Exhaustive Notes: Zero to One — Peter Thiel
While in the middle of business books it’s easy to be energized and full of ideas. But soon after finishing them life’s distractions start to creep in. Projects at work, grocery lists, and news stories gradually overwrite what we’ve learned. It’s all too common to wake up one day and realize that we can only remember a fraction of what we once knew. I took these notes to combat that problem. I’m sharing them here in the hope that they help you as much as they have helped me.
For those who have already read Zero to One:
Treat these notes like an index. Scan them occasionally to refresh your memory of important concepts. If you’re facing a hard decision, use these notes pinpoint relevant advice. Use the anecdotal references to jog your memory.
For those who have not read Zero to One
Treat these notes like a sampler platter. Read the chapter titles. Dive into the sections that seem most interesting. Learn what you can from the summary and, if you find it valuable, strongly consider buying the book here. If high school taught us anything, it’s that CliffsNotes are a poor substitute for the full text.
Enjoy!
1. The Challenge of the Future
The future can take 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 graph 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.
Startup Thinking
New technology tends to come from new ventures, therefore if you want to make technological leaps, the best way is to start a new venture.
“Startups operate under the principle that you need to work with other people to get stuff done, but you also need to stay small enough that you actually can.”
“A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.”
Question received ideas and rethink business from scratch [?]
2. Party Like It’s 1999
A period characterized by crazy valuations without the earnings or business models to back them up
“Easy to conclude that the market had gone crazy”
The “old” economy of exporting existing technologies to new places (i.e. globalization) wasn’t working as evidenced by the panics, crashes etc. that were happening around the world over the preceding years.
New technology was the only way forward
Mania: September 1998 — March 2000
Irrational exuberance with startups, valuations, and a general lack of business sanity
People who obviously had no business starting or running companies were running them (e.g.: the grad student with 6 simultaneous companies) [?]
Companies who’s entire business model was adding a “.com” to a name or industry
PayPal Mania
PayPal was originally a product that worked but was useless (payment transfers for Palm Pilots)
Pivoted to payments over email
Raised a huge round to finance an unsustainable growth strategy even if the rest of the bubble burst
Lessons Learned
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 burned in 4 (incorrect) lessons to the tech world:
- Make incremental advances over what already exists
- Stay lean and flexible (unplanned)
- Improve on the competition (marginality)
- Focus on product, not sales (marketing = waste)
In truth, 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 matters just as much as product
2000 was obviously a time of widespread irrationality but also a moment of unexpected clarity.
People looked far into the future and saw themselves as capable of creating the technology we needed to get there.
To move forward:
“How much of what you know is shaped by mistaken reactions to past mistakes?”
3. All 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)
Competitive markets destroy profits.
“If you want to create and capture value, don’t build an undifferentiated commodity business.”
Lies People Tell
If you have a spectrum of Perfect Competition (left) to Monopoly (right), most people imagine that firms are relatively similarly placed:
Perfect Competition ←— — — — —A — — B— — — — → Monopoly
When in reality, most businesses are much closer to one extreme that we (or they) would like to admit:
Perfect Competition ←A — — — — — — — — — — — B → Monopoly
The confusion comes from the ways that the companies are incentivized to represent themselves.
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.
Q: What is the actual relevant market? Not the one that makes you look best.
Non-monopolists talk about themselves in terms of intersections (British Food n Palo Alto)
Monopolies talk about themselves in terms of unions (Search u Mobile u Advertising)
Ruthless People
Highly competitive markets and industries push people towards margin squeezing behavior (ruthlessness) — the alternative is failure
If takes monopoly profits to get enough breathing room to focus on anything other than preserving your margins.
Monopoly Capitalism
Monopolies are only negative in a world where those monopolies cannot be unseated.
The world is not static, the possibility to achieve monopoly profits is a powerful incentive to create new technology and innovation (governments recognize this with patent offices)
Apple’s monopoly profits from the iPhone are clearly a result of creating greater abundance, not artificial scarcity
In an environment where competition is possible, all monopolies are temporary.
“In business, equilibrium means stasis, and stasis means death.”
“Every business is successful exactly to the extent that it does something that others cannot.”
“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.”
4. 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 (Supreme Court clerk vs. PayPal, for Peter).
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.
There is a big pull towards getting caught in a crowd competing for obvious prizes.
“Competition can make people hallucinate opportunities where none exist” (Y2K online pet stores)
In the few cases where conflict is unavoidable, best to strike hard and end it quickly.
“Recognize competition as a destructive force rather than a sign of value”
5. 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 (Zynga)
“Will this business still be around a decade from now?”
Characteristics of Monopoly
All monopolies are unique but the all tend to have:
- Proprietary technology
- Network effects
- Economies of scale
- Branding
Proprietary Technology
The biggest advantage a company can have, 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.
