Zero to One is a book by Peter Thiel and Blake Masters about the value of true innovation made accessible to the masses through startups. It outlines several tenets that keen-minded business people should hold dear, including why technology trumps globalization, why we should be supporting monopolies instead of “healthy competition”, why successful innovators have the worldview of a “definite optimist” and why no one should be afraid of losing their job to a robot. Zero to One also delivers unique business insights, such as the four most important things to pay attention to about your product (hint: they’re not quantitative) and the seven questions every business must answer for itself.

Key insights

  1. Creating truly innovative technology requires progressing from “zero to one” rather than from “one to n”. This means creating something entirely new rather than incrementally adding to what already exists.
  2. One way to move from “one to n” is globalization, or enabling new markets to access something that has already been created. But, because resources are not infinite, globalization needs to be accompanied by new technologies to make the consumption of goods more efficient and sustainable, otherwise doom awaits.
  3. The world needs startups as an engine to both envision and create the future. Though there has been new technology lately, there are still many aspects of everyday life that are begging for improvement, given the right vision and strategy.
  4. The dot-com crash of the 1990s taught entrepreneurs lessons about how to build a business that, when followed today, hinder the development of real technological innovations and sustainable growth. These “rules” should be ignored.
  5. Monopolies generate good for the world. If a business has achieved a monopoly, it indicates that the business has truly gone from “zero to one”, and created something for society that did not exist before or improved upon an existing technology to such a degree that it has made the old technology obsolete.
  6. To create this sort of change it is helpful to be a “definite optimist” – someone who believes that “the future will be better than the present if he plans and works to make it better”. This kind of worldview enables the vision, gumption, and persistence to go from zero to one.
  7. Monopolies also generate good for the world because of the privilege that major profits allot. “Since [Google] doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world”.
  8. Monopolies are more ubiquitous than we’re led to believe and shape their stories to avoid scrutiny and regulation. For example, if Google is seen primarily as a search engine company, they own 68% of that market. In contrast, if they’re described as playing in the global advertising market, they only own 3.4%.
  9. Monopolies are only bad when a business lingers in that position unchallenged for too long. Ideally, new monopolies take over, “adding entirely new categories of abundance to the world”. (Think of how Apple’s “mobile computing” replaced Microsoft’s hold on the PC market, who itself supplanted IBM’s “hardware monopoly” of the 1960s and 1970s)
  10. The key to creating a monopoly is to resist copying others’ business models and instead to think for yourself. Prioritise four aspects of your business over a hyper-focus on growth: proprietary technology, network effects, economies of scale, and branding.
  11. Rather than initially painting a grandiose vision of global market dominance, the best way to build a monopoly is to start small. Capture a small, specific market with the tentacles to easily branch to related markets over time.
  12. Beware short term thinking. Those who obsess over measurement mania (e.g. active users, revenue targets) typically overlook deeper, harder to measure problems that threaten the durability of the business. For example the Zynga story.
  13. Instead think long term. Will this business still be around a decade from now? Numbers alone wont help, instead critical thinking about the qualitative traits of the business is needed.
  14. Life is not diversifiable. Trust in the compounding effect and focus relentlessly on something you’re good at doing (assuming you believe it will be valuable in the future).
  15. The one single startup that will outperform all the others in a VC’s firm’s portfolio has solved a previously unaddressed problem or need in the world. In other words, they have unearthed and solved a “secret”. The good news is that, despite common knowledge, there are many secrets left to find and solve.
  16. The foundation you set for your startup is disproportionally important to the success of your company. The most crucial aspects to get right are related to personnel – selecting your co-founder and board.
  17. Offering equity as a form of compensation can be a good way to weed out those who lack the long-term commitment to and passion for the vision of your venture.
  18. The CEO of a startup should either receive the lowest salary at the company (and set an example of frugality) or the highest salary at the company (setting a maximum compensation), though if high it should be modest. If not, he or she risks getting too comfortable.
  19. While the fundamental innovation your business offers is crucial, sales and distribution tactics are necessary too. Sales acumen is a key distinguisher between success and failure. “Whatever the career, sales ability distinguishes superstars from also-rans”.
  20. Humans have nothing to fear from technology’s increasing presence in the marketplace. Instead, technology will create more opportunities for humans to do what they are uniquely good at, while the machine fills in the gaps by doing what is difficult for humans.
  21. Because it requires a distinctive vision to go from zero to one, successful founders are often eccentric individuals not afraid to pursue a seemingly eccentric vision. This explains both why founders are so successful and also why they can become scapegoats for corporate dysfunction.
  22. You don’t have to be the founder of a brilliant company to benefit from this knowledge. As an employee, search for these qualities in the companies and leaders you work for to ensure you have the right support to develop and to keep exploring new ideas.

