“The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine”
In Peter Thiel’s book Zero to One, the author imparts his thoughts on technology and startups, specifically the idea of creating something new, of going 0 to 1. Improving on an existing concept is to go from 1 to n; it doesn’t create something new. Thiel expresses the 2 concepts as horizontal and vertical progress. Globalization is the best example of horizontal progress: taking things that work in 1 area and applying them to another area. China’s 20-year plan is to catch up to where the US is today, reproducing everything that’s worked in the developed world, from railroads to air conditioning, to wireless. Technology is an example of vertical progress: creating a new or better way of doing things, not just limited to computers.
In the 90s the internet was made accessible to the general public by Netscape. Throughout the decade, entrepreneurs saw and took advantage of a huge market brimming with eager investors looking to cash in, so thousands of technology companies were created. In 2000, the bubble burst. The dot-com era taught entrepreneurs 4 things.
- Make incremental advances – Grand visions inflated the bubble. Small incremental steps are the only safe path forward.
- Stay lean and flexible – Don’t create a strict plan; planning is arrogant and inflexible. The only way to be successful is to roll with the punches
- Improve on the competition – Improve on recognizable products, go from 1 to n
- Focus on product not on sales – If your product requires advertising/sales, then it’s not good enough
Thiel points out, that the opposite seems to be true.
- It’s better to be bold than to make trivial advances
- A bad plan is better than no plan
- Competitive markets kill profits
- Sales matters just as much as product
“Every business is successful exactly to the extent that it does something others cannot. [Therefore], monopoly is the condition of every successful business” (34).
The author urges the reader to rethink the idea of monopolies. Sure, monopolies can be rent collectors in a static world, but we live in a dynamic world, one that’s always innovating. Real life monopolies are more creative than their dystopian counterparts. Our monopolies actively give customer more choice by creating new categories and they are a necessary part of improving society. Thiel says competition is an ideology. It is in our blood. We’ve competed for grades, for class rank, for jobs, etc. But competition is bad for the company. The competition between Microsoft and Google in the late 2000s led to Apple dominating both of them.
Escaping competition creates a monopoly, but how do you make it durable? There are 4 key characteristics
- Proprietary technology – Technology should be 10x better than its closest substitute in an important dimension in order to maintain a real advantage. The best way to do this is to invent something new.
- Network Effects – Facebook gets its value from its 2+ billion users. Without its userbase, what would be the point of the social network?
- Economies of Scale – Monopolies get stronger as they grow and fixed costs go down
- Branding – Think Apple. Interbrand, an international brand consultancy, lists Apple’s brand alone to be worth $184 million, the strongest brand in the world.
To build a monopoly, a company must first dominate a small market instead of taking a small part of a large market. Facebook started as just a social network for Harvard students before expanding outward. From there, you can scale up. Before becoming the “everything store”, Amazon started as a simple online book retailer. The focus should not be on disrupting an existing industry, because then you are too focused on existing limitations, and will have to compete with established companies in that field. The focus should be on creating a new industry altogether, where there is no competition.
Thiel believes that a startup messed up at the foundation cannot be fixed. He goes on to describe the foundations that every startup must have.
- Founding matrimony – If founders don’t get along, the company becomes the victim.
- Control – You need to answer: Who owns the company? Who runs the company? and who governs the company’s affairs? They are usually not the same person.
- In or Out – All employees should be full time and need to be invested in the business’s success.
- Cash is not king – A cash-poor executive will focus on increasing the value of the company and sets the standard for the rest of the company.
- Vested interests – Giving employees ownerships makes them invested in the success of the business.
- Extending the founding – As long as a company is creating, it’s being founded, so keep innovating.
Man vs Machine
As machines continue to improve, people are always worried that they will eventually take all of the human jobs. Thiel believes that machines are complementary rather than supplementary. Machines are good at parsing through large data sets, humans are good at making sense of that data and making decisions. For Paypal, man-machine hybrid technology was key for their fraud detection software. It would take too long for humans to sort through all the transactions, and machines couldn’t adapt to new types of fraud. The solution was to create a software that would flag any suspicious activity, which would then be reviewed by a human. The technology was so impressive that it was used by the FBI to fight financial crime. It was also the basis for Thiel’s next company Palantir, which is used by the US government today to catch fraud. It is rumored to even have been instrumental in the capture of Osama Bin Laden.
Thiel ends the book with 7 Questions that every business must answer.
- Can you create breakthrough technology?
- Is now the right time to start your particular business?
- Are you starting with a big share of a small market?
- Do you have the right team?
- Do you have a way to not just create but deliver your product?
- Will your market position be defensible 10 and 20 years into the future?
- Have you identified a unique opportunity that others don’t see?
The topic that I found most fascinating about the book was Thiel’s eager defense of monopolies. The word monopoly has to me always held negative connotations, often going hand in hand with greed and top-hats. Even the goal of the board-game, monopoly is to bankrupt your opponents and alienate your family members. I’ve always believed that without competition, innovation becomes stagnant. Why innovate when there’s no threat of losing your customer base? But this book has convinced me otherwise. Google and Amazon are incredible, both monopolies in their own right, but both have used their abundant resources to innovate: self-driving cars, Amazon Prime, voice assistants, etc. Maybe there is a place for monopolies in the world.
The book is written from a unique perspective. Theil’s experiences are second to none and offer an insider’s guide to creating a successful company. He offers a very unique perspective, often contradicting the general wisdom of entrepreneurship, which forces to the reader to critically compare the different viewpoints. It’s a book that really makes you think and provides enough examples for readers to tangibly grasp all of his concepts. I would recommend the book to anyone interested in entrepreneurship, not as a guide, but as a thought-experiment.