The easiest (most cost effective?) 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
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
Economies of Scale
When a company gets more efficient as it grows
Software businesses do this easily while service (or atom) businesses have a much harder time
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 a very underrated skill.
Don’t Disrupt
‘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)
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.
6. You Are Not a Lottery Ticket
Is success a matter of luck or is it something that can be trained? Designed?
Can You Control Your Future?
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.
“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.”
Indefinite Pessimism: Europe, Present
Definite Optimism: US, 1950s — 1960s
Indefinite Optimism: US, 1982 — Present
Definite Pessimism: China, 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.”
E.g.: 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 generate learned from childhood to overrate the power of chance and underrate the importance of planning.”
Our Indefinitely Optimistic World
Indefinite Finance
“Finance epitomizes indefinite thinking because it is the only way to make money when you have no idea how to create wealth.”
Diversification reflects indefinite thinking
Indefinite Politics
The proliferation of polling has bred a generation of politicians (and political observers) who are more concerned with next week’s opinions than a 10–20 year vision
Government used to be able to coordinate complex projects (Apollo, Manhattan) but at this point mostly provides insurance programs (Social Security, Medicare, etc.)
Indefinite Philosophy
Ancient
- Pessimistic (Plato, Epicurus, Aristotle)
Modern
- Optimistic (Marx, Hegel, Spencer)
- Indefinite (Rawls, Nozick)
“In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future.”
Indefinite Life
In the 1600s many people were working on life extension
At this point that field is fairly quiet with actuarial tables and insurance having replaced the pursuit of progress
Medical and biotech depend on random chance to make new compounds and treatments
Is Indefinite Optimism Even Possible?
The other three approaches have fairly straightforward paths, indefinite optimism does not
The best candidate for a mechanism is evolution and evolution metaphors have become omnipresent in business
This is a fine way to build a 1 to N business but never a 0 to 1 business
“In startups, intelligent design works best.”
The Return of Design
Apple is a clear example of a company where intentional design (business, not experiential) was prioritized (Jobs trashing product lines when he came back)
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, etc. 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
7. Follow the Money
“Money makes money” or perhaps more accurately, “value makes value”
The world operates exponentially, not linearly (Pareto’s Italian land ownership and pea pod yield)
“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 (in these domains and in many others)
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
Because the compounding over time does not reflect daily observations until very near the end
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 (or perhaps most?) 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
- One distribution strategy will probably outperform the rest combined
- One use of time will probably outperform the rest combined
- One decision will probably outperform the rest combined
8. Secrets
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 to be nearly 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)
Why do so many believe that there are no hard (but not impossible) problems left to solve?
- Geography? (there are no more unexplored areas)
- Incrementalism
- Risk aversion (fear of failure)
- Complacency (rent collecting)
- 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)
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.”
9. 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 (DMV, big corporations)
“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
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)
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
10. 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’
The way to build the mafia wasn’t hiring the most talented people (law firm) but to hire people that would be close knit
“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 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)
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
The best startups are like slightly less extreme cults
11. If You Build It, Will They Come?
Startups tend to underestimate (and even demonize) the importance of sales and distribution
Nerds vs. Salesmen
Because technical work is so easily evaluated, it’s easy for technical people to undervalue the nontechnical (and hard) work of sales and marketing
Sales Is Hidden
We only really react negatively to sales when it is done poorly (i.e.: obviously)
The best sales people make us buy without us realizing we’ve been sold to
If you have a great product without a way to sell it, you have a bad product
How to Sell a Product
Superior sales and distribution can make a monopoly out of even an undifferentiated product
A superior product cannot become a monopoly with undifferentiated distribution
LTV and CAC are closely related
Complex Sales ($1m — $100m)
Average deal sizes over 7 figures need very high touch consultative sales (SpaceX → NASA)
Complex sales companies do well if they grow 50–100% over a decade
They don’t have much potential for virality
Deals tend to build on each other over time
Personal Sales ($10k — $100k)
The challenge in this range is to establish a process for a modestly sized sales team (Box)
Grass roots, land & expand approach
Distribution Doldrums
There’s a dead zone between personal sales and traditional advertising
These are businesses that really need personal sales but don’t have the LTV to support it
Marketing and Advertising
Low priced products with mass appeal and no viral distribution (Laundry detergent, Warby Parker)
Viral Marketing
Virality: when core functionality encourages people to invite others
“Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.”
Ideal target for viral advertising: a small niche with frequent interactions (eBay hobby goods sellers)
The Power Law Distribution
One distribution method is usually better than all of the others combined for a business
Selling to Non-Customers
You must sell your company to potential employees and customers too
Everybody Sells
If you don’t see the salesperson, you are the salesperson
12. Man and Machine
“The most valuable companies of coming decades will be build by entrepreneurs who seek to empower people rather than to make them obsolete.”
