Zero to One by Peter Thiel

I was expecting Peter Thiel to write a book where he showcases what makes a successful startup, and how you can build a company for massive growth. Given his experience in both founding a hugely successful company, and investing in a bunch of them since, you might imagine he has some detailed lessons to share.

But this isn’t what Thiel’s book is about – it’s far more ambitious. Asides from prodding and goading you into disagreeing with him, Thiel primarily wants to lament the current stagnation of human progress, and crucially, demand that startups seize the opportunity given to them to sort it all out.

What is zero to one?

The title of the book means to go from nothing, to a breakthrough solution or product – something completely new, or fundamentally better than what existed already (at least 10 times better, by his definition). Most companies spend their time figuring out how to go from 1 to n – incremental steps which are safe, more predictable, and ultimately easier to achieve. Going from zero to one requires a special combination of people, timing, and dedication to search for an answer to a problem. But going from zero to one is what the human race needs to do to build a better future.

“Unless they invest in the difficult task of creating new things, companies will fail in the future no matter how big their profits remain today.”

Peter Thiel knows a thing or two about it. He founded PayPal, which at the time was a revolutionary product – allowing people to send payments to each other via email. It helped to broker in a new era of e-commerce, and made life on eBay considerably easier. Thiel sold PayPal to eBay for $1.5 billion in 2002. Since then he set up the Founders Fund, where he was the first outside investor in Facebook, gaining more than 10% in the company for only $500k. His founding team at PayPal is known as the PayPal Mafia, due to their incredible impact on Silicon Valley, and collectively have gone on to create massive companies:

Elon Musk founded SpaceX, and co-founded Tesla Motors. Reid Hoffman co-founded LinkedIn. Steve Chan, Chad Hurley and Jawed Karim founded YouTube. Jeremy Stoppelman and Russell Simmons founded Yelp. David Sacks co-founded Yammer. And Thiel himself founded Palantir. All seven of these companies are multi-billion dollar businesses. The impact that this group has had, and continues to have, is enormous.

Screw competition – monopolies are the key

There are two types of companies: ones that enjoy a monopoly in their field, and ones that don’t, and thus battle it out with competitors. Most companies are the latter. However, there’s a funny thing that goes on with the way these two types of companies present themselves. A monopoly company tries very hard to make it sound like a company that is actually fighting a relentless war against competitors on every front. Take Google for example – this is a company that went from 0 to 1. Since the early 2000s it hasn’t really competed with anybody, it’s enjoyed complete domination of the search market. Yet it presents itself as a technology company, battling against across different fields, against fierce competitors like Microsoft, Yahoo, and Apple, or even as an advertising company taking a tiny percentage slice of the overall worldwide ad business. Poor Google.

On the other hand, companies which are battling against competitors go to great lengths to make it sound like they are the only ones in the space, with a completely different offering to anybody else.

Google enjoys a great deal of freedom because it is a monopoly, and it can invest vast amounts of money into research and development. If Google was openly seen as a monopoly, this could attract the attention of governments wishing to break it up – just like Microsoft did in its monopolistic heyday.

To consider just how dominant Google is, compare it with an airline company. In 2012, with the average airfare at $178, the airline made 0.37 cents per passenger – a frighteningly low amount. But the airline industry as a whole is worth $160 billion. It’s a large slice of pie, but because of a state of perfect competition, nobody wins a large slice. Google however, made $50 billion in 2012, but it retained 21% of those revenues as pure profit – which is 100 times more than any airline.

“Google makes so much money that it’s now worth three times more than every U.S. airline combined.”

But monopoly companies are not bad, argues Thiel. In fact they are exactly what we need.

“Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.”

Monopoly companies can enjoy staggering growth, and the reason why they can be valued so highly is that their projected cash flows continue to grow far into the future. Take the comparison between the New York Times and Twitter.

When Twitter had its IPO, it was valued at $24 billion, 12 times the value of the New York Times. Yet at the time Twitter was not even profitable, but the NYT was, with $133 million in revenue. Both companies provide a way to get news and updates, both employ a few thousand people. The reason for the difference is that the monopoly days which the NYT has enjoyed for so long are now over, but Twitter is expected to capture monopoly profits over the next 10 to 15 years.

PayPal is similar – expecting most of the value to come from 2020 and beyond. LinkedIn, another of the PayPal Mafia companies, is valued at around $25 billion, yet its profits are very low. It’s all about future projected cash flow.

Technology companies which create monopolies are hard to start – they often make substantial losses to begin with (consider Amazon and SalesForce, who continue to make a loss). But once they establish the monopoly, they will generate huge cash flows in the future. The opposite of this is something like a restaurant or a nightclub – which can generate decent profits to start with, but it will dwindle as competition moves in, and customers move on to the newer, trendier establishments.

