Zero to One

"Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin 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. Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange."

Whilst on holiday I read Peter Thiel’s Zero to One. The book is largely compiled from the content of Thiel’s class at Stanford. The Atlantic described it as possibly the best business book ever and whilst I certainly don’t share that view, there were lots of pithy thoughts (as you would expect from a multiple billion dollar startup founder), some interesting frameworks for thinking about the future and quite a bit that I took from it.

There is, says Thiel, no formula for entrepreneurship since by definition every innovation is unique and new, and successful people find value in unexpected places through thinking from first principles rather than formulas. Thiel’s killer interview question is: ‘What important truth do very few people agree with you on?’. This may sound like a straightforward question but it is intellectually and psychologically difficult to answer since most everything we are taught is already agreed upon and the answer is by definition unpopular: ‘Brilliant thinking is rare, but courage is in even shorter supply than genius’.

Most answers to the question are different ways of seeing the present but the best answers can come close to looking into the future. So there are two types of progress – horizontal (or extensive) and vertical (or intensive). The former copies things that already work and is easier to imagine (1 to n). The latter means doing new things (0 to 1) that no-one else has done before and and is therefore much harder. Today’s “best practices” lead to dead ends; the best paths are new and untried. Thiel’s own answer to the question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more (in a world of scarce resources, globalization without new technology is unsustainable).

Expanding from this premis, Thiel goes into a number of interesting areas – since his phraseology is so cogent I've pulled out some of the most relevant quotes to illustrate the thoughts I found most interesting.

On why competition is overrated (personally I thought he was in danger of over-playing this point though there were some great thoughts in there too):

'…competition is an ideology—the ideology—that pervades our society and distorts our thinking. We preach competition, internalize its necessity, and enact its commandments; and as a result, we trap ourselves within it—even though the more we compete, the less we gain.'

…and…

'In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot.'

…and…

'Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in its own way.” Business is the opposite. 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.'

…and…

'War metaphors invade our everyday business language: we use headhunters to build up a sales force that will enable us to take a captive market and make a killing. But really it’s competition, not business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive.'

This means large businesses in competitive markets can become bad businesses with a questionable future:

'Inside a firm, people become obsessed with their competitors for career advancement. Then the firms themselves become obsessed with their competitors in the marketplace. Amid all the human drama, people lose sight of what matters and focus on their rivals instead.'

…and…

'In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now).'

…and…

'…in business, equilibrium means stasis, and stasis means death.'

…and…

'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.'

There is a big difference between monopolist businesses and non-monopolists:

'Monopolists lie to protect themselves…Non-monopolists tell the opposite lie: "we’re in a league of our own".'

…and…

'Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets…Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets.'

So startups should concentrate on how they can create their own monopoly:

‘…the world we live in is dynamic: it’s possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world.'

…and…

'Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival.'

…and…

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

…and…

'…so startups’ obsession with disruption means they see themselves through older firms’ eyes. If you think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the obstacles in your path. But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create.'

…and…

'The best projects are likely to be overlooked, not trumpeted by a crowd; the best problems to work on are often the ones nobody else even tries to solve.'

And start small, then get bigger:

'Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. 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.'

…and…

'The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.'

…and…

'Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. Amazon shows how it can be done. Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books.'

…and…

'Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.'

…and…

'It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision.'

And the 'secret' on which you build your model needs to be kept secret:

'So who do you tell? Whoever you need to, and no more. In practice, there’s always a golden mean between telling nobody and telling everybody—and that’s a company. 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.'

Small teams of people can make a big difference:

'Positively defined, a startup is the largest group of people you can convince of a plan to build a different future.'

…and…

'From the Founding Fathers in politics to the Royal Society in science to Fairchild Semiconductor’s “traitorous eight” in business, small groups of people bound together by a sense of mission have changed the world for the better.'

…and..

'So 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.'

Businesses are defined by their future, not just by their present and their past:

'…the Times was profitable while Twitter wasn’t. But a great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade, while newspapers’ monopoly days are over.'

…and…

'What does a company with large cash flows far into the future look like? Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.'

…and…

'As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.'

…and…

'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.'

…and…

'Companies must strive for 10x better because merely incremental improvements often end up meaning no improvement at all for the end user.'

…and…

'Every entrepreneur should plan to be the last mover in her particular market. That starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in?'

There were also some interesting thoughts about company culture, recruiting and the importance of sales and distribution in there which I'll talk about another time but plenty to chew on there.