Book Notes - Zero to One, by Peter Thiel

Below are all the quotes and ideas I considered worth it, gathered into 7 central themes.

Table of Content

• 1. Wrong Silicon Valley dogmas
• 2. Build a monopoly
• 3. Sales and distribution
• 4. Secrets and niches
• 5. Startup Culture: Companies
• 6. Startup Culture: People
• 7. Seven questions that every business must answer

1. Wrong Silicon Valley dogmas

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:

1. Make incremental advances

Anyone who claims to be able. To do something great is suspect, and anyone who wants to change the world should be more humble. Small incremental steps are the only safe path forward.

2. 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.

3. Improve on the competition

Build your company by improving on recognizable products already offered by successful competitors.

4. 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 probable 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

2. Build a monopoly

Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.

Monopolist can afford to think about things other than making money, non-monopolist can’t.

Monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.

Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.

1. Proprietary technology

As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.

Apple improved on anything that had come before by at least an order of magnitude: tablets went from unusable to useful.

2. Network Effects

Network effects make a product more useful as more people use it. Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.

This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.

It is much easier to reach a few thousand people who really need your product than to try to compete for the attention of millions of scattered individuals. The perfect target market for a startup is a small group of particular people concentrated together and served by a few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse.

The most successful companies make the core profession to first dominate a specific niche and then scale to adjacent markets a part of their founding narrative. As you craft a plan to expand to adjacent markets, don’t disrupt - avoid competition as much as possible.

3. Economies of Scale

Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.

A good startup should have the potential for great scale built into its first design.

4. Branding

A company has a monopoly on its own brand by definition, so creating a strong brand is powerful way to claim a monopoly. However, no technology company can be built on branding alone.

Many have tried to learn from Apple’s success: paid advertising, branded stores, luxurious materials, playful keynote speeches, high prices, and even minimalist design are all susceptible to imitation. But these techniques for polishing the surface don’t work without a strong underlying substance. Apple has a complex suite of proprietary technologies, bot in hardware (like superior touchscreen materials) and software (like touchscreen interfaces purpose-designed for specific materials). It manufactures products at a scale large enough to dominate pricing for the materials it buys.

3. Sales and distribution

Customers will not come just because you build it. You have to make that happen.

In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works.

It’s better to think of distribution as something essential to the design of your product. If you’ve 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 monopoly, even with no product differentiation. The converse is not true.

Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a nre customer (Customer Acquisition Cost, or CAC)

Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution.

A product is viral if its core functionality encourages users to invite their friends to become users too. This is how Facebook and PayPal both grew quickly: every time someone shares with a friend or makes a payment, they naturally invite more and more people into the network.

At PayPal we didn’t want to acquire more users at random, we wanted to get the most valuable users first.

Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure. 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.

4. Secrets and niches

Great companies have secrets: specific reasons for success that other people don’t see.

• The best projects are likely to be overlooked, not trumpeted by a crowd.
• The best problems to work on are often the ones nobody else even tries to solve.
• The single most powerful pattern I have noticed is that successful people find value in unexpected places.

What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of values without becoming very valuable itself. Creating value is not enough - you also need to capture some of the value your create. Your niche or secret has to be profitable.

Most people act as if there were no secrets left to find. If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.

When thinking about what kind of company to build, there are tow distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?

5. Startup Culture: Companies

• New technology tends to come from new ventures-startups. It’s hard to develop new things in big organizations and it’s even harder to do it by yourself, you need a team.
• 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. It’s much better to be the last mover - that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.
• “Thiel’s Law”: a startup messed up at its foundation cannot be fixed.
• Most conflicts in a startup erupt between ownership and control - that is between founders and investors on the board.
• Most fights inside a company happen when colleagues compete for the same responsibilities - Defined roles reduced conflict.
• Whenever an entrepreneur asks me to invest in this company, I ask him how much he intends to pay himself. A company does better the less it pays the CEO - that’s the 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 150k per year in salary.
• “Company culture” doesn’t exist apart from the company itself: no company has a culture, every company is a culture.
• Startups have limited resources and small teams. They must work quickly and efficiently in order to survive, and that’s easier to do when everyone shares an understanding of the world.
• Recruiting is a core competency for any company. It should never be outsourced.

6. Startup Culture: People

• Asperger’s-like social ineptitude seem to be at an advantage in Silicon Valley today. If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you.
• Heroes take their personal honor so seriously they will fight for things that don’t matter. This twisted logic is part of human nature, but it’s disastrous in business.
• Search for definite people. A definite view favors firm convictions. Instead of pursuing many-sided mediocrity and calling it “well-roundness”, a definite person determines the one best thing to do and then does it.
• Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know. So who do you tell? Whoever you need to, and no more.
• 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.
• Founders should share a prehistory before they start a company together - otherwise they’re just rolling dice.
• A board of three is ideal. You board should never exceed five people, unless your company is publicly held.
• We didn’t assemble a mafia by sorting though resumes and simply hiring the most talented people. I had seen the mixed results of that approach firsthand when I worked at a New York lay firm. The lawyers I worked with ran a valuable business, and they were impressive individuals one by one. But the relationships between them were oddly thin. They spent all day together but few of them seemed to have much to say to each other outside the office. Why work with a group of people wo don;t even like each other? Many seem to think it’s a sacrifice necessary for making money.
• Job assignments aren’t just about the relationship’s between the owners and tasks, they are also about relationship’s between employees. The best thing I did as a manager at Paypal was to make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing.
• Men and machines are good at fundamentally different things. People have intentionality - we form plans and make decisions in complicated situations. We’re less good at making sense of enormous amounts of data. Computers are exactly the opposite: they excel at efficient data processing, but they struggle to make basic judgments that would be simple for any human.
• Why do so many people miss the power of complementarity? It starts in school. Software engineers tend to work on projects that replace human efforts because that’s they’re trained to do.

7. Seven questions that every business must answer

1. The Engineering Question

Can you create breakthrough technology instead of incremental improvements?

Companies must strive for 10x better because merely incremental improvements often end up meaning no improvement at all for the end user.

2. The Timing Question

Is now the right time to start your particular business? You can’t dominate a sub-market if it’s fictional. Are the cultural, societal, and political contexts right for the product?

3. The Monopoly Question

Are you starting with a big share of a small market? Customers won’t care about any particular technology unless it solvers a particular problem in a superior way.

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? The product needs to reach the final consumer, otherwise you don’t have a product at all.

6. The Durability question

Will your market position be defensible 10 and 20 years into the future? Rephrase the durability question and ask: what will stop China from wiping out my business?

If you focus on near-term growth above all else, you miss the most important question you should be asking: 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.

7. The Secret Question

Have you identified a unique opportunity that others don’t see?