To build a monopoly, you must focus on the long term. Consider tech companies Zynga and Groupon, who focused on short term profits, and did not create a 10X advantage, and subsequently suffered. Google had the search algorithms, Microsoft had Windows, Amazon had a limitless book-store, Apple had the iPod, iPhone, iPad, which were all 10X above the existing offerings and defined their own category (MP3 players, smart phones, and tablets were not new – Apple took them from average to incredible).

So, the four pillars of building a monopoly are:

1 – Proprietary technology

“Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate. Google’s search algorithms, for example, return results better than anyone else’s.”

To be sure, the technology must be at least 10 times better than its closest comparison, in one important dimension. Without this it is doubtful you can create a monopolistic advantage.

2 – Network Effects

The more people use the product, the more useful it becomes – such as Facebook, the Telephone and Fax machine. But the key is to start with a very small niche, and totally satisfy that group of users – delight them. This is also what Geoffrey Moore prescribes in his brilliant Crossing the Chasm book. Facebook started off with Harvard students, Mark Zuckerberg was not trying to get the whole world to sign up, just his college classmates.

“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 at all.”

3 – Economies of Scale

A monopoly business will get stronger and stronger – this is why software companies are especially valuable; once the groundwork is in place, the cost of producing another copy of the product is close to zero. Service businesses, however, require more cost and people to make it scale – it is very hard to get exponential growth this way. Make sure you’re building a business that can exploit economies of scale.

4 – Branding

A technology company cannot be built on branding alone – it must have substance behind the brand. Some companies are just polishing the surface, and lacking real substance underneath. But the brand is something a company has a monopoly on in any case, it owns the identity. Apple is the strongest technology brand in the world – but behind the brand is real substance.

Don’t disrupt

There’s a lot of talk about disruption today (this one was fun), but Thiel believes disruption is dangerous:

“Disruption often attracts attention: disruptor’s are people who look for trouble and find it.”

And the goal is to avoid competition.

“Any big market is a bad choice, and a big market already served by competing companies is even worse.”

Focus on a niche, an under-served group, by offering them a proprietary technology which is an order of magnitude better than anything else they’ve seen, with the ability for it to scale quickly and efficiently – and create a strong and unique brand.

The indefinite mindset must be broken

As a society, the way we see the future has a big impact on the things we do today. A definite view of the future is one which looks for the one best way to do something, and then goes out and does it. An indefinite view on the other hand, is one that is uncertain about which choices to make, and instead remains stagnant through indecision (or slowly dies through incrementalism).

As well as definite and indefinite, you are either optimistic or pessimistic about the future. Most of history has been pessimistic, believing that things roughly stay as they are, or may even get worse – however, in the Renaissance and the Enlightenment society began to believe it could shape the future, and optimistically believe it will be a better one.

In the world today, China is an example of a definite pessimist. It has definite plans, building giant cities, investing in maritime capabilities, and so on – mostly copied exactly from the US model (Thiel explains that this is deliberate and very much planned). But China is pessimistic in outlook, as it does not believe it can sustain the growth.

“with a huge population pushing resource prices higher, there’s no way Chinese living standards can ever actually catch up to those of the richest countries, and the Chinese know it.”

Europe is an example of indefinite pessimism, but it also dominates the thinking for most of the world. Europe is in ‘slow-motion crisis’, with an ineffective central bank and government. There is widespread scepticism of the European Union. Individual states like Germany and the UK are progressing, but most others are not. There is a lack of clear plans and vision, and a general feeling of pessimism about the future, and it’s been like this since the 1970s.

“All [Europe] can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime: hence Europe’s famous vacation mania.”

After World War 2 the United States entered a golden era of definite optimism. The future was looking good, there were concrete plans to make it so, and the US was getting on with it:

  • The Empire State building was started in 1929 and finished in 1931.
  • The Golden Gate Bridge was started in 1933 and completed in 1937.
  • The Manhattan Project was started in 1941 and had already produced the world’s first nuclear bomb by 1945.
  • NASA’s Apollo Program began in 1961 and put 12 men on the moon before it finished in 1972.

The baby boomer generation was confident, full of engineers, and in a rush to get things done. However since 1982, finance emerged as a new way to approach growth, showing that profits could be made just by playing on the stock market, rather than building real products.

“Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones.”

The US is still an optimistic society, but it lacks any definite plan for the future, consider how NASA has massively scaled back its projects. The government seems unable to commit to complex solutions to big problems like lunar exploration. Instead its aims are to prop up the existing system, and try to keep everybody happy.

