Zero to One
I’ve read Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel. Here are my notes on the book.
Peter Thiel is a well known Silicon Valley founder and investor. He is often portrait as a contrarian and is quite a controversial figure. He is a founder of PayPal and Plantir. I’ve heard very good reviews of the book and it was on my list for quite some time.
What important truth do very few agree with you on? (or a founder version of the question What valuable company is nobody building?) ==> look for secrets (things that are hard, but not impossible).
Competition drives profits down, to build a great company you need to build something new (you need to take the world from 0 to 1), instead of competing and incremental improvements (1 to N). You want to build a monopoly.
Price to earnings is a useless review-view image. Future discounted cash flows are the basis for valuating companies.
Start small, dominate the market and scale up to other markets. Focus on creation not disruption (not fight with other companies).
Foundation is a special moment that defines the company. Pick a good team you can work with. Small groups of smart people (see Insanely Simple).
Man and machine are not enemies, they complement each other. The best tech companies harness this synergy.
Control the future.
You’re not a lottery ticket. Plan and build your future.
- Power law (and Pareto principle) is everywhere:
- This is super important (there seems to be a similar point to Black Swan).
- Only a couple of opportunities will bring extraordinary returns.
- If you diversify too much even you best opportunities will not make up for the rest of your portfolio.
- This is true not only for investments, but also for your own brand and career.
- It is hard to pick the “winners”, the “outliers”, but you should bear the power law in mind in your every decision. There are few great options and a lot of mediocre ones.
- Salesmanship is everything.
How to evaluate businesses?
The questions every business must have an answer for:
The engineering question => Can you create breakthrough technology instead of incremental improvements?
The timing question => Is now the right time to start your particular business?
The monopoly question => Are you starting with a big share of a small market?
The people question => Do you have the right team?
The distribution question => Do you have a way to no just create but deliver your product?
The durability question => Will your market position be defensible 10 and 20 years into the future?
The secret question => Have you identified a unique opportunity that others don’t see?
I really enjoyed the book. I’ve found a lot of the ideas appealing.
Modern thinking often takes you your agency away. Some examples — you should invest in index funds, because picking winning stocks is impossible; you’ve just graduated — great, but it only means you’d come from privilege; space flights? well, the budget is tight and grand projects won’t get you reelected.
This is what I’ve really liked about the book, it tells you that you’re not a lottery ticket. You can plan and build the future. You have to think about your actions because only few will give extraordinary results. There are still secrets out there — maybe if you search hard enough you can find some of them. Of course there’s no guarantee — by (power law) definition most of the efforts will be mediocre . But at least the book asks you to try, because if you don’t then for sure you can’t expect great returns.
There is some concrete advise there as well, I’ve liked the checklist on evaluating if a business is viable; also the note on the earnings and future cash flows — earnings are trailing indicator, if you want to invest (your time or money), you should evaluate the future prospects (discounted future cash flows) instead of the last quarterly results. Also, the chapter on salesmanship, I liked that it presented sales from a different perspective. I’m programmed to consider sales people as sneaky and pushy unlikable characters. And yet, we have to sell all the time. Plus, we don’t really see the good ones, we only notice the ones that are not the best in their craft.
The part about indefinite things really resonated with me, e.g. the politicians don’t have their opinions anymore, they have near-realtime pools and they know what to tell to be liked. Nobody knows how to make money, the bankers diversity and invest in many funds and sectors, the funds diversify and invest in many companies. Maybe some companies know what to do with the money, but on the other hand the big tech sits on piles of cash.
Of course the book is not a scientific article or a fair debate which tries to present both sides of an argument. There’s a lot of things to disagree with, but I’ve enjoyed even the parts that I disagreed with (I don’t focus on them here) — it was intellectually challenging to consider the author’s arguments.
I recommend to read the book.
Other books that may correspond with Zero to One:
- Black Swan by Nassim Taleb,
- Insanely Simple by Ken Segall,
- (to some extent) Essentialism by Greg McKeown.
What important truth do very few people agree with you on?
- Or, What valuable company is nobody building?
0 to 1 vs 1 to N
- Horizontal vs vertical scaling.
- 0 to 1 is the vertical progress, it’s doing new things.
- 1 to N is scaling, copying / improving things that work.
Capitalism and competition
- Under perfect competition no company can make profits.
- Under perfect monopoly company produces at price and quantity to max its profits.
