Review of “Zero to One”

Review of “Zero to One”


This book is about companies that build new things. Peter Thiel is the author and he is known for his original thinking. He is also a very successful entrepreneur in Silicon Valley and this gives him special credibility when it comes to startups. From beginning to end, the book goes against common wisdom and questions dogma in both the business world and beyond. For this reason, I’ve found this book very interesting; I didn’t watch the clock reading it and finished it within just a few days.

One thing I admire about Peter Thiel is his contrarian thinking. His question: “What important truth do very few people agree with you on?” is central in the book. This question is shockingly challenging because the correct answer necessarily entails something completely new. The author provides some answers to this question in the context of startups. For example he argues: technology matters more than globalization, capitalism and competition are opposites, and that monopoly is the condition of ever successful business.

Thinking in terms of Thiel’s question means we strive to invent new things rather than merely improve what already exists. This can accelerate the rate of innovation to unprecedented levels. Through this book, Peter Thiel will be recognized in history not just as a successful investor but also as an influential thinker and philosopher.

This is by far one of the best books I’ve read. I definitely recommend it. Below are some passages in the book I found myself reading twice or three times. These only provide snapshots and they represent in no way a substitute to the book.

Preface

Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.

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

Today’s best practices lead to dead ends; the best paths are new and untried.

Humans are distinguished from other species by our ability to work miracles. We call these miracles technology.

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.

Chapter 1    The Challenge of the Future

Whenever I interview someone for a job, I like to ask this question: “What important truth do very few people agree with you on?”. This question sounds easy because it’s straightforward. Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is by definition agreed upon. And it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply.

A good answer takes the following form: “Most people believe in X, but the truth is the opposite of X.”

Most answers to the contrarian question are different ways of seeing the present; good answers are as close as we can come to looking into the future.

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.

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.

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.

Chapter 2 Party Like It’s 1999

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

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:

1- Make incremental advances, 2- Stay lean and flexible, 3- Improve on the competition, 4- Focus on product, not sales

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 competition, 4- Sales matters just as much as product

The most contrarian thing for all is not to oppose the crowd but to think for yourself.

Chapter 3 All Happy Companies Are Different

The business version of our contrarian question is: what valuable company is nobody building?

Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.

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

Monopoly is the condition of every successful business.

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.

Chapter 4 The Ideology of Competition

So why do people believe competition is healthy? The answer is that competition is not just an economic concept or a simple inconvenience that individuals and companies must deal with in the marketplace. More than anything else, competition is an ideology- the ideology– that pervades our society and distorts our thinking. We preach competition, internalize its necessity, and enact its commandments; and as a result, we trap ourselves within it- even though the more we compete, the less we gain.

Inside a firm, people become obsessed with their competitors for career advancement. 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.

Winning is better than losing, but everybody loses when the war isn’t worth fighting.

If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.

Chapter 5 Last Mover Advantage

A great business is defined by its ability to generate cash flows in the future.

Simply stated, the value of a business today is the sum of all the money it will make in the future.

For a company to become valuable it must grow and endure.

Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.

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.

The clearest way to make a 10x improvement is to invent something completely new.

Once you’re 10x better, you escape competition.

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.

The most successful companies make the core progression- to first dominate a specific niche and then scale to adjacent markets- a part of their founding narrative.

You’ve probably heard about “first mover advantage”: if you’re the first entrant into a market, you can capture significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. It’s much better to be the last mover- that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and to scale up from there, toward your ambitious long-term vision. In this one particular at least, business is like chess. Grandmaster Jose Raul Capablanca put it well: to succeed, “you must study the endgame before everything else”.

Chapter 6 You Are Not A Lottery Ticket

You can expect the future to take a definite form or you can treat it as hazily uncertain. If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it.

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.

Darwinism may be a  fine theory in other contexts, but in startups, intelligent design works best.

A 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.

