Zero to One — Peter Thiel
Ask yourself “What important truth do very few people agree with you on ?”. Good answers will be like “Most people believe in X, but the truth is opposite of X.” Most answers to this question are different ways of looking at the present. Good answers are as close as we can come looking into the future.
Monopolists lie to conceal their monopoly, usually by exaggerating the power of their non-existent competition. Example: Google is a monopoly in Search engine since 2000, but if it says it is primarily an advertising company, it holds only 3.5% market of global advertising. Non-monopolist exaggerate their monopoly by defining too narrow a market so that they dominate by definition. Overall, Non-monopolist define their market as the intersection of various smaller markets like British food Intersect Restaurant Intersect Palo Alto. Monopolists frame their market as the union of several large markets like search engine U wearable options U wearable computers U self driving cars.
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.
The value of a company today is sum of all the money it will make in the future. To properly value a business, also discount the future cash flows to the present worth, since a give amount of money today is worth more than the same amount in the future. An old economy business like Newspaper might hold its value if it can maintain its current cash flows for next few years. Their cash flows might dwindle as people move to newer and trendier alternatives. That is why twitter is valued 12 times more than New York Times. Tech companies initially lose money as it takes time to build something valuable. Most of their revenue will thus come in future. Ask yourself: “Will this business still be around a decade from now?” Don’t just focus on current numbers, think qualitative characteristics of the business.
What does a company with large cash flows far into the future look like ? They share some combination of following characteristics: Proprietary technology, network effects, economies of scale & branding.
Proprietary Technology: Invent something new or give better experience such that the new thing is at least 10 times better than the closest substitute. Anything less than that will probably be perceived as a marginal improvement. Example: Amazon had at least 10 times as many books as any other bookstore. Paypal reduced payment on ebay from 7–10 days to instantly.
Network effects make a business more useful as more people use it. Initial markets of Network effects business are so small that they often don’t even appear to be business opportunities. You will reap network effect only when your product is valuable to its very first users when the network is small. Example: Facebook started just with Harvard students.
Economies of Scale: Fixed cost of creating a product should be able to spread out as the business grows. Example: A yoga studio will only be able to serve a certain number of customers. You can hire more and expand to locations but due to high cost of replicating the studio, the profit will remain fairly low or grow linearly. You will never reach a point where a core group of people can provide value to millions of separate clients. With software, the cost of producing another copy of the product is close to zero. A good startup should have the potential of great scale built into the design.
Startup should start with a small group of particular people concentrated together and served by few or no competitors. Create a monopoly in that market and then scale. It is tough to dominate a large market. It is tough to get attention of millions of scattered individuals. Any big market is already served by many competitors so its hard to even reach 1% if $100 billion market. Even if you do succeed in getting a foothold, cutthroat competition will lead to zero or low profits.
Once you dominate a niche market, then you should gradually expand into related & slightly broader markets.
You can expect future to take a definite form or you can treat it as hazily uncertain. If you treat it 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.
Since time is the most valuable asset, it’s odd to spend it working with people who don’t envision any long term future together. The way to hire good team is hire talented people who are excited about working with each other.
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I have 10 years of industry experience in Google, Adobe & Goldman Sachs. I took 100+ interviews at Google to hire for the role of Software Engineer. I am a former Tech lead at Google Pay & Google Ads team. I am helping everyone build a successful career in Software industry.
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