- Monopolies will try to hide themselves (e.g. google mentions the global advertising market, not the global search engine market), while companies in competitive markets will try to show how unique they are.
- In dynamic world monopolies can be more than rent-collectors, they can drive innovation (and they have to, unless they want to be obsolete by new contenders; e.g. iOS threatening Windows as the main operating system).
- Competitions and wars are costly, and can threaten both parties.
- Small groups of smart people (see Insanely Simple) tend to produce new tech / original work.
- Better to risk boldness than triviality.
- A bad plan is better than no plan.
- Competitive markets destroy profit.
- Sales matters just as much as the product.
What drives company valuations?
It’s not current earning (looks like P/E is useless, as it provides a rear view mirror image of a company). What matters are discounted future revenues, i.e. the ability to generate cash flows in the future.
E.g. Twitter vs New York Times.
The company must grow and endure. The latter, durability, is hard to measure. E.g. Groupon or Zynga. Will the business be still around a decade from now?
- Proprietary technology:
- As a rule of thumb should be 10x better than competition, otherwise don’t bother.
- Network effects.
- Economies of scale.
How to build it?
- Start small, capture a niche first and monopolize it.
- Scale up — expand from the niche into new markets.
- Don’t disrupt — focus on creation, not on the fights.
- Last mover advantage — moving first make it easy to capture the market, but it’s better to have the last great development on the market, unseat current contenders and enjoy monopoly. Arguably this point is not super clear to me.
Controlling the future
Is success accidental? E.g. Gates, or Buffet, or Bezos claim there was some luck involved in their success. There are serial entrepreneurs like Musk, or Jobs. Thiel seems to think that success is not accidental, but OTOH is it different than mutual fund management (all of the fund managers suck, some seems successful, but given there are so many of them some will be successful many years in a row just by chance)?
Definite vs indefinite: you can control or at least try to shape the future.
Optimism vs pessimism.
|Optimistic||U.S., 1950s–1960s||U.S., 1982–present|
|Pessimistic||China, present||Europe, present|
Indefinite results in hedging your bets and mediocrity — diversification, many extracurricular activities; no specialization, not trying to be great at a single thing.
Here I think the book resonates nicely with Essentialism, though I’m not sure if I buy it 100%.
Our word is indefinite. The next points really resonate with me.
Nobody knows how to create wealth.
- Successful founders sell the company and get a lot of money:
- They don’t know what to do with it, so they give it to a large bank.
- The bankers have no idea either, so they spread it into a portfolio of large funds or thousands of loans.
- The funds don’t know either, so they diversify by investing in a portfolio of stocks.
- If the underlying companies are successful they pay dividends or buy back stock and the cycle repeats.
- At no point (except the companies) anyone knows what to do with the money. Money is an end, not a means to it.
Near real time polling allows politicians to know what the general public think now, instead of offering a plan or a vision for the next 10–20 years.
Government doesn’t work on big problems anymore, it merely provides insurance. According to the author the entitlement spending in the US eclipsed discretionary spending around 1975 (according to wikipedia in the 1990s https://en.wikipedia.org/wiki/Discretionary_spending).
- Ancient philosophers where mostly pessimistic, but that changed later on. XIX is optimistic with Hegel or Marx. They also believe in planned progress, so they are definite, In XX it shifted to indefinite optimism.
- We focus on the differences between left liberal egalitarianism and libertarian philosophizes, but we don’t see the are all indefinite.
Finally the points above lead to indefinite life.
- We’ve stopped dreamed big (like life extensions, or youth recovery). Now that’s just a number in the probability table.
- Number of new drugs approved per billion $ in R&D has halved every nine years since 1950 )biotech has basically has a Moor’s law, but in reverse).
- Biotech startups are different from software startups. They experiment blindly instead of forming a theory, they require a lot of capital, they rely on external advisors instead of a dedicated team.
Evolution vs Design
- Indefinite optimism is an evolutionary process. You don’t plan, but hope that things will be better. Live tends to progress without anybody intending it (Darwin).
- Is it the best way forward? Peter Thiel prefers planning and building the future you want.
- Evolution can lead to improvements, but it won’t take you form 0 to 1.
- The most important of Jobs designs was the business (he didn’t produce MVPs, but things that people wanted).
- Planning (or rather a view on the outlook of plan) means that it is hard to value a company. Either you believe in the success and value the company based on its (large) future discounted cash flows or you don’t and you value them on the current metrics.
