Weekly Reading #4: Zero to One (Part 4)
Notes on Startups, or How to Build the Future by Peter Thiel
“Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Segrey Bin 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.”
It’s easier to copy than to create something new. Copying takes the world from 1 to n, adding more of something similar. Creating takes us from 0 to 1. Innovation is what makes American businesses successful. We will fail if we stop searching for new paths.
Zero to One is about how to build companies that create new things.
Read Part 3 (Chapter 6–7) here:
Chapter 8: Secrets
Every one of today’s most famous and familiar ideas was once unknown and unsuspected. The Pythagorean triple was a secret, so the creator had to think hard to discover it. Overtime, a secret becomes a conventional truth. A conventional truth can be important but it won’t give you an edge. It’s not a secret.
There are many things we don’t yet understand, but some of those things may be impossible to figure out — mysteries rather than secrets. The difference matters. You can achieve difficult things, but you can’t achieve the impossible.
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. If there are many secrets left in the world, there are probably many world-changing companies yet to be started.
Why aren’t people looking for secrets?
Along with the natural fact that physical frontiers have receded, four social trends have conspired to root out belief in secrets.
- Incrementalism — From an early age, we are taught that the right way to do things is to proceed one very small step at a time. If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange for doing exactly what’s asked of you (and for doing it just a bit better than your peers), you’ll get an A.
- Risk aversion — By definition, a secret hasn’t been vetted by the mainstream. The prospect of being lonely but right — dedicating your life to something that no one else believes in — is already hard. The prospect of being lonely and wrong can be unbearable.
- Complacency — Why search for a new secret if you can comfortably collect rents on everything that has already been done?
- “Flatness” — As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace. Given that assumption, anyone who might have had the ambition to look for a secret will first ask himself: if it were possible to discover something new, wouldn’t someone from the faceless global talent pool of smarter and more creative people have found it already? This voice of doubt can dissuade people from even starting to look for secrets in a world that seems too big a place for any individual to contribute something unique.
Very few people take unorthodox ideas seriously today, and the mainstream sees that as a sign of progress. 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.
The World According To Convention
What happens when a company stops believing in secrets? The sad decline of Hewlett-Packard provides a cautionary tale. In 1990, the company was worth $9 billion. HP invented the first affordable color printer, one of the first super-portable laptops, the first all-in-one printer/fax/copier. By mid-2000, HP was worth $135 billion.
However, the company started to stop inventing. The company’s management belived that charting the plan for future technology was beyond the board’s competence. The board restricted itself into the night watchman’s role: accounting, management, etc. In the end, by late 2012 HP was worth just $23 billion — not much more than it was worth in 1990, adjusting for inflation.
The Case For Secrets
You can’t find secrets without looking for them. Andrew Wiles demonstrated this when he proved Fermat’s Last Theorem after 358 years of fruitless inquiry by other mathematicians. If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.
There are many more secrets left to find, but they will yield only to relentless searchers. There is more to do in science, medicine, engineering, and in technology of all kinds. But we will never learn any of these secrets unless we demand to know them and force ourselves to look.
The same is true of business. Great companies can be built on open but unsuspected secrets about how the world works. Before Airbnb, travelers had little choice but to pay high prices for a hotel room, and property owners couldn’t easily and reliably rent out their unoccupied space. Airbnb saw untapped supply and unaddressed demand where others saw nothing at all. The same is true of private car services Lyft and Uber. Few people imagined that it was possible to build a billion-dollar business by simply connecting people who want to go places with people willing to drive them there. The same reason that so many internet companies, including Facebook, are often underestimated — their very simplicity — is itself an argument for secrets. If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
How to find secrets
There are two kinds of secrets: secrets of nature and secrets about people. So when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?
The best place to look for secrets is where no one else is looking. Most people think only in terms of what they’ve been taught. So you might ask: are there any fields that matter but haven’t been standardized and institutionalized?
What to do with secrets
If you find a secret, you face a choice: Do you tell anyone? Or do you keep it to yourself?
It depends on the secret: some are more dangerous than others. Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know.
The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
As Tolkien wrote in The Lord of the Rings:
The Road goes ever on and on
Down from the door where it began
Life is a long journey; the road marked out by the steps of previous travelers has no end in sight. But later on in the tale, another verse appears:
Still round the corner there may wait
A new road or a secret gate,
And though we pass them by today,
Tomorrow we may come this way
And take the hidden paths that run
Towards the Moon or to the Sun.
The road doesn’t have to be infinite after all. Take the hidden paths.
Chapter 9: Foundations
“Theil’s law”: a startup messed up at its foundation cannot be fixed.
Beginnings are special. They are qualitatively different from all that comes afterward. Take the Constitution of the United States for example. If the debate had turned out different, we have had a very different country today. Companies are like countries in this way. Bad decisions made early on are very hard to correct after they are made. As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.
Ownership, possession, and control
To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts:
• Ownership: who legally owns a company’s equity?
• Possession: who actually runs the company on a day-to-day basis?
• Control: who formally governs the company’s affairs?
A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control.
Early-stage startups are small enough that founders usually have both ownership and possession. Most conflicts in a startup erupt between ownership and control — that is, between founders and investors on the board. The potential for conflict increases over time as interests diverge: a board member might want to take a company public as soon as possible to score a win for his venture firm, while the founders would prefer to stay private and grow the business.
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. A board of three is ideal. Your board should never exceed five people, unless your company is publicly held. If you want an effective board, keep it small.
On the bus or off the bus
If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus. As a general rule, everyone you involve with your company should be involved full-time. 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. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day.
Cash is not 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. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
A cash bonus is slightly better than a cash salary — at least it’s contingent on a job well done. But even so-called incentive pay encourages short-term thinking and value grabbing. Any kind of cash is more about the present than the future.
Vested interests
Equity is the one form of compensation that can effectively orient people toward creating value in the future. You must allocate it very carefully. Giving everyone equal shares is usually a mistake: every individual has different talents and responsibilities as well as different opportunity costs, so equal amounts will seem arbitrary and unfair from the start. On the other hand, granting different amounts up front is just as sure to seem unfair. Resentment at this stage can kill a company, but there’s no ownership formula to perfectly avoid it.
Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret. Sending out a company-wide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.
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.
Extending the founding
The founding moment of a company, however, really does happen just once: only at the very start do you have the opportunity to set the rules that will align people toward the creation of value in the future.
The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops. If you get the founding moment right, you can do more than create a valuable company: you can steer its distant future toward the creation of new things instead of the stewardship of inherited success. You might even extend its founding indefinitely.
About Weekly Reading
Weekly Reading is a personal project to expand my knowledge by exposing myself to new ideas. Every Saturday, I lock myself in the neighborhood Barnes & Nobles and consume a book in one reading. Then, I share my note with the world.
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