“after 40 years of indefinite creep, the government mainly just provides insurance; our solutions to big problems are Medicare, Social Security, and a dizzying array of other transfer payment programs. It’s no surprise that entitlement spending has eclipsed discretionary spending every year since 1975.”

zero-to-one-definite-optimism

“We have to find our way back to a definite future, and the Western world needs nothing short of a cultural revolution to do it.”

How do we get back to definite optimism? Thiel argues that startups are the vehicle we can use to get us moving in that direction.

Startups are how we get there

You used to be able to make a big difference in politics, or even in philosophy in more distant times (think of the impact Plato and Aristotle had on our thinking for centuries). But it’s hard to do so now, even if you have the talent and the right intentions. A startup, however, offers you the chance to have complete mastery over a field, one which can grow quickly, and achieve exponential returns. If you succeed in creating a monopoly from it, then you can generate vast profits, which can be used to fund innovation, and allow you to shoot for more zero to one problems to solve.

Larry Page was intimating the same thing when he said he would rather give his billions to Elon Musk rather than to charity.

Less than 1% of new businesses in the US receive venture capital, and total VC investment amounts to something less than 0.2% of GDP. But venture backed companies create 11% of all private sector jobs. They generate revenues which amount to a staggering 21% of GDP. The dozen largest tech firms were all VC backed, and together are worth more than $2 trillion, more than all the other tech firms combined. The impact these VC backed companies have is disproportionate, and they fuel the entire economy.

We live in a world dominated by power laws. Those companies which become monopoly businesses, capture significantly more value and outperform thousands of other companies combined. Yet most VC firms diversify their portfolio, and fail to focus relentlessly on the very few companies which can become overwhelmingly valuable.

“The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.”

Andreessen Horowitz invested $250,000 in Instagram in 2010. Two years later Facebook bought Instagram for $1 billion, giving a return of $78 million to Andreessen Horowitz (312x return in under two years).

“VCs must find the handful of companies that will successfully go from 0 to 1 and then back them with every resource.”

What we need are companies, or more specifically founders, who are willing to search for secrets.

Searching for secrets

There are problems out there which might be impossible to solve. But, there are a lot of problems which might appear impossible, yet are just secrets waiting to be discovered. Pythagoras figured out the secrets of the triangle. Newton figured out the secrets of gravity. NASA figured out how to land humans on the Moon. And Elon Musk wants to take us to Mars by 2026. To Peter Thiel, It seems today most people are not willing to search for these hard secrets.

“Why has so much of our society come to believe that there are no hard secrets left? It might start with geography. There are no blank spaces left on the map anymore.”

We have also been taught that the right way to do things is incrementally, small steps at a time. This mentality of incrementalism is widespread in corporate life. People have become afraid of being wrong, and would rather take the safe option. If you can comfortably get returns from existing products or existing models, just by tweaking them slightly, then why go exploring difficult problems? This mindset pervades every aspect of life, from our education system, to corporate decision making.

This is why we need founders. The average person does not go looking for difficult problems to solve, nor have the fortitude to create a company to pursue it.

“It’s more powerful but at the same time more dangerous for a company to be led by a distinctive individual instead of an interchangeable manager.”

You might expect that founders are one type of extreme – either the extreme nerd and outsider, or the ultra-charismatic insider. But strangely founders seem to be a mix of both, and oscillate between the two extremes. They can be charismatic at times, and savant-like outsiders at others. Richard Branson and Lady Gaga are both figureheads of their empires – both have created a brand around their own eccentricity, yet both are disciplined and utterly focused individuals. They exemplify this strange mix that makes a zero to one founder.

zero-to-one-founder-types

“Bill Gates embodied the founder archetype: he was simultaneously an awkward and nerdy college-dropout outsider and the world’s wealthiest insider.”

Steve Jobs is another – at times he could be the most charismatic CEO in the world, and at other times he could be maniacal and crazy. We need these strange individuals, because the impact they can have is disproportionate – founder types are like power laws themselves.

“The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.”

Which future will it be?

Our future has four possible paths: a recurrent collapse, where we alternate between prosperity and ruin; a plateau, where the future will look very much like the present; extinction, where a collapse occurs which is so devastating that we do not survive it; or finally, takeoff, where we race into a brighter future that we create for ourselves.

The last one is the hardest of all to imagine, because it could take any kind of form. Breakthrough discoveries in science and technology can be so transformative to our lives, that it’s almost unthinkable what might be in one hundred or two hundred years from now. But just because the last one hundred years have been so progressive, it doesn’t mean it will always be that way – we have to return to a state of definite optimism to achieve it.

“We cannot take for granted that the future will be better, and that means we need to work to create it today.”

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