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Zero to One

April 23, 2019
Peter Thiel and Blake Masters
Solid advice, although it may not be immediately actionable, and some of it is painted with unnecessarily broad strokes. If you're in the startup world, I'd read this and my notes for Basecamp's book Getting Real for a starter foundation.
Get it here →

Thiel presents great advice on entrepreneurial thinking and sales, although he tends to come off as arrogant at points. The book is short and organized, and I highlighted something on almost every page. This is a good book for people trying to create a unicorn company instead of a lifestyle business.

My notes

How to think about business

TL;DR: What valuable company is nobody building?

The single most powerful pattern I've noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.

What important truth do very few people agree with you on? To rephrase, what valuable company is nobody building? Conventional beliefs only ever come to appear arbitrary and wrong in retrospect.

Some iconoclastic advice: it's better to take big risks than to take small, incremental steps forward. A bad plan is better than no plan and iteration. When possible, create a new market – competitors destroy profits, so improving on competition will just get you caught in a cycle. Sales matters just as much as product.

Creating value is not enough – you also need to capture some of the value you create.

U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits – more than 100 times the airline industry's profit margin that year. Google makes so much money that it's now worth three times more than every U.S. airline combined.

Making small changes to things that already exist might lead you to a local maximum, but it won't help you find the global maximum.

Try to build a monopoly

TL;DR: Competition isn't good – it's a destructive force. The more we compete, the less we gain. So try to create a monopoly.

Create a product so good at what it does that no other firm can offer a close substitute. And create it in a "real" market – if you're a niche restaurant, you're still competing against all restaurants.

The life of a monopolist is much easier. You can afford to think about, and work on, things that non-monopolists can't. For instance, restaurant profit margins are so thin that Grandma is working out front and the kids are washing dishes in the back. A monopoly can afford time off, to take ethics more seriously, and so on.

It's okay to be single-mindedly interested in making something. Don't get caught up in crowds competing for obvious prizes.

Every monopoly is unique, but they usually share some combination of the following characteristics:

  • Proprietary technology. Aim to make something 10x better than whatever's currently on the market. Anything less will be hard to sell. The easiest way to do this is to invent something completely new, or to make a 10x improvement through design (Apple's ease of use).
  • Network effects. If all your friends are on Facebook, it makes sense for you to join Facebook, too. Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard students.
  • Economies of scale. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
  • Branding. No technology company can be built on branding alone, but when it follows substance, you can see a dramatic shift in perception.

Start in a niche

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

Every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it's easier to dominate a small market than a large one. Dominate a small niche, and then scale toward your ambitious long-term vision.

As you expand into adjacent markets, avoid competition as much as possible. Instead of disrupting, find ways to make it a positive-sum game for everyone involved.

Luck doesn't matter

Shallow men believe in luck, believe in circumstances. ... Strong men believe in cause and effect. – Ralph Waldo Emerson

Many people have started multiple multi-million-dollar business. A few, like Steve Jobs, Jack Dorsey, and Elon Musk, have created several multibillion dollar businesses. If success were mostly a matter of luck, these kinds of serial entrepreneurs wouldn't exist. In January 2013, Jack Dorsey tweeted to his 2 million followers: "Success is never accidental."

Create a good plan

TL;DR: A business with a good plan will always be underrated in a world where people see the future as random.

The greatest thing Steve Jobs designed was his business. Apple imagined and executed definite multi-year plans to create new products and distribute them effectively. Forget minimum viable products – ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others' successes.

Founders only sell when they have no more vision for the company.

When Yahoo! offered to buy Facebook for $1 billion in July 2006, I thought we should at least consider it. But Mark Zuckerberg walked into a board meeting and announced, "Okay, guys, this is just a formality, it shouldn't take more than 10 minutes. We're obviously not going to sell here."

Remember the power law

TL;DR: Some opportunities are much better than others.

Focus relentlessly on something you're good at doing, but before that, think hard about whether it will still be valuable in the future. Remember that you might get a bigger return by being a rider on a rocket ship than a leader at a lemon.

Build your business around a secret

TL;DR: The best entrepreneurs build businesses around secrets.

Unless you still believe there are things to discover, you'll never achieve much. You need to find out what secrets nature isn't telling you, and what secrets people aren't telling you. What's forbidden or taboo? Where is no one else looking? What fields matter but haven't been standardized?

Great companies can be built on open but unsuspected secrets about how the world works:

  • AirBnb, Lyft, and Uber all harnessed the spare capacity that is around us but often ignored.
  • Facebook was underestimated due to its simplicity – letting people see what's going on with their friends online.
  • Tesla knew that fashion drove interest in cleantech. Rich people especially wanted to appear "green," even if it meant driving a boxy Prius. Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.

