Notes on Startups, or How to Build the Future
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Zero to One is a book written by legendary entrepreneur and investor, Peter Thiel. Peter shares his knowledge on how to shift your startup from zero to one. He covers the importance of strong foundations, team culture, and persistence. However, he also encourages companies to think outside the box and build a monopoly based on innovation rather than copying others. There are new inventions out there ready to be found.
Peter Thiel’s Perspective
Peter Thiel is a highly successful entrepreneur and venture capitalist. He currently has a net worth of $2.5 billion and was ranked no. 328 on the Forbes 400 in 2018. He is one of the co-founders of PayPal alongside Elon Musk and other successful business people. Additionally, he is a co-founder of Palantir Technologies and Founders Fund. Born in Germany, Peter moved with his parents to the US at a young age and now lives in California with his own family.
Peter Thiel has an impressive record of creating successful teams that breed personal innovation. In Silicon Valley, the first business team he built has been given the title of the “PayPal Mafia.” Thiel’s first team has subsequently founded, co-founded, or invested in some of the world’s most successful tech companies. Together, they founded PayPal and sold it for $1.5 billion in 2002. Since then:
- Elon Musk has become one of the richest men in the world. He has founded SpaceX, Tesla Motors, and Neuralink
- Reid Hoffman co-founded LinkedIn
- Steve Chen, Chad Hurley, and Jawed Karim founded YouTube together
- Jeremy Stoppelman and Russel Simmons founded Yelp
- David Sacks co-founded Yammer
- Thiel co-founded Palantir
All of these companies are now worth more than $1 Billion each. The culture of this team was strong enough to excel after the sale of PayPal. Zero to One will outline how this level of success was possible.
To Imagine the Future, You Have to View the Present Differently
“Indefinite attitudes to the future explain what’s most dysfunctional in our world today. Process trumps substance: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options. This describes Americans today. In middle school, we’re encouraged to start hoarding “extracurricular activities.” In high school, ambitious students compete even harder to appear omnicompetent. By the time a student gets to college, he’s spent a decade curating a bewilderingly diverse résumé to prepare for a completely unknowable future. Come what may, he’s ready—for nothing in particular.” – Peter Thiel
The future is often one of the most fascinating topics for humans. We can only begin to imagine what the world could look like in 2100. However, we should not fixate on the characteristics of our future. Instead, we should consider all the progress required between now and then. The changes and progress in our present are what defines our future.
Peter Thiel outlines two types of progress: horizontal and vertical progress. Horizontal progress involves expanding existing ideas and innovations. One of the driving forces behind horizontal progress is globalization. Globalization allows ideas to be spread to more people. In comparison, vertical progress involves completely novel innovation, such as an idea that had never been actualized or a completely novel technology type.
Peter Thiel describes horizontal progress as going from one to ‘n’. In comparison, vertical progress is going from zero to one. Vertical progress is more challenging. You have to imagine something that doesn’t exist yet, but it has greater potential rewards. To imagine these future ideas, you have to think about the present critically. Peter Thiel sees critical thinking as an essential skill when he is hiring new employees. In fact, at every job interview, Peter asks interviewees whether there is a significant truth that few people believe. Peter believes that only those who can think outside established conventions can understand and change the future.
The challenge of the Future
“Every 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.” – Peter Thiel
Peter provides an outline of the most important factors influencing our futures. Although globalization will lead to substantial changes, Peter believes that technology will have more meaningful impacts on our lives. Additionally, applying old approaches in a globalized format will only lead to destruction. Peter gives the example of Chinese air pollution. Globalization has made China a trading giant, but we are still using the same old ways of creating wealth. Therefore, China is polluting on a mass scale. Globalizing old ideas is not the best approach for changing the future. Peter suggests that technological innovation is a better option for changing the future.
Resources are a scarcity on earth. Therefore, technology is one of the most critical tools for preserving our resources during an era of globalization.
Startups are the gold-standard of innovation within the business world. Peter describes a startup as the largest group of people you can convince of a plan to build a different future. Hence, effective and economically-backed startups are integral to our future development.
How You Can Be the Architect of Your Own Future
“A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.” Peter Thiel
One of the most common mistakes in business is thinking indefinitely. Humans tend to prepare themselves for all possible future events. However, the future has too many unknowns and variables to account for all possible future events. Therefore, a more effective approach is to make a focused effort to become the architect of your own future. Being the architect of your own future involves attempting to create the best future for you.
Peter describes future success as being a product of focus, dedication, and determination. You have to forget about the ideas of fate and luck. Those who are consistently successful create their luck through their actions.
Each startup will have optimal conditions to excel—specifically, optimal markets, time to launch, and time to pivot. Therefore, you need to make a conscious effort to identify your startup’s ideal conditions. Peter describes this as the future you are aiming to obtain.