Startup is the largest endeavor over which you have an agency over. Reject the tyranny of chance. You are not a lottery ticket.
Follow the money
- Compound interest, whoever has will be given more.
- We live under the power law. People (even VCs who make money out of it) often fail to see it, as the outcomes are far away and removed from daily experience.
- Everybody is an investor; if not in a company, then in themselves.
- Diversification is the usual recommendation, but it produces only average results.
- In a diversified portfolio your winners will be watered down by the average performers.
- Owning 100% of a failed startup is nothing, owning 0.01% of google is a lot.
- Thinking in power law
- Most important things are singular (one market is better that most of the others, one distribution strategy is better, etc.).
- Put your time and decision making skills into important things.
- Think where your actions fall on the curve.
- Conventions: obvious, easy.
- Secrets: hard, achievable with serious effort.
- Mysteries: impossible.
- Fundamentalists promote a view with obvious truths that everyone should follow, and mysteries that none can understand.
- Secrets can be found only after looking hard for them.
Two kinds of secrets: (1) nature, (2) about people.
- How to look for them?
- What secrets is nature / people not telling me? (What people are not allowed to talk about?)
- The best place is where no one else is looking. (e.g. human nutrition: not easy, but not obviously impossible either).
- What do do with them?
- Form a ~conspiracy~ startup.
- Foundation of a company is a special moment and it has to be done right.
- Founders need to work together well.
- Ownership: who legally owns the company (shareholders)?
- Possession: who runs the company day-to-day (management and workers)?
- Control: who formally governs or oversees the company (board)?
3 ppl on board good, more than 5 ppl on board bad.
Most employees should be full time: “you’re either on the bus or off the bus”.
- CEO salary should be limited and should be the highest in the company (and should limit the other salaries). Too high salary creates wrong incentives.
- Equity better than cash as it creates better incentives.
- Equity split will be somehow unfair.
- Beware of consultants who want short term cash and no equity.
The Mechanics of Mafia
- Every company is a culture, there’s no way to create a culture — perks without the substance are useless.
- Team needs to be tightly-knit, not transactional. Time is precious, don’t waste it on people you don’t want to spend your future with.
- Recruiting is a core competence, this can’t be outsources.
- Talented ppl don’t have to work for you, they can work for Google. They need to like your mission. Don’t fight the perk war.
- Early staff should be similar to the founding team (when you’re thin on resources it’s easier if you share a similar view of the world).
- Let a person do one thing. This avoids conflicts, makes responsibilities obvious.
- Don’t hire consultants. Hire cult followers.
If You Build It, Will They Come?
- Sales look easy, but it takes hard work to make it look easy.
- Salesmanship works best when hidden. Politicians sell themselves, investment bankers sell companies, account execs sell ads.
- Sales are needed everywhere, even at the university research (cancer research funding is driven by sales, dominant theories about english literature are driven by sales).
The best product dones’t always win.
- CLV — customer lifetime value
- CAC — customer acquisition cost
- Complex sales, CAC $10m, enterprises / governments
- Multimilion $$$ deals require personal attention: SpaceX, Plantir.
- Sales CAC $10k, enterprises / governments
- Dead zone, small business
- CLV too small to hire dedicated salespeople
- Hard to reach via advertising / general marketing, personal reach would be better, but too expensive.
- Marketing, CAC $100, consumers
- Needed for low-priced products with mass appeal, but no method of viral distribution.
- Viral marketing, CAC $1, consumers
- Cheap and fast; great if you pull it off.
- Paypal, youtube, facebook, etc.
- Complex sales, CAC $10m, enterprises / governments
Power law applies here as well — one of the methods may bring way better results for you than all of the others. You need to nail just one for a successful business.
- You need to sell your company to non-customers as well (PR, journalists, investors, employees).
Everybody has a product to sell.
Man and Machine
- You should think about machines as complementary.
- Computers complementing human bring great companies (Palantir, Linkedin for recruiters, etc.).
- Strong AI may bring doom, but it’s a worry for 22nd century.
The Founder’s Paradox
- A lot of founders have contradicting traits (they are both rich and poor, loved and hated, idiot and genius, insider and outsider). The traits can be natural, or acquired, or maybe even just a cultivated image.
- Celebrities are founders of their personal brand.
- King and scapegoat dichotomy.
- Founders are important because they can bring the best work of their team.
Stagnation or Singularity?
For patterns for humanity:
- Recurrent collapse
Future won’t build itself, help it!