Peter Thiel’s Zero to One: A book about secrets

There are hundreds of great books about building startups but not enough time to read all of them. This is the first post in a series of seven minute summaries of top startup resources aimed at entrepreneurs who are building the next great company.

Zero to One is one of the definitive books on building and investing in startups. It’s written by Peter Thiel, the founder of PayPal and Palantir, who built a team that has gone on to start companies like SpaceX, Tesla, LinkedIn, YouTube, Yelp, and Yammer. A cross between a manifesto and a how to start and invest in startups guide, this is one of the best books for people who want to build world-changing companies.


The Challenge of the Future

Thiel starts the book with what appears to be a relatively simple question that is incredibly difficult to answer well:

“What important truth do very few people agree with you on?”

Thiel’s answer to this question is that most people think the future will be defined by globalization, but he thinks the future will be defined by technology. Thiel defines globalization as the process of taking things that work somewhere and making them work everywhere, or going from 1 to n, whereas technology is defined by creating new and better ways of doing things, or going from 0 to 1.

Party Like It’s 1999

After the dot-com crash, entrepreneurs learned four main lessons for building startups, which has shaped general thinking in the startup world. However, Thiel believes these are largely incorrect, and that the opposite principles are actually true.

Lessons from the dot-com crash

  1. Make incremental advances
  2. Stay lean and flexible
  3. Improve on the competition
  4. Focus on product, not sales

Thiel’s principles

  1. It is better to risk boldness than triviality
  2. A bad plan is better than no plan
  3. Competitive markets destroy profits
  4. Sales matters just as much as product

All Happy Companies Are Different

The business version of “What important truth do very few people agree with you on?” is “What valuable company is nobody building?

Obviously this is a tough question to answer well, and one of the counterintuitive insights from looking at the business world today is that even very big businesses can be bad businesses. For example, airlines charge an average of $178.00 per one way trip but only make $0.37 in profit. Google, on the other hand, made $50 billion in revenue in 2012 and kept 21% of the revenues as profit.

The reason that Google is valuable and airlines are not is Google is a monopoly, and airlines operate in a perfectly competitive market where economic profits are driven to zero.

Thiel ends the chapter with a Tolstoy-inspired quote. “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 Ideology of Competition

“Competition is the ideology that pervades our society and distorts our thinking.” It makes people hallucinate opportunities where none exist and distracts people from the actual opportunities at hand. Thiel advises founders to recognize competition as a destructive force in building a monopoly business.

Last Mover Advantage

All monopolies are unique, but every monopoly tends to have some mix of these four attributes:

  1. Proprietary technology — 10x improvement to existing substitutes
  2. Network effects — product needs to be valuable when network is small in order to get big
  3. Economies of scale — business needs to get stronger as it gets bigger
  4. Branding — brand is important, but beginning with brand rather than product is dangerous

Startups should find small markets with few or no competitors and dominate a large share of that market. After dominating a small market, startups should move into broader, adjacent markets. For example, moving from books to CDs, videos, and software.

Big markets are bad choices, and it’s a red flag when entrepreneurs talk about getting 1% of a $100 billion market.

Conventional wisdom is that the first entrant into a market can capture significant market share, but to create a long-term, enduring monopoly , it’s much better to be the last mover and create the last great development in a given market.

You Are Not a Lottery Ticket

The most contentious question in business is whether success comes from luck or skill. Malcolm Gladwell says success is a “patchwork of lucky breaks and arbitrary advantages.” Thiel argues that if you believe life is a matter of chance, you shouldn’t be reading this book. It would be the same thing as reading a book of stories about people who won the lottery.

Follow the Money

In venture capital, returns follow a power law — not a normal distribution. The best investments will radically outperform all of the others.

Facebook was the best investment in Founders Fund 2005 fund, and it returned more money than all the other companies in that fund combined. Palantir was the second-best investment, and it returned more than all of the other investments except for Facebook.

This power law distribution means VCs must only invest in companies that have the potential to return the entire value of their fund. Likewise people who are considering starting a new venture vs. joining a company should consider what the power law implies about choosing where to work. Owning 0.01% of Google is much more valuable than 100% of a smaller company.

Secrets

“Every one of today’s most famous and familiar ideas was once unknown and unsuspected.”

Good answers to the question “What important truth do very few people agree with you on?” lead to secrets that are glimpses of the future and could one day be world-changing ideas and companies. You can’t find secrets without looking for them, but there are many secrets left to find.

There are two kinds of secrets, secrets about nature and secrets about people. Sometimes they lead to the same truth. For example, the monopoly secret: competition and capitalism are opposites. The natural, empirical evidence would be a study showing corporate profits are eliminated by competition. The human approach is observing that people who run monopolies downplay their monopoly status, and people who run competitive firms exaggerate their uniqueness.

The best place to find secrets is where other people aren’t looking. Schooling tends to teach people conventional wisdom, so fields such as physics tend to be standardized and institutionalized. Nutrition, on the other hand matters to everyone, but you can’t major in it at Harvard, and there is very little good information on the topic, making it just the type of field that could yield secrets.

Foundations

“Thiel’s law”: a startup messed up at its foundation cannot be fixed. Making bad decisions early on will be very hard to correct later on.

  • Founders should share a prehistory before they start a company together
  • Effective boards are small (three is ideal)
  • Anyone involved with a company should be full-time (okay to break this rule for lawyers and accountants)
  • Early-stage CEOs should not receive more than $150,000 per year in salary
  • Equity is the best way for a founder to keep stakeholders’ incentives aligned. Allocating equity equally is usually a mistake
  • The most valuable companies maintain an openness to invention that is characteristic of beginnings

The Mechanics of Mafia

Talented people have plenty of options, so it is critical to have a good answer to 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?”

Bad answers include “Your stock options will be worth more here than elsewhere,” “you’ll get to work with the smartest people in the world,” and “you can help solve the world’s most challenging problems” because everyone makes these claims. Good answers need to be specific to your company’s mission and your company’s team.

The best startups might be considered slightly less extreme than cults, except instead of being fanatically wrong about something important, they are fanatically right about something that those outside it have missed.

If You Build It, Will They Come?

Most people underrate the importance of sales, and Silicon Valley underrates it more than most. However, superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.

Typical distribution methods vary by the size of your average deal.

Seven Questions Every Business Must Answer

These are the seven questions that Thiel believes all startups must answer. Having the answers to five or six might be enough to make your company work, but good answers to all seven mean you will “master fortune and succeed.”

  1. The Engineering Question — Can you create breakthrough(10x better) technology instead of incremental improvements?
  2. The Timing Question — Is now the right time to start your particular business?
  3. The Monopoly Question — Are you starting with a big share of a small market?
  4. The People Question — Do you have the right team?
  5. The Distribution Question — Do you have a way to not just create but deliver your product?
  6. The Durability Question — Will you be the last mover in your market? Will your market position be defensible 10 and 20 years into the future?
  7. The Secret Question — Have you identified a unique opportunity that others don’t see?

If you liked this summary, please hit recommend and tune in for our livestream on 2pm PT on Thursday, April 21 where we will discuss Zero to One live with a special guest from Madrona Venture Group.