Substitution vs. Complementarity
“Computers will take our jobs is a fear of substitution but computers are complementary.”
Globalization Means Substitution
People tend to have the same cognitive strengths as other people
Globalization increases the supply of people with roughly the same skills
Technology Means Complementarity
People and computers are good at fundamentally different things
Technology allows for specialization
“Computers are tools, not rivals.”
Complimentary Businesses
When fighting transaction fraud at PayPal they tried an automated approach first but it was ineffective, fraudsters could adapt faster than they algorithm could
The best approach was blended — the algorithms would flag suspicious transactions and humans would review them
This blended approach led to founding Palantir
Linkedin took the same approach with products for recruiters
The Ideology of Computer Science
Focuses on replacing human effort, not complimenting it (machine learning, big data, etc.)
The most valuable companies will ask “How can computers help humans solve hard problems?”
Even Smarter Computers: Friend or Foe?
There’s a lot of fear about the impact of ‘strong AI’ but we are a long way away from there right now
That fear shouldn’t stop us from building better computers today
“Indefinite fears about the far future shouldn’t stop us from making definite plans today.”
13. Seeing Green
In the early 2000s thousands of clean tech companies were started and almost all of them have since failed
Why?
Because they ignored one or more of the seven questions a business must answer:
1. The Engineering Question
Can you create breakthrough technology instead of incremental improvements?
2. The Timing Question
Is now the right time to start your particular business?
3. The Monopoly Question
Are you starting with a big share of a small market?
4. The People Question
Do you have the right team?
5. The Distribution Question
Do you have a way to not just create but deliver your product?
6. The Durability Question
Will your market position be defensible in 10 and 20 years into the future?
7. The Secret Question
Have you identified a unique opportunity that others don’t see?
The Engineering Question
Companies must aim for a 10x improvement over their competition, only then will people take you seriously and accept the risk of switching from what they are doing to what you want them to do
The Timing Question
“Entering a slow-moving market can be a good strategy, but only if you have a definite and realistic plan to take it over.”
The Monopoly Question
Exaggerating your uniqueness is a poor way to answer this question (thin-film solar)
Identify actual competitors
Thin-film → Solar → Renewable → Energy
The People Question
If the business requires technologists, hire (or as a VC, invest in) technologists. (suits running clean tech companies)
The Distribution Question
Make it easy for customers to buy (Better Place electric cars)
The Durability Question
Ask ‘what will stop someone from wiping out my business 20 years from now?’
Clean tech got blindsided by fracking
The Secret Question
If everyone describes your future success using broad conventions that everyone sees you are probably in trouble
The Myth of Social Entrepreneurship
Most nonprofits tend to push the same set of agendas, one more won’t add anything unique to the conversation
What is good for society is what is different
Tesla: 7 for 7
One of the few clean tech companies to nail all seven questions
- Technology: superior
- Timing: government subsidies in 2009
- Monopoly: tiny market (luxury electric)
- Team: highest bar
- Distribution: own the dealerships
- Durability: head start and innovating fast
- Secret: fashion drives clean tech
Energy 2.0
Tesla proves clean tech can work, the other companies just did a bad job of framing and strategy
“An entrepreneur can’t benefit from a macro scale insight unless his own plans begin at the micro scale.”
“No sector will ever be so important that merely participating in it will be enough to build a great company.”
14. The Founder’s Paradox
“It’s more powerful but at the same time more dangerous for a company to be led by a distinctive individual instead of an interchangeable manager.”
The Difference Engine
Founders tend to be eccentric but it’s not clear if this is innate or a reinforced behavior (Branson, Parker, Gaga)
Where Kings Come From
“The famous and infamous have always served as vessels for public sentiment: they’re praised amid prosperity and blamed for misfortune.”
Founders/leaders(/executives?) serve the same societal purpose
American Royalty
Fame/adulation tends to be binary (Elvis, Hughes, Gates)
The Return of the King
Jobs (in, kicked out, brought back)
A company’s success is highly dependent on one person — in this way they resemble monarchies
Lesson: we need founders, arguably the more extreme or unusual the better
Great founders are valuable/important not for their own contributions but because they bring out the best in others
“The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenfranchisement for wisdom.”
Conclusion: Stagnation or Singularity
The ancients saw history as a continual cycle between prosperity and ruin
Recently we’ve started to hope that we will reach a quality of life plateau and stay there
The third option is a collapse so devastating that we can’t recover
Without continued technological progress stagnation will happen, leading to conflict
The fourth option is that continued technological advancement leads to a singularity (Kurzweil)
“We cannot take for granted that the future will be better, and that means we need to work to create it today.”
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