Book Review: Zero to One
Book Author: Peter Thiel
This is a fantastic book. This is my second read and I feel that I missed so much the first time through. Some of the chapters were validation and some were pure game changers. I’ll be doing a thorough recap on this one.
The book is about inventing new things and creating the future. These types of businesses are the truly successful ones because they can monopolize their market. One of the paradox’s of teaching how to do this is every company is different and must be in order to invent a new future. That said there are organizing principles.
Companies are values today based on cash flows they will generate in the future. These future cash flows are discounted (because money now is more valuable than money later). This is why high growth is more valuable than no growth even if the no growth company produces more cash.
The book starts with identifying the opportunities to invent the future. It’s about identifying secrets, truths, that most people do not believe. These must be contrarian view points. However, our current environment is one where folks are growing “incrementally” instead of reinventing the future.
The second chapter was fascinating. It turns the view that monopolies are un-capitalistic and “bad” on it’s head. In fact, all the great empowering companies today are de-facto monopolies i.e. Google. Monopolies are only bad in a static world, they are good in a changing world (they only exist for a time). Monopolies have an incentive to downplay their monopoly status. While commodity companies have an incentive to claim to be unique. This creates disinformation and a fog of war for business. But really, this masks that monopolies are good (in the right context) and building a monopoly is the best kind of business.
Peter goes on to tear the notion of competition being good apart. In fact, it creates massive waste / heat energy in the system. It means you cannot think long term about the future because you don’t have the capacity to do so. You need profits, cushion, to have the luxury of long term planning. Without long term planning nothing ground breaking can happen – think moon landing. Where has the long term think and grand vision of the US gone? It seems to have vanished.
Characteristics of a monopoly:
- proprietary technology
- network effects (i.e. a self-reinforcing cycle)
- economies of scale
- branding
To build a monopoly you want to start as small as you can and dominate that market. Zuckerburg did this with Harvard Facebook, Paypal did this with ebay auctions.
Once you have a niche monopoly gradually expand, think Amazon expanding from books to everything else.
Do not disrupt! Disruption implies competition. Instead invent new markets.
An idea I love, that is empowering, is that you determine your destiny, not chance, not luck, not circumstance (for the most part). He says it as “you are not a lottery ticket”.
A definite view of the future, your vision of where it will go, is self-fulfilling because it leads you to take action to bring it about. Whereas a future that is indefinite, one that can not be planned for means you become reactionary. Luck seems to exist in this second viewpoint because you are waiting for things to happen to you. You react and find local optima instead of searching high and low for global optima.
We have a lack of vision (broadly as a society). Without vision people favor short-termism and optionality – but if all folks are favoring this nothing important can get done putting our society into a slow decline and march towards short-termism with an irrational optimism things will get better on their own.
Something special to me in this part of the book is the discussion of the ass-backwards approach to biological engineering. We are missing a grand vision of making biology engineerable (synthetic biology aims to change this) and biotech is following a reverse moore’s law where its getting more expensive, not less to produce medical breakthroughs.
It’s an interesting way to frame the US’s behavior. This idea of definite/indefinite and optimistic/pessimistic. A definite view of the future, having clear vision, also implies investment. We are clearly a society in need of long term think and investment and less short-termism.
Intelligent design is what matters. We are not lottery tickets. We can build the future if we lay plans and invest our time, energy, and cash into worthy enterprises.
The next big idea is around power laws. Since monopolies are the only companies that can invent the future and a monopoly is a winner take all situation it turns out that when investing only a few companies will make the big bucks while the rest become average competitors or die.
What this implies is you want to find those companies and concentrate on them rather than diversifying your energy. Our society over values broad skills and diversification and we should instead be looking to invest both from an education standpoint and a VC standpoint in the few areas that will have outsized returns.
In order to build a monopoly you must search for secrets. There are two types of secrets in the world:
- secrets of nature
- secrets of people
Uber, Airbnb, and Google embraced sometimes contrarian ideas about people. Uber and Airbnb had obvious secrets – connect people who want to give rides and rent space to people who want those things. Secrets about nature might be SpaceX or biotech.
Secrets exist between convention – what is known and obvious to everyone and mysteries, those things that are impossible to know or understand. Secrets are hard.
You can find secrets by looking where others do not look. Maybe it’s forbidden, maybe it’s overlooked, maybe it’s dangerous
When you find a secret and share it with a few others aka start a company now you must get the foundation right. This means getting the right co-founders, the right team, and the right equity structure.
To make sure you are aligned you must consider these three areas:
- ownership – who legally owns the equity
- possession – who operates the business
- control – who directs the business
Ideally you concentrate these areas early on to avoid potential for misalignment. Every new layer creates new and non-obvious ways misalignment can occur. The best way to align the early team is with equity. Make sure everyone is also fully bought in – no part timers – you get on the bus or you get off. Part timers have different incentives. Contractors have different incentives – a short term one.
He recommends that the CEO gets paid either the least in the company (to set the floor) or the most in the company (to set the ceiling).
In order to have a successful team you need to build a cult – a positive cult. A group of obsessives who have strong bonds. Ride or die brothers and sisters. They must be co-conspirators in your venture. He talks about the team he built – the paypal mafia who have all gone on to found billion dollar ventures.
You need to ask yourself why would the 20th person want to join your company? Better stock options, perks and so on won’t make a difference. Better answers revolve around your team and your mission. These things are unique.
Internally eliminate competition by having each team member do one thing. This eliminates in-fighting.
Peter goes on to talk about distribution. Silicon valley nerds tend to undervalue sales but just because you build something great doesn’t mean folks will come to you – especially in a network based business.
Sales, good sales, is hidden. Sales people are more like actors focused on persuasion. Peter defines a dead zone in distribution where below it you must advertise/market. Paypal actually paid the first few hundred thousand customers to join to get a critical mass. Above it you move towards more complex sales. This involves personal time and attention to grow. Personal sales can always be important if it can give a beachhead to grow from. The small sale to one department where adoption can sprout from.
Having one great distribution channel is better than trying many and failing.
There is latent feat that machines will compete with man but we focus too much on this. We undervalue hybrid approaches to problems – combining man and machine together. We look too much at full automation solutions to issues when often a hybrid solution is best, easier to sell, easier to build, easier to distribute.
On a macro scale this also applies to business. Instead of destroying or competing complement.
There are seven questions you must use to evaluate your ideas:
- do we know a secret?
- can we build it?
- is now the time?
- is the team right?
- is it defensible 10+ years into the future?
- can we distribute?
- are we starting with a big share of a small market?
In order to get the right founding team you need to be like minded. This cuts down on overhead. This is contrary to the “diversity and inclusion” woke push of present day. The best founders are extreme.