Unless you have perfectly conventional beliefs, it's rarely a good idea to tell everybody everything that you know. So who do you tell? Whoever you need to, and no more. 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.

Build good foundations

Get the first few things right. You can't build a strong business on a flawed foundation.

  • Make sure you get along with your cofounders.
  • The CEO should either be the least-paid or most-paid.
  • Keep the details of ownership distribution secret.
  • Beware of employees who want cash over stock.
  • Prioritize talent and passion over résumés.

How to attract and manage top talent

To recruit top talent, explain why your mission is compelling: what you're doing that no one else is going to get done. An engaged employee will also wonder, "Are these the kind of people I want to work with?" so make sure you have a smart, passionate team.

Don't fight the perk war. 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.

The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee's one thing was unique, and everyone know I would evaluate him on only that one thing. Defining roles reduced conflict, because most fights inside a company happen when colleagues compete for the same responsibilities.

Learn to sell

TL;DR: Yes, you need to sell. But sales works best when hidden.

Customers won't come just because you build it.

Advertising matters because it works. It works on nerds, and it works on you. You may think that you're an exception: that your preferences are authentic, and advertising only works on other people. It's easy to resist the most obvious sales pitches, so we entertain a false confidence in our own independence of mind. Advertising doesn't exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.

Sales works best when hidden. None of us wants to be reminded when we're being sold. We only react negatively to awkward, obvious salesmen – that is, the bad ones. There's a wide range of sales ability: there are many gradations between novices, experts, and masters. There are even sales grandmasters. If you don't know any grandmasters, it's not because you haven't encountered them, but rather because their art is hidden in plain sight.

If you've invented something new but you haven't invented an effective way to sell it, you don't have a business yet. You must support it with a strong distribution plan. There are several ways to distribute your product:

  1. Complex sales. For deals ranging from $1,000,000 to $100,000,000. At this price point, buyers want to speak directly to the CEO, and your time will be spent focusing on the most crucial people to win contracts. Businesses that use complex sales succeed if they start small and work their way up, aiming for 50% to 100% year-over-year growth. Sales grandmaster Elon Musk does this for SpaceX.
  2. Personal sales. These range from $10,000 to $100,000, and usually the CEO won't have to do all the selling himself. The challenge here is to establish a process by which a sales team of modest size can move the product to a wide audience. Box did this with small customers, which eventually led to much bigger customers, and turned it into a multi-billion dollar business. Sometimes, the product itself is a kind of distribution: a two-sided market can create so much value that it becomes a fundamental utility for an industry (ZocDoc).
  3. The dead zone. In between personal sales and traditional advertising is a dead zone. These products can cost something like $1,000/year and need a personal sales effort, but at that price point, you don't have the resources to send an actual person to talk to every prospective customer. This is hard, and there's no right answer. Try to stay out of this zone.
  4. Marketing and advertising. This works for relatively low-priced products that have mass appeal but lack any method of viral distribution.
  5. Viral marketing. A product is viral if its core functionality encourages users to invite their friends and 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. This isn't just cheap – it's fast, too. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth. The ideal viral loop should be as quick and frictionless as possible. (PayPal's strategy was to pay people to sign up. Although it cost $20 per customer, it led to 7% daily growth, which meant that the user base nearly doubled every ten days. After about five months, they had hundreds of thousands of users and a viable opportunity to build a great business by charging transaction fees. This quickly made them profitable. The lesson: whoever is the first to dominate the most important market segment with viral methods will be the last mover in the whole market. PayPal didn't want to acquire more users at random; they wanted to get the most valuable users first.)

If you can get just one channel to work, you have a great business. But employing distribution as an afterthought doesn't work. You have to bake it into the product from the beginning.

Answer these questions

Whatever your industry, any great business plan must address every one of the following questions. If you can't answer them, you'll run into lots of "bad luck" and your business will fail. If you nail all seven, you'll master fortune and succeed. Even getting five or six correct might work.

  1. Engineering – Can you create breakthrough technology instead of incremental improvements? Is your product 10x better than existing solutions? Are you actually worse than the products you're seeking to replace?
  2. Timing – Is now the right time to start this particular business? (When most people thought the government would continue to support green jobs, Elon Musk saw federal funds as a one-time opportunity.)
  3. Monopoly – Are you starting with a big share of a small market? Customers won't care about any particular technology unless it solves a particular problem in a superior way.
  4. People – Do you have the right team? Can you assemble a team of salesman-engineers?
  5. Distribution – Do you have a way to not just create but deliver your product?
  6. Durability – Will your market position be defensible 10 and 20 years into the future? You should plan to be the last mover in a particular market. (The cleantech industry, for instance, was blindsided by fracking.)
  7. Secret – Have you identified a unique opportunity that others don't see? Great companies have secrets: specific reasons for success that other people don't see. The best problems to work on are often the ones nobody else even tries to solve.