Weekly Reading #4: Zero to One (Part 5)
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 8–9) here:
Chapter 10: The mechanics of mafia
No company has a culture; every company is a culture. You can’t accomplish anything meaningful by hiring outsiders to do your job. A startup is a team of people on a mission, and a good culture is just what that looks like on the inside
Beyond professionalism
The first team that I built has become known in Silicon Valley as the “PayPal Mafia” because so many of my former colleagues have gone on to help each other start and invest in successful tech companies. We sold PayPal to eBay for $1.5 billion in 2002. Since then, Elon Musk has foundedSpaceX and co-founded Tesla Motors; Reid Hoffman co-founded LinkedIn; Steve Chen, Chad Hurley, and Jawed Karim together founded YouTube; Jeremy Stoppelman and Russel Simmons founded Yelp; David Sacks co-founded Yammer; and I co-founded Palantir. Today all seven of those companies are worth more than $1 billion each.
Sorting through resume and simply hiring the most talented people wasn’t the approach, in fact I had seen the mixed results of that approach. From the start, I wanted PayPal to be tightly knit instead of transactional. Stronger relationships would make us not just happier and better at work but also more successful in our careers even beyond PayPal. We set out to hire people who would actually enjoy working together. They had to be talented, but even more than that they had to be excited about working specifically with us. That was the start of the PayPal Mafia.
Recruiting conspirators
Recruiting is a core competency for any company. It should never be outsourced. You need people who are not just skilled on paper but who will work together cohesively after they’re hired. Talented people don’t need to work for you; they have plenty of options. You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?
Every company makes the same claims, so they won’t help you stand out. “Your stock options will be worth more here than elsewhere.” “You’ll get to work with the smartest people in the world.” “You can help solve the world’s most challenging problems.”
The only good answers are specific to your company, so you won’t find them in this book. But there are two general kinds of good answers: answers about your mission and answers about your team. You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done. That’s the only thing that can make its importance unique.
However, even a great mission is not enough. The kind of recruit who would be most engaged as an employee will also wonder: “Are these the kind of people I want to work with?” You should be able to explain why your company is a unique match for him personally. And if you can’t do that, he’s probably not the right match.
Above all, don’t fight the perk war. Anybody who would be more powerfully swayed by free laundry pickup or pet day care would be a bad addition to your team. 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.
What’s under Silicon Valley’s hoodies
From the outside, everyone in your company should be different in the same way.
Young people in Mountain View and Palo Alto go to work wearing T-shirts. It’s a cliché that tech workers don’t care about what they wear, but if you look closely at those T-shirts, you’ll see the logos of the wearers’ companies — and tech workers care about those very much. The startup uniform encapsulates a simple but essential principle: everyone at your company should be different in the same way — a tribe of like-minded people fiercely devoted to the company’s mission.
Max Levchin, my co-founder at PayPal, says that startups should make their early staff as personally similar as possible. Startups have limited resources and small teams. They must work quickly and efficiently in order to survive, and that’s easier to do when everyone shares an understanding of the world.The early PayPal team worked well together because we were the same kind of nerd and all obsessed with creating a digital currency that would be controlled by individuals instead of governments. For the company to work, it didn’t matter what people looked like or which country they came from, but we needed every new hire to be equally obsessed.
Do one thing
On the inside, every individual should be sharply distinguished by her work.
Startups have to move fast, so individual roles can’t remain static for long. But it’s also because job assignments aren’t just about the relationships between workers and tasks; they’re also about relationships between employees.
The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. 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.
When a startup fails, we often imagine it succumbing to predatory rivals in a competitive ecosystem. But every company is also its own ecosystem, and factional strife makes it vulnerable to outside threats. Internal conflict is like an autoimmune disease: the technical cause of death may be pneumonia, but the real cause remains hidden from plain view.
Of cults and consultants
The most intense kind of cults happens when members hang out only with other members. They ignore their families and abandon the outside world. In exchange, they experience strong feelings of belonging, and maybe get access to esoteric “truths” denied to ordinary people.
The extreme opposite of a cult is a consulting firm like Accenture: not only does it lack a distinctive mission of its own, but individual consultants are regularly dropping in and out of companies to which they have no long-term connection whatsoever.
Every company culture can be plotted on a linear spectrum:
The best startups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful startup are fanatically right about something those outside it have missed. You’re not going to learn those kinds of secrets from consultants, and you don’t need to worry if your company doesn’t make sense to conventional professionals. Better to be called a cult — or even a mafia.