On “Lean Startup” Dogmas
“Even in engineering-driven Silicon Valley, the buzzwords of the moment call for building a “lean startup” that can “adapt” and “evolve” to an ever-changing environment. Would-be entrepreneurs are told that nothing can be known in advance: we’re supposed to listen to what customers say they want, make nothing more than a “minimum viable product,” and iterate our way to success. But leanness is a methodology, not a goal. Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum. You could build the best version of an app that lets people order toilet paper from their iPhone. But iteration without a bold plan won’t take you from 0 to 1. A company is the strangest place of all for an indefinite optimist: why should you expect your own business to succeed without a plan to make it happen? Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.” – Peter Thiel
There are some popular thoughts in the startup community that were learned after the dot-com crash:
- Make incremental advances
- Stay lean and flexible
- Improve on the competition
- Focus on your product, not sales
Peter points out that the opposites are valid:
- It is better to risk boldness than triviality
- An imperfect plan is better than no plan
- Competitive markets destroy profits
- Sales matter just as much as products
Competition Is for Losers
“If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most” – Peter Thiel
Some books suggest that competition is healthy and helps your business to improve. However, Peter describes competition as brutal and that it cuts into your capital. Peter provides U.S. airlines as an example. These airlines serve millions of passengers and create hundreds of billions of dollars of value each year. Despite this, they make only 37 cents per passenger trip. In contrast, Google has a 100 times higher profit margin than the entire airline industry. The reasoning behind this is that many airline companies are vying for consumers’ attention. Google is by far the industry leader and does not have to compete, realistically, with another company.
The importance of moving away from the idea of healthy competition is that competition means there will be no capital left for you. The rest of the capital ‘pie’ will be eaten by your competitors. Therefore, Peter emphasizes the importance of building a monopoly.
Building a Monopoly
Creative monopolists give customers more choices by adding entirely new categories of products. Microsoft had a giant monopoly in operating systems. Simultaneously, Apple’s iOS & Google’s Android emerged and overtook operating system dominance through a new approach. Monopolies develop our society, while competition just leaves us fighting over the same ideas and products.
Peter describes four characteristics that define durable monopolists:
- Proprietary technology
- Network effects (aka virality)
- Simple scalability
Peter suggests that you attempt to incorporate each of these features into your startup. On top of this, Peter has two tips for achieving substantial growth by using a monopolization system:
- Start small and monopolize – It’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. Huge markets like this will be near-impossible to infiltrate. Therefore, that 1% is far harder to reach than people expect. Additionally, even if you do succeed in gaining a small foothold, you’ll have to be satisfied with the stress of cutthroat competition and the likelihood of low-profit margins. With competition, your prices will be driven down. In comparison, once you create and dominate a niche market, you are in a stronger position. You can then gradually expand into related and slightly broader markets.
- Don’t disrupt – Directly challenging large competitors will reduce your profits. Peter provides the example of Napster vs. U.S. recording industry. Peter also provides personal insight from his time at Paypal. PayPal took some cash away from Visa, but overall it gave Visa more business than it took.
Why Monopolies Are Good
Monopolies are generally frowned upon within the business world. The first word that often comes to people’s minds when they hear the word monopoly is evil. However, Peter states that this is not true. Instead, monopolies are essential for innovation.
Firstly, a company having a monopoly does not mean this company’s competition is being mistreated. Instead, the monopolizing company is often just doing things much better than competitors. Alternatively, a company may have a monopoly as they can create something that other companies cannot copy.
Monopolies help businesses to become more effective due to monetary injections. However, they also push other businesses to come up with truly innovative solutions rather than copying ideas. For example, if a company wants to compete in the search-engine market today, it needs to invent a better search engine than Google. And, if it does, it’ll be the consumers who benefit.
Monopolies Thrive Based on Technological Advantages, Economies of Scale, and Effective Branding
Peter outlines four characteristics that help companies become monopolies:
- Technological Advantage – Generally, the technology of monopolies is ten times more efficient than your average company. Peter provides the example of Google. Google’s search algorithms are considerably faster and have better predictive power than any other search engine
- Network Effects – Monopolies benefit from more people using their products. The more people who use their products, the more useful their products are to their customers. Peter provides the example of Facebook. Having all of your friends signed up to Facebook makes the social media platform more useful for you as the consumer
- Economies of Scale – Monopolies can produce on a large scale, which helps save money. Since monopolies are the largest producers in their industry, economies of scale allow them to offer customers more attractive prices than newcomers. This only further strengthens their position
- Strong Branding – Monopolies often have branding that cannot be replicated as it is unique. Peter provides the example of Apple. Apple is the strongest tech brand in existence. Other companies have tried to mimic their shop styles and advertisements. All of these companies have failed as they don’t have the brand that Apple does
You can compare your company against these characteristics to identify how close your company is from becoming a monopoly.
