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

October 24, 2015

Peter Thiel · ★★★★★ · 223 pages · 2014

One of the best books I've read recently. Thiel covers the nature of startups but he covers it in the context of contemporary society. He states that companies no longer plan for the future and are beholden to very short term returns. Instead he recommends planning a company for the long haul and figuring out how to get there by starting with the smallest piece of a market which can be monopolized as profits and value are created from monopolistic enterprises. If you are beholden to competition then you can't plan for the long term because you are constantly fighting battles in the short term. It prevents long term thinking.

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.
But I don’t think that’s true. My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more.
Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.
The easiest explanation for this is negative: it’s hard to develop new things in big organizations, and it’s even harder to do it by yourself.
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).
Positively defined, a startup is the largest group of people you can convince of a plan to build a different future.
If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
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.
Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.
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.
In the world of business, at least, Shakespeare proves the superior guide. Inside a firm, people become obsessed with their competitors for career advancement. Then the firms themselves become obsessed with their competitors in the marketplace. Amid all the human drama, people lose sight of what matters and focus on their rivals instead.
Just as war cost the Montagues and Capulets their children, it cost Microsoft and Google their dominance: Apple came along and overtook them all.
Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past.
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.
Winning is better than losing, but everybody loses when the war isn’t one worth fighting.
Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly.
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. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.
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.
No technology company can be built on branding alone.
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
Any big market is a bad choice, and a big market already served by competing companies is even worse. This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market.
As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
No one pretended that misfortune didn’t exist, but prior generations believed in making their own luck by working hard.
To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely.
But they miss the even bigger social context for their own preferred explanations: a whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.
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.
But iteration without a bold plan won’t take you from 0 to 1.
A company is the strangest place of all for an indefinite optimist: why should you expect your own business to succeed without a plan to make it happen? Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.
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.
When a big company makes an offer to acquire a successful startup, it almost always offers too much or too little: founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough.
A business with a good definite plan will always be underrated in a world where people see the future as random.
We can be glad that there are fewer crazy cults now, yet that gain has come at great cost: we have given up our sense of wonder at secrets left to be discovered.
If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.
If you didn’t already know it, you could discover it the natural, empirical way: do a quantitative study of corporate profits and you’ll see they’re eliminated by competition.
But you could also take the human approach and ask: what are people running companies not allowed to say? You would notice that monopolists downplay their monopoly status to avoid scrutiny, while competitive firms strategically exaggerate their uniqueness.
The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside.
“Thiel’s law”: a startup messed up at its foundation cannot be fixed.
Companies are like countries in this way. 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.
Unfortunately, it also limits what kind of company you can build. It’s very hard to go from 0 to 1 without a team.
Misalignment can creep in even if he receives stock compensation in the name of “shareholder value.” If that stock comes as a reward for short-term performance, he will find it more lucrative and much easier to cut costs instead of investing in a plan that might create more value for all shareholders far in the future.
This is why it’s crucial to choose wisely: every single member of your board matters. Even one problem director will cause you pain, and may even jeopardize your company’s future.
it usually makes sense to hire outside lawyers and accountants, for example. However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future.
That’s why hiring consultants doesn’t work.
A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups.
If a CEO collects $300,000 per year, he risks becoming more like a politician than a founder.
Equity is a powerful tool precisely because of these limitations. Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future. Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.
A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.
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.
From the start, I wanted PayPal to be tightly knit instead of transactional. I thought stronger relationships would make us not just happier and better at work but also more successful in our careers even beyond PayPal. So we set out to hire people who would actually enjoy working together. They had to be talented, but even more than that they had to be excited about working specifically with us. That was the start of the PayPal Mafia.
Talented people don’t need to work for you; they have plenty of options. You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?
Above all, 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.
Just cover the basics like health insurance and then promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.
The startup uniform encapsulates a simple but essential principle: everyone at your company should be different in the same way—a tribe of like-minded people fiercely devoted to the company’s mission.
The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing.
But then I noticed a deeper result: defining roles reduced conflict.
But every company is also its own ecosystem, and factional strife makes it vulnerable to outside threats.
If anything, people overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss is that it takes hard work to make sales look easy.
All salesmen are actors: their priority is persuasion, not sincerity.
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.
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.
Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
Properly understood, technology is the one way for us to escape competition in a globalizing world.
This chapter is about why it’s more powerful but at the same time more dangerous for a company to be led by a distinctive individual instead of an interchangeable manager.
He liked to remind people that he was a mere mortal, not a Greek god—something that mortals say only when they want to invite comparisons to gods.
Jobs’s return to Apple 12 years later shows how the most important task in business—the creation of new value—cannot be reduced to a formula and applied by professionals.
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.”

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