Zero to One captures the philosophy and life lessons of the author ‘Peter Thiel’ for making your startup a success. Thiel founded and sold PayPal to eBay for $1.5 billion in 2002 and was the first outside investor in Facebook in 2004.
Here are my most important lessons from the book:
- The biggest leaps of progress are vertical, not horizontal.
- There is no success formula for entrepreneurship.
- Monopolies are good for both business and society.
- All happy companies are different. All failed companies are the same.
- Dominate a small niche and scale up from there.
- In the end, cash flows matter.
- Poor sales rather than bad product is the most common cause of business failures.
- Founders need a vision to take their business from zero to one.
Here is the gist of the book in greater detail:
1. Each Moment in Business Happens only Once
Like Heraclitus, who said that “You cannot step in the same river twice”, Thiel states that “Each 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.”
How can the world move to zero emission? How can we fully live off renewable energies? How can world work with only digital currency? These are the kinds of questions you should concern yourself with if you want to play big in 0 to 1 space.
2. There is no Entrepreneurship Formula
“The paradox of teaching entrepreneurship is that such a formula (for innovation) cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be more innovative. Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas. Today’s ‘best practices’ lead to dead ends; the best paths are new and untried.”
Entrepreneurship is all about finding problems, imagining solutions, and executing relentlessly to serve humanity. As every problem is unique, solutions will be unique. While we can talk about the traits of entrepreneurs and path to entrepreneurship, we can’t define the success formula for the same.
3.The Path to Progress is Through Technology
The future is not just about ‘moments to come’; it’s about time when the world looks different from today. Thiel quotes “If nothing about our society changes for the next 100 years, then the future is over 100 years away. If things change radically in the next decade, then the future is nearly at hand. No one can predict the future exactly, but we know for sure: it’s going to be different.”
“Progress to the future can be either horizontal or vertical. Horizontal or expansive progress means copying things that work—going from 1 to n. This kind of progress is easy to envision because we already know what it looks like. Vertical or intensive progress means doing new things—going from 0 to 1. It’s harder to imagine because it requires doing something nobody else has ever done.”
With increasing population, we need more of everything. Our natural resources are depleting. We are probably mortgaging our future if we don’t become mindful. Think of doubling the number of factories or cars on the road without technology change. Result would be environmentally catastrophic.
Mindless horizontal growth can be disastrous in long term. Hence, growth is sustainable only with support of technology development. Thiel states “The key to a better future is both imagining and creating the technologies to get us there.”
4.Question Your Learnings, Assumptions, and Beliefs
At the end 2000, tech companies were the darling for venture capital firms. The Initial Public Issues market was buzzing. With fall in the market at the end of year 2002, “Country interpreted the market’s collapse as a kind of divine judgment against the technological optimism of the ‘90s. The era of cornucopian hope was relabelled as an era of crazed greed and declared to be definitely over.”
“The entrepreneurs, stuck with Silicon Valley, learned four big lessons from the dot-com crash that still guide their thinking:
- Make incremental advances — Grand visions inflated the bubble. Small, incremental steps are the only safe path forward.
- Stay lean and flexible — All companies must be lean, which is code for unplanned. Planning is arrogant and inflexible. Instead, you should try things out, iterate, and treat entrepreneurship as agnostic experimentation.
- Improve on the competition — Don’t try to create a new market prematurely. You should build your company by improving on recognizable products already offered by successful competitors.
- Focus on product, not sales — If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution.
These lessons have become dogma in the startup world; those who would ignore them are presumed to invite the justified doom visited upon technology in the great crash of 2000. And yet the opposite principles are probably more correct.
- It is better to risk boldness than triviality.
- A bad plan is better than no plan.
- Competitive markets destroy profits.
- Sales matter just as much as the product.
To build the next generation of companies, we must challenge our assumptions and beliefs shaped by our view of the past. Thiel states, “It means we need to rethink what is and is not true and determine how that shapes how we see the world today. The most contrarian thing of all is not to oppose the crowd but to think for yourself.”
5. Monopolies drive Progress
Think of the Aviation industry. When you have to travel, your only basis of choice is pricing. Little wonder that most of the aviation companies, most of the times lose money. Thiel states “Under perfect competition, in the long run, no company makes an economic profit. The competitive eco-system pushes people toward ruthlessness or death.”
A monopoly like Google is different. Since it 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.
Google’s motto—’Don’t be evil’—is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence.
In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.
A monopoly is good for everyone on the inside, but what about everyone outside? Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers’ wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes.
But we can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.”
Thiel further states “every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.”
Now, look at the FAANG companies – Facebook, Amazon, Apple, Netflix and Google. All of them are differentiated businesses, building eco-systems and empowering humanity. They create value and also seize large part of the value created. Thiel states “The lesson for entrepreneurs is – If you want to create and capture lasting value, don’t build an undifferentiated commodity business.”
Thiel concludes “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.”
6. Characteristics of Monopoly Businesses
“While every monopoly business is unique, they share some combination of the following characteristics:
- Proprietary technology: This may be your most substantive advantage because it makes your product difficult or impossible to replicate. For example, Google’s search algorithms return results better than anyone else’s. For proprietary technology to give you a monopolistic edge, it needs to be at least 10 times better than its closest substitute in some important dimension. Anything short of a dramatic difference will seem incremental and unimportant.
