Notes from Zero to One:
Be Bold, Build Monopolies
These are some notes to remind me of what I learnt reading Peter Thiel’s, Zero to One.
Peter Thiel believes we aren’t being bold enough. Lessons learnt over the last 15 years that startups are told to believe in are wrong. We should make incremental advances: instead, it is better to risk boldness than triviality; we should stay lean and flexible: instead, a bad plan is better than no plan; we should improve on the competition: instead, competitive markets just destroy markets; and focus on product rather than sales: instead, sales matter just as much as product.
Our lack of bold plans are a result of indefinite optimism. This manifests itself in people and companies choosing to keep options open. This includes our best and brightest going into traditional careers such as banking and consulting; banks choosing to diverse money across many stocks rather than choose winners; and Governments choosing to prevent disaster (eg. Maintaining healthcare) instead of acting on ambitious plans (eg. Get a man on the moon).
The secret to success lies in indefinite optimism. In the 1950s and 1960s people knew what they wanted and focused on achieving it. Bold plans included putting a man on the moon. But you don’t need to be NASA (or an expert) to create bold plans. For example, John Reber created bold plans to transform the San Francisco bay that were taken very seriously (though, in the end, were not implemented).
The lesson: Make bold plans and act on them. Don’t let your path be dictated. This reminds me of what Jim Collins laid out in Good to Great: set Big Hairy Audacious Goals. Though I believe Peter Thiel would argue that even Jim’s idea of a BHAG is still too incremental.
Bold plans are needed to create a monopoly company. And monopolies are the most successful startups. What does a monopoly look like? It has these characteristics:
- Proprietary technology. This is the most substantive advantage a company can have because it makes your product difficult or impossible to be replicated. As a rule of thumb, the technology must be 10x better than what currently exists.
- Network effects. The more people who use it, the more powerful the product will be. “Network effects businesses must start with especially small markets.” For example, Facebook was used initially just within Harvard and then just within the Ivy league universities. “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.”
- Economies of Scale. “Fixed costs of creating a product are spread out over ever greater number of sales.” Service businesses (eg. yoga) are difficult to scale because it’s harder to scale people.
- Branding. A distinct brand is a big asset (eg. Apple), but no tech company can be built on branding alone.
Sometimes it’s hard to tell if a company is a monopoly because monopoly companies try and appear similar to others (to avoid regulation), while competitive companies try and appear different (to stand out in a undifferentiated market)
A venture fund needs to ensure every one of its investments could be a unicorn. Most companies in a VC’s portfolio will fail, therefore, the ones that succeed, must succeed big. Monopoly companies are ones that are likely to succeed big. How do you spot a successful monopoly? Ask these seven questions:
- Engineering — Can you create breakthrough technology instead of incremental improvements?
Be 10x better. - Timing — is now the right time to start your particular business?
You don’t need to be first, you just need to be last. “You must study the endgame before everything else,” said Jose Capablanka. - Monopoly — are you starting with a big share of a small market?
Start with a very small market. It’s easier to dominate a small market. For example, PayPal targeted the power buyers and sellers on eBay. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. A big market is a bad choice, a big market served by competitors is even worse. - People — Do you have the right team?
On founders and teams:
A CEO should never be paid more than $150,000. The less they’re paid, the more likely the startup will be successful.
Why should someone join your company? You need to be able to detail a clear answer specific to your company. It can’t be generic enough to apply to other companies as well.
Recruit similarly minded people. Most important is that they all believe in the same mission. But having similar personal preferences also helps (eg. The founders of PayPal all loved Star Trek).
Make every employee responsible for just one thing. This avoids political infighting. - Distribution — Do you have a way to not just create but deliver your product?
Products often don’t sell themselves. Therefore a startup needs strong sales and marketing. You need to make sure it’s cost effective. - Durability — will your market position be defensible 10 to 20 years into the future?
Unique technology that can’t easily be replicated is a good starting point. Creating a strong brand can improve this further. - Secret — Have you identified a unique opportunity that others don’t see?
Must have a secret: something you believe that everyone else disagrees with you or doesn’t know. Assuming you’re right, you have a massive advantage.
Must differentiate between secrets (which are discoverable) and mysteries (which are impossible to discover).
Secrets require hard work to learn. People don’t look for secrets because: 1. We’re taught to think incrementally; 2. Risk aversion — people don’t like being wrong; 3. Complacency; 4. Flatness — assuming someone in the world has already discovered it.
Companies need to believe in secrets, and discover them, to stay ahead, otherwise they fail to innovate.
There are two types of secrets: 1. What nature is not telling you (may need a PHD to discover); and 2. What secrets people are not telling you (what do people not talk about/ taboos).
One way to discover is look at what universities are not teaching, eg. Nutrition.
Final note of interest:
Machines won’t replace men. They’ll complement humans to achieve more.
