Notes on Startups: ‘ZERO to ONE’

About the book: Creating something from 0 to 1 is a singular event. This is called vertical progress. It’s less likely to follow the walked paths! Horizontal progress, on the other hand, is to copy what worked so far. Just like, China has been efficiently replicating what worked in the developed world. This book is about vertical progress, going from Zero to One.

Peter Thiele (with his student Blake Masters) prepared this book based on notes of a class that he taught at Stanford called “Computer Science 183: Startup”. The author mentioned the patterns he experienced as a co-founder/investor of hundreds of startups including PayPal, Palantir, SpaceX, and Facebook. However, this book does not necessarily carry any formula for success. In his words, “today’s “best practices” lead to dead ends; the best paths are new and unknown”.

Monopoly is the mantra of successful businesses: A successful business creates or improves something which is at least 10X better than its closest substitute. This leads to escaping the competition and gives the business a monopolistic business. However, once the momentum of monopoly is established, the wise ones usually stay quiet or conceal their monopoly by highlighting their competitors. This way, they can avert unintentional audits, scrutiny, and competition.

Stay non-disruptive as much as possible: Disruption attracts attention and creates unnecessary competition. Stepping onto the toes of an established large competitor at an initial stage can be particularly fatal. Avoid competition as much as possible. While doing so, you need to move forward. Because, in business, equilibrium means stasis, and stasis means death; just like many other segments of our lives.

Substance and endgame over being the first: Dominate a small niche and establish yourself in that area. Moving first can only give the initial tactical advantage. Without substance, new competitors can unseat you. Therefore, “you must study the end game before everything else.”

Our life follows the power laws: Venture capitalists identify and fund early-stage startup companies. The investments usually have 10-years of lifespan to allow the companies to grow and lift off. Few investments grow exponentially, and many of them fail. The best investment often equals or outperforms the entire rest of the fund combined. However, it can only be realized by looking backward. So, (Thiel’s) ‘Founders Fund’ focuses on 5–7 startups that can potentially be multi-billion-dollar companies over time based on their unique fundamentals.

The scenario is true in the general sense as well. Time and our decision-making follow power laws. Some decisions and moments matter far more than others. And, what’s the most important is rarely obvious!

Conventional truths won’t give you an edge: Mathematical relationship between triangles’ sides was a secret for millennia. Pythagoras had to think hard to discover it. Now that it is a conventional truth, it’s important to know. However, knowing it will not give an edge.

Just like that, you need to ask what valuable company is nobody building? Every correct answer is necessarily a secret. And, “every great business is built around a secret that’s hidden from the outside.”

It all starts with a belief in the secret, first. You can’t find secrets without actively looking for them. Brilliance can help to uncover the secret via accomplishing near-impossible tasks. However, a strong faith in secret is what makes someone start looking diligently. And, the best place to look for secrets is where no one is looking.

Evolution is not sufficient for Startups: Progress without planning comes from evolution. In Darwinism, unintended random iterations lead to new species in nature. And, in a competitive sphere, the best output of the interaction wins. However, simply iteration without a bold plan won’t create something from 0 to 1. Counting on evolutionary progress won’t give the necessary edge. Evolutionary progress might help you reach the local maxima; but, it won’t reach the global maximum. Therefore, startups can not rely on that, and rather require intentionally built intelligent design.

Recruitments in startups: At the early stage, the staff of a startup should be personally as similar as possible. Founders should share a prehistory before starting the collaboration. That is what formes a well-functioning team. Otherwise, they are just rolling dice! However, inside, they must have sharply distinguishable complementary technical capabilities.

While forming PayPal, the founders actively focused on hiring people who will actually like to work together, be excited about working specifically with the founders. That’s how PayPal Mafia was born. It did not come out by finding the most talented people from a pool of resumes.

Everyone in the company should be a full-timer. Hiring consultants does not work. Employees are either fully on the bus or off the bus!

In the boardroom, less is more. A board of three is ideal. It should never exceed five unless the company is publicly held.

In an essence, “recruiting is part detective work and part sales: you have to scrutinize applicants’ history, assess their motives and compatibility, and persuade the most promising ones to join you.”

Cash is not the king: “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.” Any kind of cash is more about the present, not the future. Equity, on the other hand, is the best way a founder can have everyone aligned. However, the fate of the equity is also tied to the fate of the company. It’s not liquid like cash. So, some might not want to settle with that considering the risk.

A good strategy is to cover the basics like health insurance and promise a compelling mission to work on a unique problem alongside great people.

Being a compelling salesperson: “It sells itself’-is a delusional statement in business. One exception is the viral products where its core functionality encourages its users to invite their friends too. In regular cases, inventing an effective way to sell is an integrated task of inventing an important product.

Sales work best when it’s hidden, just like acting. Complex and valuable sales work best when you don’t have a ‘salesman’ at all. At that level of importance, maybe, it’s the CEO the buyers want to talk to, not the VP of sales. So, it’s very much case-dependent.

Conclusive remarks: Just because modern technological development is promising, it does not necessarily guarantee that it will continue automatically. It took 10,000 years to escape the primitive agricultural age to medieval windmills, steam engines of the 1760s, or the invention of airplanes and landing on the moon of the last century. Technological progress can move fast and can also stay stuck within a realm for centuries. In recent decades, getting traction of internet, crumbling of East Asian financial crises of 1997, bust of promising ‘.com’ bubble and housing bubble shows that progress is not always as sustainable as is perceived. Set careers and work patterns that worked for previous generations will not necessarily work for the coming generations. Therefore, the continuation of progress, be it in startups or in other segments of our lives, requires deliberate effort in making that happen.