“What important truth do very few people agree with you on?”
This is the question that PayPal co-founder, Peter Thiel asks his interviewees. From the beginning of the book this brings us a peek into the billionaire investor’s way of thinking. Peter Thiel’s contrarian way of thinking helped him invest in some of today’s largest internet companies like Facebook, AirBnB or Spotify.
In his book, Zero to One, Thiel shows what it takes to go from Zero to One. To make Vertical Progress.
“If you take one typewriter and build 100, you’ve made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.”
His own response to the contrarian question, is that “most people think the future of the world will be defined by globalisation, but the truth is that technology matters more.”
“In a world of scarce resources, globalisation without technology is unsustainable.”
An important part of this New York Times bestseller is the view on monopolies:
“Monopoly is the condition of every successful business.”
While many economists argue that perfect competition creates most value.
“Perfect competition is when a company has a product that is essentially the same as another company’s, or several other companies’.“
Thiel shows, how in a perfect competition scenario, the companies battle on price, which brings their profits down and that in turn hinders their capabilities to innovate.
“Under perfect competition in the long run, no company makes an economic profit.“
It’s the creative monopolies who can invest in research that create new products. They go from zero to one.
“Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.”
Proprietary Technology, as for example Google’s search algorithm, is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate. Thiel advocates exponential growth, and not linear growth. In order to get to a real monopolistic advantage, the proprietary technology must be at least 10x better than it’s closest substitute. And the easiest way to create something 10x better, is to invent something new.
Network effects, e.g. Facebook’s graph, make a product more useful as more people use it. Still, in order to attract a large portion of a market, successful products must start with a small market that they can dominate.
Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth.
Economies of scale and a powerful brand can enforce a monopoly.
Thiel cautions the aspiring entrepreneurs: “As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.”
Another popular business concept is being demystified in Zero to One: the first mover advantage.
“Sure, first movers get a head start on the competition. But they get caught. Once they’re caught, they fall behind. Instead, a startup should bide its time until its team senses that the time is right to create the greatest development in a specific market. This will ensure its position as a monopoly.”
Thiel is also against a popular start-up methodology – the Lean startup methodology made popular by Eric Ries, as “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.”
“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 other’s success.”
As a successful venture capitalist who started the ‘Founders Found’, Thiel is against the ‘balanced portfolio’ approach. In his view, each VC must find a handful of companies that will go from 0 to 1, that will create vertical progress and then back them with every resource. Every single company in a good venture portfolio must have the potential to succeed at a vast scale.
If you want to build a better future, you must believe in secrets.
Thiel believes that “Every great business is built around a secret that’s hidden from the outside.” Not believing in secrets means believing that everything that can be achieved has been achieved.
The founder or founding team is one of the vital parts of a start-up. And devising the incentive method can help make or break a company.
“A company does better the less it pays the CEO – that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.”
This is also true when it comes to employee incentives. You should be looking to hire people who, despite having the capability to work for Google, want to work for you because they’re excited by what you do.
“Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future.”
“Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.”
“A startup is a team of people on a mission, and a good culture is just what that looks like on the insight.”
“From the outside, everyone in your company should be different in the same way.”
“On the inside, every individual should be sharply distinguished by her work.”
You should always follow the power law, also known as Pareto’s principle or the 80/20 rule that states that 80% of the output is done by 20% of the input. This also applies to the distribution of your product or service.
“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.”
There are 7 questions every company that wants to become a lasting monopoly must answer:
- The Engineering Question – Can you create breakthrough technology instead of incremental improvements?
- The Timing Question – Is now the right time to start your particular business?
- The Monopoly Question – Are you starting with a big share of a small market?
- The People Question – Do you have the right team?
- The Distribution Question – Do you have a way to not just create but deliver your product?
- The Durability Question – Will your market position be defensible 10 and 20 years into the future?
- The Secret Question – Have you identified a unique opportunity that others don’t see?
In the conclusion, Thiel talks about stagnation or singularity.
There are four different possible scenarios that the future holds for us: recurrent collapse – a neverending alternation between prosperity and ruin, a plateau of development similar to the rich countries today, extinction – a collapse so devastating that we won’t survive it or the take off – an accelerating takeoff towards a much better future.
“The most dramatic version of this outcome is called the Singularity, an attempt to name the imagined result of new technologies so powerful as to transcend the current limits of our understanding.”
As my conclusion, Zero to One is a quick and easy, but polarising book. Be it that you agree or disagree with Thiel’s contrarian views, it’s a book that makes you think, shows you the difference between vertical and horizontal progress and puts monopolies into another light.
Zero to One is considered one of the best business books of 2014 and I agree with this. It’s a book I recommend you to read.
“Our task today is to find singular ways to create the new things that will make the future not just different, but better-to go from 0 to 1.”
View some of the best nuggets from Peter Thiel’s Zero to One bestselling book.
You can see the Popular Highlights from Zero to One here.
If you want to receive the full nugget collection from Peter Thiel’s Zero to One, please subscribe below.