Chase Secrets That Cannot Be Copied
Peter advises against horizontal progress. Even if it might feel like there is no room for vertical progress, the world has a vast number of secrets left to be found. These secrets are hard to discover, but not impossible.
Suppose you are unwilling to take a risk and go for vertical progress. In that case, you will be stuck producing conventional products in a competitive market. Peter provides the example of Hewlett-Packard. In the 1990s, Hewlett-Packard had the best technology and used it to bring out one innovative product after the other. However, in the early 2000s, they stopped chasing secrets and just kept to the status quo. Through doing this, the company lost half its market value.
You Cannot Build a Successful Company Overnight
Building a successful monopoly takes time. It can take years for your startup to become profitable, even if it is seemingly successful. However, do not be downhearted if you are not profitable yet. Instead, consider the value your company brings. This value is what is essential when you are considering the profits of the company in the long-term.
Peter brings in his experiences from his time at PayPal. He describes how PayPal wasn’t making any profit in 2001. Their value was based on the money they would be making in ten years. He and his co-founders stuck with PayPal as they understood the company’s value was the critical thing.
After accepting that building a profitable company will take time, you can start utilizing these two tips to start expanding:
- You only have to be the best in your business’ field. You don’t need to be the very best company across all fields. Remembering this will help you to define your market as narrow and specific as possible
- After dominating your narrow field, you can start expanding. For example, Amazon founder Jeff Bezos started by selling nothing but books
Startups Need a Solid Foundation
For a company to survive long-term, it has to lay down a solid foundation at the start.
The first piece of a company’s solid foundation is the people who work for the startup. Hence, finding the right people is integral to the company’s success. As startups are so small, the actions of each individual are even more critical. From personal experience, Peter explains how you need to hire people who can work well together. Before co-founding PayPal, Peter invested in a company that his future co-founder had started with someone he barely knew. Personal differences led to the company failing, and Peter losing all of his investment.
This experience provides the foundation for another tip. Specifically, it is acceptable for owners to have different interests. It can sometimes be beneficial having owners with different interests as it provides greater balance. The important thing is that these differences do not impact on the company. Differences in opinion should be addressed quickly and used productively.
Finally, a strong culture is crucial for startups’ success. Strong company cultures help employees to feel like they are part of something greater. Plus, strong company cultures can improve the efficiency with which the company’s teams work together. You cannot develop a company culture purely by offering perks to your employees. Instead, the most important thing is that you develop strong relationships with and between your employees. This is the culture that Peter had while working at PayPal. The team was so cohesive that many of the people working there moved on and started new companies together later.
People working in tech often underestimate the importance of sales. There is a consensus that products that are good enough will sell themselves. This belief is almost always incorrect.
Here are some core ideas that Peter provides on the topic of sales:
- All salesmen are actors: their priority is persuasion, not sincerity.
- Two metrics set the limits for effective product distribution:
The total net profit you earn on average throughout your relationship with a customer (Customer Lifetime Value, CLV)
The amount you spend on average to acquire a new customer (Customer Acquisition Cost, CAC)
- CLV must be higher than CAC
- The CAC methods adopted by companies have to be adapted depending on how expensive your company’s products are. For expensive products, such as those over 1 million dollars, complex sales are the most effective. Complex sales should not involve dedicated salespeople and should instead involve the CEO. The next approach is called Personal Sales and applies to products between ten thousand dollars and approximately one million dollars. This approach involves developing a relationship with more and more users. These users then provide opportunities to produce complex sales with big organizations. Then, for small businesses selling products for approximately one thousand dollars, the most important thing is a solid distribution channel. For companies that sell products that are approximately one hundred dollars, you can rely on viral marketing if the product has viral potential. However, most products won’t have viral potential; they should market/advertise the products. Finally, for extremely cheap products, you want to utilize viral marketing. Paypal utilized viral marketing, first focusing on the most valuable eBay “power sellers.” Then, PayPal simply paid for signups and invitations: the CAC was around $20. This CAC led to 7% daily growth for 5–7 months.
7 Questions Every Startup Should Answer
- The Engineering Question: Can you create breakthrough technology instead of incremental improvements? A 20% improvement is not enough.
- 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? For Thiel’s venture capital fund (Founders Fund), the common red flag was that the CEO was wearing a suit. This meant the CEO would look like a salesman, but won’t sell or do tech.
- The Distribution Question: Do you have a way to not 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?
Peter recommends ensuring that your innovative company can give a minimum of 5 correct answers out of 7.
Tech Companies Are Often Monarchies
As well as tech companies being better at developing monopolies, Peter describes how they can be monarchies. Peter describes them as monarchies as they have one person driving the company forward with their vision. Peter provides the examples of Steve Jobs with Apple and Elon Musk with Tesla. Unlike in other companies, these owners can make authoritative decisions that require significant loyalty from the rest of the company.
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