Challenge of The Future

Thiel when interviewing likes to ask:

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

Or in other words, what do most people disagree with you about? The business version of this, what valuable company is nobody building?

Progress can take one of two forms:

  • Horizontal progress: 1 to N (replicating things that have been done before)
  • Vertical progress: 0 to 1 (doing something no one has done before)

If you were to 2D plot the path of potential progress, Y would be doing new things which we call ‘technology’, X would be doing things that already work in one place and doing them elsewhere which we call ‘globalization’.

In a world of scarce resources, globalization of the status quo is unsustainable without technological advancement.

Our challenge: Imagine and create technologies to make the 21st century more peaceful and prosperous than the 20th.

Lessons From The Dotcom Crash

After the crash people began to treat the future as indefinite and globalization replaced technology as the path forward.

People switched back from “clicks” to “bricks” (real estate) and “BRICs” (globalization) which just led to the creation of another bubble in 2008.

The backlash from the .com bubble tattooed in 4 (incorrect) lessons to the tech world:

  1. Make incremental advances over what already exists
  2. Stay lean and flexible (unplanned)
  3. Improve on the competition (marginality)
  4. Focus on product, not sales (marketing = waste)

In truth, the opposite principles are probably more correct:

  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

Happy Companies Are Different

“What valuable company is no one building?”

Value creation is not enough, you must also capture some of that value. Airlines vs Google for example, the airlines create huge value to society, but they struggle to capture it, unlike Google. In other words competitive markets destroy profits.

“If you want to create and capture value, don’t build an undifferentiated commodity business.”

If you have a spectrum of Perfect Competition (left) to Monopoly (right), most people imagine that firms are relatively similarly placed. When in reality, most businesses are much closer to one extreme that we (or they) would like to admit.

  • Monopoly: “We’re common and therefore weak!”
  • Competitive: “We’re special and therefore strong!”

Startups are tempted to understate competition and define their market so narrowly so as to dominate that market by default.

The Ideology of Competition

Competition is a social obsession that we are trained to respond to effectively since birth through the educational system (grades, standardized tests, class rank, etc).

Pursuing winning the competition usually distracts us from potentially more valuable uses of time.

War and Peace

The concept that business ultimately requires competition (war) is flawed. Competition is a huge drain on resources and encourages a focus on old opportunities and what has worked in the past rather than looking for and pursuing new opportunities.

Funny story about how Informix put up a billboard near Oracle’s Redwood Shores HQ that read “CAUTION: DINOSAUR CROSSING AHEAD” and another on Highway 101 “YOU’VE JUST PASSED REDWOOD SHORES, SO DID WE”.

There is a big pull towards getting caught in a crowd competing for obvious prizes.

“Competition can make people hallucinate opportunities where none exist” (dotcom bubble online pet stores)

In the few cases where conflict is unavoidable, its best to strike hard and end it quickly.

“Recognize competition as a destructive force rather than a sign of value”

Last Mover Advantage

A great company is defined by its ability to generate cash flows in the future, not in the short term.

  • Low growth businesses lead to short term cash flows
  • High growth businesses lead to long term cash flows

Growth alone isn’t enough, a company must grow and endure. For example Zynga and Groupon’s short-term growth distracted executives and investors from long-term challenges. Early Farmville wins (their psychometric engine) faded out facing the same problem as every Hollywood studio; how to create an constant entertainment stream for a fickle audience.

“Will this business still be around a decade from now?”

The Four Characteristics of a Monopoly

All monopolies are unique but the all tend to four key traits:

  1. Proprietary technology
  2. Network effects
  3. Economies of scale
  4. Branding

1. Proprietary Technology

The biggest advantage a company can have, is that it makes it hard to replicate (Google).

Rule of thumb: New technology must be more than 10x better than the alternatives or it will not be recognized as anything other than a marginal improvement, especially in a crowded market.

The easiest way to find a 10x improvement is to invent something completely new.

For example:

  • PayPal for eBay purchases
  • Amazon for book selection
  • Apple for the iPhone or iPad

2. Network Effects

When a product becomes more useful with scale.

