>\n

    Chapter 3: all happy companies are different<\/h3>\n

    “What valuable company is nobody building?”<\/p>\n

    Big business can be bad businesses
    \nE.g. airlines: provide huge value, create tiny profit (37c profit on average airfare of $178)
    \nGoogle: 21% profit margin<\/p>\n

    Perfect competition vs. monopoly<\/p>\n

    In a perfect competition, all profits get competed away
    \nThe good kind of monopoly: a company that’s so good that nobody can offer a close substitute<\/p>\n

    “If you want to create and capture lasting value, don’t build an undifferentiated commodity business”<\/p>\n

    “Non-monopolists try to exaggerate their distinction by defining their market as an intersection of various smaller markets.”<\/p>\n

    “Monopolists […] disguise their monopoly by framing their market as the union of several large markets.<\/p>\n

    “In business, money is either an important thing, or it is everything.”<\/p>\n

    “Monopolies drive progress because the promise of years or even decades of monopoly profits provide a powerful incentive to innovate.”<\/p>\n

    Chapter 4: The Ideology of Competition<\/h3>\n

    “[…] the more we compete, the less we gain.”<\/p>\n

    Companies become obsessed with their competitors.<\/p>\n

    While Microsoft and Google competed, Apple overtook both.<\/p>\n

    Don’t take your personal honor so seriously that you will fight over things that don’t matter.<\/p>\n

    Recognize competition as a destructive force.<\/p>\n

    Chapter 5: Last Mover Advantage<\/h3>\n

    Cash flow of a high-growth technology company follows the opposite trajectory than cash flow of a low-tech Old Economy company.<\/p>\n

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

    4 characteristics of monopoly<\/p>\n

      \n
    1. Proprietary technology that is at least 10 times better than its closest substitute in some important dimension<\/li>\n
    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)<\/li>\n
    3. Economies of scale. Build potential for scale in the first design, avoid business were margin stay low as you grow.<\/li>\n
    4. Brand is a\u00a0factor, 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.<\/li>\n<\/ol>\n

      How to build a monopoly<\/p>\n

        \n
      1. Start in a small (but not non-existant) market<\/li>\n
      2. Scale up<\/li>\n
      3. Don’t disrupt for the sake of disruption<\/li>\n<\/ol>\n

        Chapter 6: You Are Not a Lottery Ticket<\/h3>\n

        The debate how much of success can be attributed to luck cannot be settled objectively because companies are not experiments.<\/p>\n

        “Shallow men believe in luck, believe in circumstances… Strong men believe in cause and effect” — Ralph Waldo Emerson
        \n“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<\/p>\n

        Four worldviews:<\/p>\n

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

          Indefinite Optimism is not sustainable, someone has to build the future.<\/p>\n

          Design must return. Not just aesthetics, but business design<\/p>\n

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

          Chapter 7: Follow the Money<\/h3>\n

          “The power law is the law of the universe”<\/p>\n

          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.<\/p>\n

          “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”<\/p>\n

          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?<\/p>\n

          “Venture-backed companies create 11% of all private sector jobs”<\/p>\n

          You cannot diversify your life. Don’t just be good at something, be good at something that matters.<\/p>\n

          “The difference between companies will dwarf the difference in roles inside companies.”<\/p>\n

          100% of nothing is less than 0.01% of Google<\/p>\n

          Chapter 8: Secrets<\/h3>\n

          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<\/p>\n

          “Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up.”<\/p>\n

          Why people are no longer looking for secrets:<\/p>\n

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

            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.<\/p>\n

            “There are many more secrets left to find, but they will yield only to relentless searchers”
            \nNot incremental improvements, but revolutionary discoveries<\/p>\n

            Two kinds of secrets: secrets of nature and secrets of people<\/p>\n

            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.<\/p>\n

            “It’s rarely a good idea to tell everybody everything that you know.”<\/p>\n

            The golden mean between telling everybody and telling nobody is a company.<\/p>\n

            Chapter 9: Foundations<\/h3>\n

            “Thiel’s Law”: “A startup messed up at its foundation cannot be fixed.”<\/p>\n

            Fundamental pillars:
            \n– founding team
            \n– ownership, possession, control
            \n– commitment
            \n– compensation<\/p>\n

            Founding a company is like marriage, the founding team should share a prehistory<\/p>\n

            Most potential for conflict between founders (ownership) and investors on the board (control)
            \nA small board is an effective board<\/p>\n

            Everybody should be involved full-time and preferably on-site: no consultants, part-timers, remote workers<\/p>\n

            “A company does better the less it pays the CEO”
            \nA CEO can set an example by taking the lowest or the highest salary in a company
            \nHigh cash compensation does not encourage employees to invest in the future of the company<\/p>\n

            Startups can afford to pay poorly because they can offer equity
            \nPerfectly fair distribution is impossible
            \nEquity is a powerful tool because it can help keep people aligned with the long-term interest of the company<\/p>\n

            A company’s founding can be extended indefinitely by constantly creating new things<\/p>\n

            Chapter 10: The Mechanics of Mafia<\/h3>\n

            Without substance, perks don’t work<\/p>\n

            A startup is a group of people on a mission<\/p>\n

            Your time is your most valuable asset, don’t spend it working with people you don’t envision a long future with<\/p>\n

            Hire talented people excited to work specifically for you<\/p>\n

            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<\/p>\n

            “everyone at your company should be different in the same way” – every hire should be equally obsessed about the same things<\/p>\n

            Have everyone do one thing: defining roles reduces conflict<\/p>\n

            The best startups might be considered slightly less extreme kinds of cults.<\/p>\n

            Chapter 11: If You Build It, Will They Come?<\/h3>\n

            Don’t make the mistake of underestimating the importance of sales, especially if you have a technical background.<\/p>\n

            Good sales is hidden – everywhere.<\/p>\n

            Distribution is effective if the Customer Lifetime Value exceed Custome Acquisition Cost<\/p>\n

            Complex sales: 7+ figures
            \nPersonal sales: 5-6 figures
            \nDeadzone: around $1000 -> no effective distribution channel (really?)
            \nMarketing & Advertising: $100
            \nViral Marketing: $10<\/p>\n

            Power Law applied to Distribution: find one channel that works and focus on it<\/p>\n

            You are selling to everyone (customers, investors, employees) and everyone should be selling<\/p>\n

            Chapter 12: Man and Machine<\/h3>\n

            Contrarian view: computers are complements for humans, not substitutes<\/p>\n

            Globalization means substitution, technology means complementarity: computers are far more different from people than any two people are different from each other<\/p>\n

            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.<\/p>\n

            Complementary businesses combine the strengths of humans and computers. Examples:<\/p>\n