- Network effects: A network effect is the way additional users improve the value of a product or service for all users. For example, the more your friends use Instagram, the more value you get from being on it too. To generate network effects, your product has to be immediately valuable to its earliest adopters and then grow from there. A network business has to work on a small scale before it can go big—in fact, you have to plan on starting small. Mark Zuckerburg started Facebook by getting just his Harvard classmates to sign up.
- Economies of scale: A monopoly gets stronger as it grows because the fixed costs of creating a new product (like office space and engineering or development) are spread over a greater volume of sales and the cost per unit declines. When starting a business, you should build in the capability of scaling. For example, Facebook, Linkedin and Instagram enjoy built-in scale: it can keep increasing the number of users without adding customized features.
- Branding: Creating an unassailable brand is integral to having a monopoly. For example, Apple is the most powerful technology brand. Everything from product design (including look and materials), to store design, price, and advertising contributes to an overall impression that Apple products are like no other. Of course, branding alone isn’t enough—you also need substance. Apple’s market dominance is based on superior products backed by an array of proprietary hardware and software technologies.
Every startup starts small. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.
Amazon deliberately started with ‘Books’. With growth, they had two options: expand the number of people who read books or expand to adjacent markets. They chose the latter, starting with the most similar markets: CDs, videos, and software. Dominate a small niche and scale up from there, towards your ambitions long-term vision.”
7. Focus on Differentiation, not Competition
“Creative monopoly means new products that benefit everybody and generate sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. So why do people believe that competition is healthy? 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. It’s competition, not business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive. Why do people compete with each other?”
Marx and Shakespeare provide two models that we can use to understand almost every kind of conflict.
According to Marx, people fight because they are different. The greater the difference, the greater the conflict.
To Shakespeare, by contrast, all combatants look more or less alike. It’s not at all clear why they should be fighting since they have nothing to fight about.
In the world of business, Shakespeare proves the superior guide. 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.”
An interesting question to ask here is ‘What should be your focus – Differentiation or Competition.’ I believe, if you think of customers instead of competitors, you would be better off. Building long term solutions for your customers’ problems can differentiate you and help you create long term value for your customers and yourself.
8. Cash Flow Matters
There are two kinds of businesses – businesses generating cash today and businesses which have the potential to generate cash tomorrow. Running hotels, clubs, bars, shops, hospitals, a toll road, etc. are examples of businesses generating cash today. They are like straight bonds, giving you cash year to year without any potential upside (prices will probably get adjusted a bit to reflect inflation).
On the other hand, Tech companies follow the opposite trajectory. They often lose money for the first few years: it takes time to build valuable things, and that means delayed revenues. They work like zero-coupon bonds, giving you accumulated rewards towards the later part.
Thiel states “Escaping competition will give you a monopoly, but even a monopoly is only a great business if it can endure in the future. If you’re the first entrant into a market, you can capture significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. You should ask a question ‘Will this business still be around a decade from now?’ Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.”
As one has to work on the roots to change the fruits, you have to work on the quality of your business to change the quantity (financials).
9. Success is Never by Chance
Success is never accidental. Ralph Waldo stated “Shallow men believe in luck, believe in circumstances…. Strong men believe in cause and effect. Victory awaits him who has everything in order-luck, people call it.”
Thiel states “Instead of pursuing many-sided mediocrity and calling it ‘well-roundedness’, a definite person determines the one thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at what something substantive-to be a monopoly of one.
‘It doesn’t matter what you do, as long as you do it well.’ That is completely false. It does matter what you do. You should focus relentlessly on something you are good at doing, but before that you must think hard about whether it will be valuable in the future.”
Creating a great business that no one else can compete with is all about an untapped opportunity or a different way of looking at a problem. For example, Airbnb recognized and connected a supply of unoccupied lodging with travellers’ demand for affordable and unique accommodations. The founders of Uber and Ola built billion-dollar businesses by connecting people who needed rides with drivers willing to provide them. These entrepreneurs saw an opportunity no one else noticed.
Some general points from the book are:
- When starting a company, it’s important to choose leaders who have the right technical knowledge and whose skills are complementary. Equally important, however, is how well the founders know each other and work together. You also need a structure and clearly defined roles so everyone is aligned to move the organization forward. Clarity on ownership and control to the entire team is critical for long term success.
- Many entrepreneurs underestimate the importance of distribution, or the process of selling the product (advertising, sales, marketing, and distribution channels). They often believe their product is so superior it should sell itself: if they build it, customers will come. But that is not true. Thiel states “If you have invented something new but you haven’t invented an effective way to sell it, you have a bad business – no matter how good the product. Superior sales and distribution by itself can create a monopoly, even with no product differentiation.” Interestingly, he mentions that “Poor sales rather than the bad product is the most common cause of failures.”
- Technology/machines and humans will complement each other a lot more. People and computers are good at different things. People excel at making plans and decisions in complicated situations; they’re not as good at analyzing huge amounts of data. In contrast, computers excel at processing data, but can’t make judgments that are easy for humans. Technology is to be seen not as a substitute but a way to enhance human capabilities and productivity.
- Thiel provides a simple checklist of questions to entrepreneurs:
- Engineering: Your technology provides incremental improvement or revolutionary change?
- Timing: Is this the right time for business? Do people need your products / services and are willing to pay for that?
- Monopoly: Are you targeting a big share of a small market?
- People: Do you have the right team?
- Distribution: Do you have a plan to sell your product?
- Durability: Will your products / service be relevant to customers in the next 10 to 20 years?
- Secret: Have you identified a unique opportunity overlooked by others?
So think big. As they say: “Shoot for the moon. Even if you miss it, you’ll be among the stars.”