You will never get big enough to achieve network effects unless your product is valuable enough to your first users while the network is small.

Network effect businesses must start with a small market and grow.

3. Economies of Scale

When a company gets more efficient as it grows.

Software businesses do this easily while service (or biotech) businesses have a much harder time.

4. Branding

Branding tactics can be copies (minimalism, material quality, etc) but they lose impact without consistency and cohesion.

Branding can be a powerful effect but:

“No company can be built on branding alone”

Building a Monopoly

The above characteristics define a monopoly but you will never get there unless you grow in a very careful and deliberate way.

Start Small and Monopolize

On starting small:

“It’s easier to dominate a small market than a large one”

Corollary: Small does not mean nonexistent. The perfect market is:

“A small group of people concentrated together and served by few or no competitors”

Trying to compete in a big market leads to either no starting point and therefore no competition, or competition and therefore a race to zero margins.

Scaling Up

Dominate a small market and then expand gradually into adjacent markets.

Amazon: Books > CDs > Videos > Software > Everything

Ebay: Beanie Babies > Other hobby items > Everything unique

Sequencing markets correctly is an underrated skill.

Don’t Disrupt

I loved this clarification, a term that is abused and overused especially in tech.

Disruption as a concept was coined to describe threats to established companies and as such, it’s inherently competitive.

If your company is defined by its opposition to older firms than it can’t be completely new and therefore is probably never going to be a monopoly.

Disruption also attracts attention and implies that you’re destroying an incumbent; in this situation incumbents will usually fight back. Napster for example got cremated by the music industry.

As you craft a plan to expand to adjacent markets, don’t disrupt, avoid competition as much as possible.

The Last Will Be First

Being the first mover is nice but only if no one else comes along and unseats you — it’s a tactic, not a goal.

It’s far better to be the last mover in the market, aka the one who captures monopoly profits.

Do this by starting small, dominating your market, and scaling.

You Are Not a Lottery Ticket - Be Purposeful, Be Definite

Is success a matter of luck or is it something that can be trained? Designed?

You have two choices, either you can view the future as definite and try to shape and change it or treat it as indefinite and assume you cant impact it at all.

Indefinite thinking is the source of a lot of the world’s disfunction and jack of all trades:

“Instead of pursuing many-sided mediocrity and calling it ‘well roundedness’, a definite person determines the one best thing to do and then does it”

“Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive — to be a monopoly of one”

+-----------------------------------------------+
|  Definite Optimism    |  Indefinite Optimism  |
|  US, 1950s — 1960s    |  US, 1982 — Present   |
+-----------------------------------------------+
|  Definite Pessimism   |  Indefinite Pessimism |
|  China, Present       |  Europe, Present      |
+-----------------------------------------------+

Indefinite Pessimism

“[The indefinite pessimist] looks out on a bleak future, but he has no idea what to do about it.”

“…react to events as they happen and hope that things don’t get worse.”

Definite Pessimism

“[The definite pessimist] believes the future can be known, but since it will be bleak, he must prepare for it.”

Such as Chinese resource hoarding in offshore accounts.

Definite Optimism

“[The definite optimist believes] the future will be better than the present if he plans and works to make it better.”

Characterized by the primacy of professions with tangible output: Doctors, Scientists, Engineers, Businessmen

Outputs of this approach include the Suez and Panama Canals, the Golden Gate Bridge, the Manhattan Project, and the Apollo Missions.

People in this mode welcome big plans and ideas and ask if they will work.

Indefinite Optimism

Between the 1982 bull market and the present is when finance eclipsed engineering as the dominant way to approach the future.

“[The indefinite optimist knows] the future will be better but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely.”

Characterized by the primacy of professions of middlemen: bankers, lawyers, private equity, consultants.

Strange impact of Baby Boomers; things just got better all the time as they grew up which leads to thinking improvement always happens without any intentional effort.

They passed these values down to their kids and promoted indefinite careers.

“A whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.”

The Return of Design

“In startups, intelligent design works best”

Apple is a clear example of a company where intentional design was prioritised; Jobs trashing product lines on his return.

When big businesses acquire startups they almost always offer too much or too little. If the startup has no more definite future plans they pay too much. If the startup has definite plans for the future they pay too little.

You Are Not a Lottery Ticket

Indefinite thinking needs to be replaced in philosophy, politics, and others, but those environments are highly resistant to change.

A startup is a vehicle for change that you can have definite mastery over.