Chapter 11: If you build it, will they come?
Even though sales is everywhere, most people underrate its importance. We underestimate the importance of distribution — a catchall term for everything it takes to sell a product. Our bias is salespeople and other “middlemen” supposedly get in the way, and distribution should flow magically from the creation of a good product. It is especially popular in Silicon Valley, where engineers are biased toward building cool stuff rather than selling it. But customers will not come just because you build it. You have to make that happen, and it’s harder than it looks.
Nerds vs. Salesmen
In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works. It works on nerds, and it works on you. Advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.
Nerds are used to transparency. Sales is the opposite: an orchestrated campaign to change surface appearances without changing the underlying reality. They know their own jobs are hard, so when they look at salespeople laughing on the phone with a customer or going to two-hour lunches, they suspect that no real work is being done. If anything, people overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss is that it takes hard work to make sales look easy.
Everybody sells
Everybody has a product to sell — no matter whether you’re an employee, a founder, or an investor. It’s true even if your company consists of just you and your computer. Look around. If you don’t see any salespeople, you’re the salesperson.
Sales is hidden
All salesmen are actors: their priority is persuasion, not sincerity. Like acting, sales works best when hidden. Almost everyone whose job involves distribution — whether they’re in sales, marketing, or advertising — has a job title that has nothing to do with those things. There’s a reason for these redescriptions: none of us wants to be reminded when we’re being sold.
The engineer’s grail is a product great enough that “it sells itself.” The polar opposite business cliché 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. That’s true, but it doesn’t mean the operating systems we use today and the keyboard layouts on which we type were imposed by mere chance. It’s better to think of distribution as something essential to the design of your product. 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.
How to Sell a Product
Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product — even if it easily fits into already established habits and anybody who tries it likes it immediately — you must still support it with a strong distribution plan.
Two metrics set the limits for effective distribution
- Customer Lifetime Value
- Customer Acquisition Cost
Complex Sales
If your average sale is seven figures or more:
- Every detail of every deal requires close personal attention.
- It might take months to develop the right relationships.
- You might make a sale only once every year or two.
- You’ll usually have to follow up during installation and service the product long after the deal is done.
Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade. Good enterprise sales strategy starts small: a new customer might agree to become your biggest customer, but they’ll rarely be comfortable signing a deal completely out of scale with what you’ve sold before. Once you have a pool of reference customers who are successfully using your product, then you can begin the long and methodical work of hustling toward ever bigger deals.
Personal Sales
Most sales are not particularly complex: average deal sizes might range between $10,000 and $100,000, and usually the CEO won’t have to do all the selling himself. The challenge is how to establish a process by which a sales team of modest size can move the product to a wide audience
Distribution Doldrums
In between personal sales (salespeople obviously required) and traditional advertising (no salespeople required) there is a dead zone. Advertising would either be too broad or too inefficient. The product needs a personal sales effort, but you don’t have the resource to hire a salesman. This is why so many small and medium-sized businesses don’t use tools that bigger firms take for granted. t’s not that small business proprietors are unusually backward or that good tools don’t exist: distribution is the hidden bottleneck.
Marketing and Advertising
Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution. Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.
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. But, no early-stage startup can match big companies’ advertising budgets. You need to find a league of your own.
Viral Marketing
A product is viral if its core functionality encourages users to invite their friends to become users too. This is how Facebook and PayPal both grew quickly: every time someone shares with a friend or makes a payment, they naturally invite more and more people into the network.
Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
The Power Law of Distribution
Distribution follows a power law of its own.
This is counterintuitive for most entrepreneurs, who assume that more is more. But the kitchen sink approach — employ a few salespeople, place some magazine ads, and try to add some kind of viral functionality to the product as an afterthought — doesn’t work. Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure. If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.
Selling to Non-Customers
Your company needs to sell more than its product. You must also sell your company to employees and investors. Clamor and frenzy are very real, but they rarely happen without calculated recruiting and pitching beneath the surface.
Selling your company to the media is a necessary part of selling it to everyone else. You should never assume that people will admire your company without a public relations strategy. The press can help attract investors and employees. Any prospective employee worth hiring will do his own diligence; what he finds or doesn’t find when he googles you will be critical to the success of your company.
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.
If you find this post helpful. Please recommend it and share it with your friends. Feel free to leave me a note anytime.