Chapter 7 Follow The Money

In 1906, economist Vilfredo Pareto discovered what became the “Pareto principle”, or the 80-20 rule, when he noticed that 20% of the people owned 80%  of the land in Italy- a phenomenon that he found just as natural as the fact that 20% of the peapods in his garden produced 80% of the pears. This extraordinarly stark pattern, in which a few small radically outstrip all rivals, surrounds us everywhere in the natural and social world.

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.

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.

This implies two very strange rules for VCs (Venture Capitalists). 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. This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

Every single company in a good venture portfolio must have the potential to succeed at vast scale.

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.

Chapter 8 Secrets

Recall the business version of our contrarian question: what valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable.

Along with the fact that physical frontiers have receded, four social trends have conspired to root out belief in secrets: incrementalism, risk aversion, complacency, and flatness.

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.

He needed brilliance to succeed, but he also needed a faith in secrets. If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.

This is why physics PhDs are notoriously difficult to work with- because they know the most fundamental truths, they think they know all truths.

Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know.

Chapter 9 Foundations

I stress this so often that friends have teasingly nicknamed it “Thiel’s Law”: a startup messed up at its foundation cannot be fixed.

Beginnings are special. They are qualitatively different from all that comes afterward. This was true 13.8 billion years ago, at the founding of our cosmos: in the earliest microseconds of its existence, the universe expanded by a factor of 10^30- a million trillion trillion.

Now when I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much.

It’s very hard to go from 0 to 1 without a team.

In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight.

Actually, a huge board will exercise no effective oversight at all; it merely provides cover for whatever microdictator actually runs the organization. If you want that kind of free rein from your board, blow it up to giant size. If you want an effective board, keep it small.

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.

Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and 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.

Chapter 10 The Mechanics of Mafia

If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well.

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.

On the inside, every individual should be sharply distinguished by her work.

The best thing I did as a manager of 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. Most fights inside a company happen when colleagues compete for the same responsibilities. Startups face an especially high risk of this since job roles are fluid at the early stages. Eliminating competition makes it easier for everyone to build the kinds of long-term relationships that transcend mere professionalism.

Internal conflict is like an autoimmune disease: the technical cause of death may be pneumonia, but the real cause remains hidden from plain view.

Chapter 11 If You Build It, Will They Come?

But advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.

In engineering disciplines, a solution either works or it fails… What nerds miss is that it takes hard work to make sales look easy.

The engineer’s grail is a product great enough that “it sells itself”.

The polar opposite cliche warns that “the best product doesn’t always win”. Economists attribute this to “path dependence”: specific historical circumstances independent of objective quality can determine which products enjoy widespread adoption.

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.

Every entrepreneur envies a recognizable ad campaign, but startups should resist the temptation to compete with bigger companies in the endless contest to put on the most memorable TV spots or the most elaborate PR stunts.

Chapter 12 Man And Machine

Every one of today’s smartphones has thousands of times more processing power than the computers that guided astronauts to the moon.

But the most valuable companies in the future won’t ask what problems can be solved by computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?

Technology is supposed to increase our mastery over nature and reduce the role of chance in our lives; building smarter-than-human computers could actually bring chance back with a vengeance.

Chapter 13 Seeing Green

Cleantech companies rarely produced 2x, let alone 10x, improvements.

Customers won’t care about any particular technology unless it solves a particular problem in a superior way.

Most cleantech founders would have been better off opening a new British restaurant in dowtown Palo Alto.

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.

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.

Great companies have secrets: specific reasons for success that other people don’t see.

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.

While generic cleantech companies struggled to differentiate themselves, Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.

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 problem can make money.

Faccebook started as a service for just one university campus before it spread to other schools and then the entire world.

Paradoxically, the challenge for the entrepreneurs who will create Energy 2.0 is to think small.

Chapter 14 The Founders Paradox

But it happens all the time to founders: startup CEOs can be cash poor but millionnaires on paper. They may oscillate between sullen jerkiness and appealing charisma. Almost all successful entrepreneurs are simultaneously insiders and outsiders. And when they do succeed, they attract both fame and infamy.

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.

The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.

Conclusion Stagnation or Singularity?

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 the 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.

 

 

 

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