A successful startup is the best way to inject definite thinking into these domains. As a software engineer I personally love this mentality, planning, design, intentional action and architecture. Interestingly this way of conducting business is precisely what other business experts, like as Gerber in the infamous E-Myth, prescribe.

Follow the Money

“Money makes money” or perhaps more accurately, “value makes value”.

The world operates exponentially, not linearly, as famously observed by Pareto’s Italian land ownership and the pea pod yield measured.

“Power law” dynamics define much of our world, especially in business.

The Power Law of Venture Capital

Most startups fail and most VC funds fail with them.

People almost always underestimate just how different winners are from losers, not only in busines but in most other domains too.

The error is thinking that returns will be normally distributed, which leads to portfolio diversification which is indefinite thinking.

“The biggest secret in VC is that the best investment in a successful fund outperforms the entire rest of the fund combined”

Therefore an intelligent investor should:

“Only invest in companies that have the potential to return the value of the entire fund”

Once your investments become so indefinite that they start needing diversification or hedging you’ve already lost.

Why People Don’t See the Power Law

Mostly because compounding over time does not reflect daily observations until very near the end. That is, the staggering power of the compounding effect is most observable later in its lifecycle, once it has taken flight.

The differences between winners and losers, success and failure hide in plain sight.

What to Do with the Power Law

Life is not diversifiable. Focus relentlessly on something you’re good at doing, assuming you believe it will be valuable in the future.

The differences between companies dwarf the differences within companies.

For many it makes more sense to attach yourself to a company with huge potential than to start your own.

If you do decide to start a company, remember power law dynamics come in to play in many other ways

  • One market will probably outperform the rest combined (chapter 5)
  • One distribution strategy will probably outperform the rest combined (chapter 11)
  • One use of time will probably outperform the rest combined (chapter 9)
  • One decision will probably outperform the rest combined

Secrets

The business version of Thiels contrarian question:

What valuable company is nobody building?

Every successful company has a secret at its core; something important and unknown, hard but doable.

Why Aren’t People Looking for Secrets?

The idea that additional technological advancement is so hard that it is virtually impossible, is pervasive.

“If everything worth doing has already been done, you may as well feign an allergy to achievement and become a barista”

This idea is shared by fundamentalists of all types, aka people who want to go back to a simpler/easier/better time.

Kaczynski, the famous child prodigy and PhD in math, aka the Unabomber, is referenced for having made a 35K word manifesto, who claimed that in order to be happy, every individual “needs to have goals whose attainment requires effort, and needs to succeed in attaining at least some of his goals”. He divided human goals into 3 categories:

  1. Goals that require minimal effort
  2. Goals that require serious effort
  3. Goals that cannot be satisfied, no matter how much effort is made

Kaczynski argued that modern people are depressed because the all the worlds hard problems have already been solved. What’s left is either easy or impossible, pursuing either is deeply unsatisfying. What you can do, even a child can do; what you can’t do, event Einstein couldn’t have done.

While Kaczynski’s methods were crazy, his loss of faith in the technological frontier is all around us. Why do so many believe that there are no hard (but not impossible) problems left to solve?

  1. Geography? (there are no more unexplored areas)
  2. Incrementalism (only take small steps)
  3. Risk aversion (fear of failure)
  4. Complacency in the elite (rent collecting)
  5. Flatness (of the world, economy, talent pool, etc)

The World According to Convention

Hypothesis: We’ve already solved all solvable problems therefore our world’s conventions are in the best possible state therefore our world has no injustice.

The idea there aren’t any more hard but solvable problems leads to fantasies like the efficient market hypothesis despite persistent evidence to the contrary (bubbles, irrationality, etc.)

What happens when a company stops believing in secrets?

HP led by rent collectors instead of new tech R&D.

The Case for Secrets

Discovering secrets requires someone to have faith that hard does not equal impossible and to actually spend time looking (Andrew Wiles w/ Fermat’s last theorem).

There are myriad secrets in science, medicine, and business left to discover. We only need someone to recklessly defy convention by looking for them.

How to Find Secrets

There are two types of secrets:

  • Secrets about nature; to find them you must study the natural world
  • Secrets about people; to find them you must study what people don’t know about themselves or what they hide intentionally

This leads to two questions when deciding what kind of company to build:

  • What secrets is nature not telling you?
  • What secrets are people not telling you?

People secrets are relatively unappreciated because they don’t require any special training or expertise to ask:

  • What are people not allowed to talk about?
  • What is taboo?
  • What is forbidden?

“The best place to look for secrets is where no one else is looking” (nutrition, taxis, affordable quite accomodation)

What to Do with Secrets

Once you find a secret who do you tell?

Exactly as many people as you need to (this is also known as a company)

“A great company is a conspiracy to change the world.”

Tolkien LOTR quote:

Still round the corner there may wait, A new road or a secret gate, And though we pass them by today, Tomorrow we may come this way, And take the hidden paths that run, Towards the Moon or to the Sun

Foundations

There are a few things that every great company must get right at the beginning

“Theil’s law: A startup messed up at its foundation cannot be fixed”

Founding Matrimony

The first and most important decision is who you start the company with.

Founders should share history and work well together.

Ownership, Possession, and Control

You need everyone (not just the founders) to work well together and get along and you need rules in place to make sure the social contract is understood and followed. To prevent future misalignment it’s useful to outline who has which of these:

  • Ownership (financial ownership, equity)
  • Possession (day to day operations)
  • Control (formal governance of affairs)

In theory these distinctions are simple but misalignment is still very possible (Department of Motor Vehicles, big corporations, government institutions).

“A board of three is ideal. Your board should never exceed five people, unless it is publicly held"

On the Bus or off the Bus

Avoid part time, contractors, remote workers, etc. — all are risks for misaligned incentives. Why? It’s about genuine commitment to something bigger and building something long term; these models incentivise short-term thinking and behaviors.

Cash Is Not King

There’s a clear pattern between low paid CEOs and company performance (focus on LTV).

The CEO should either be the lowest paid person in the company (signaling) or the highest paid (ceiling).

“In no case should a CEO of an early-stage, venture-backed startup receive more than $150K per year in salary”

A cash poor executive will focus on increasing the value of the company as a whole. It also sets the bar for everyone else (Aaron Levie CEO of Box)

Vested Interests

Equity is the one form of compensation which best aligns incentives but it is effectively impossible to allocate in a way that won’t cause resentment.

Solution: keep allocations secret

Extending the Founding

A founding only really happens once but the best companies establish a founding’s openness to invention as a persistent company value.

“If you get the founding moment right, you can do more than create a valuable company: you can steer its distant future toward the creation of new things instead of stewardship of inherited success”

The Mechanics of Mafia

“Company culture doesn’t exist apart from the company itself”

All of the perks in the world won’t help inject culture if there is no unifying mission — it’s just window dressing

Beyond Professionalism

In PayPal, they assembled a culture so strong that it transcended the company itself spawning 7+ $1B companies and a ‘Mafia’.

“A startup is a team of people on a mission, and a good culture is just what that looks like on the inside”

The way to build the mafia wasn’t hiring the most talented people (law firm) but to hire people that would be close knit. The relationship between misaligned people, like in law firms or consultancies, is oddly thin. Why work with a group of people who don’t even like each other?

“They had to be talented, but even more than that they had to be excited about working specifically with us”

Recruiting Conspirators

Equity, salary, and working with smart people aren’t enough to catch top talent, those are a given anywhere they go.

More important is your answer to:

“Why should the 20th employee join your company?”

More valuable are specifics about your mission, and why you are the only ones that can get it done.

You must also explain why your company is a good fit for them personally.

“Above all, don’t fight the perk war”

What’s Under Silicon Valley’s Hoodies?

“From the outside, everyone in your company should be different in the same way”

The early PayPal team worked so well together because they all shared the same interests and obsessions (Cryptonomicon, Star Wars, currency)

“Startups should make their early staff as personally similar as possible” - Max Levchin (PayPal cofounder)

Do One Thing

“On the inside, every individual should be sharply distinguished by her work”

Internal conflict tends to happen when people are competing for the same responsibilities. To solve this, assign and evaluate people on one (and only one) thing.

Internal strife makes companies vulnerable to outside threats.

Most companies fail from the inside out.

Of Cults and Consultants

Cults and consultants are on two ends of the same spectrum.

Cultures of total dedication look crazy from the outside.

The extreme opposite of a cult is a consulting firm like Accenture, void of meaning and purpose, consultants drop in and out of companies to which they have no long-term connection.

The best startups are like slightly less extreme cults.

“People at successful startups are fanatically right about something those outside it have missed”

Glossary

TermDefinition
CACCustomer Acquisition Cost
CLVCustomer Lifetime Value