“Our contrarian question—What important truth do very few people agree with you on?—is difficult to answer directly. It may be easier to start with a preliminary: what does everyone agree on? ‘Madness is rare in individuals—but in groups, parties, nations, and ages it is the rule,’ Nietzsche wrote (before he went mad). If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.“
On the surface, Zero to One is a book of advice for people starting companies. It’s relevant to people outside of Silicon Valley because of Peter Thiel’s grasp on the societal trends that hold back innovation and what needs to change in order to facilitate new and better businesses in America.
Peter Thiel is a venture capitalist who co-founded PayPal in 1998 after graduating from Stanford Law and realizing that work at a big law firm wasn’t what he wanted to do with his life. After selling PayPal to eBay in 2002 for $1.5 billion, Thiel co-founded the data analysis company Planatir and was the first investor in Facebook, among other reputable companies. His opinions are challenging precisely because they are ambitious and expect more from the world than to just humming along with the status quo.
The book contains many ideas that are way too perceptive for me to come up with on my own. Among them are that there are two kinds of progress: doing new things vs. copying things that work (think innovation vs. globalization); that the dot com bubble was a moment of unbridled excitement about the future and its implosion has made companies and investors more cautious ever since; competition is the opposite of capitalism (how are you going to make money if you’re so busy competing?); that being optimistic without a definite plan is lunacy—that a better future doesn’t come without great planning and exertion, and much more. The book is a quick read, the tone is lively and the chapters are full of interesting examples that illuminate fresh ideas.
Peter Thiel’s Vox interview with Ezra Klein: “I think “big data” is one of these buzzwords that when you hear it, you should almost always think “fraud,” because the problem is actually to find meaning within data. It’s to make big data small. That’s actually the core challenge. It’s not to collect more and more data.”
What the professionals had to say: New York Times Interview and Review of Zero To One.
Peter Thiel’s podcast interview with James Altucher.
Speech given at Stanford like the ones that inspired him to write the book in the first place.
Buy on Amazon: Zero to One: Notes on Startups, or How to Build the Future
I came close to simply typing this book out from start to finish, my highlights were so numerous.
Ch.1 The Challenge Of The Future
The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative. Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.
My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more. Without technological change, if China doubles its energy production over the next two decades, it will also double its air pollution. If every one of India’s hundreds of millions of households were to live the way Americas already do—using only today’s tools—the result would be environmentally catastrophic. Spreading old ways to crate wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.
The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old: only computers and communications have improved dramatically since midcentury. That doesn’t mean our parents were wrong to imagine a better future—they were only wrong to expect it as something automatic. Today our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th.
Ch.2 Party Like It’s 1999
The NASDAQ reached 5,048 at its peak in the middle of March 200 and then crashed to 3,321 in the middle of April. By the time it bottomed out at 1,114 in October 2002, the country had long since interpreted the market’s collapse as a kind of divine judgment against the technological optimist of the ‘90s. The era of cornucopian hope was relabeled as an era of crazed greed and declared to be definitely over.
Everyone learned to treat the future as fundamentally indefinite, and to dismiss as an extremist anyone with plans big enough to be measured in years instead of quarters. Globalization replaced technology as the hope for the future. Since the ‘90s migration from “bricks to clicks” didn’t work as hoped, investors went back to bricks (housing) and BRICs (globalization). The result was another bubble, this time in real estate.
So the backdrop for the short-lived dot-com mania that started in September 1998 was a world in which nothing else seemed to be working. The Old Economy couldn’t handle the challenges of globalization. Something needed to work——and work in a big way——if the future was going to be better at all. By indirect proof, the New Economy of the Internet was the only way forward.
Ch.3 All Happy Companies Are Different
The business version of our contrarian question is: what valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value is not enough—you also need to capture some of the value you create.
This means that every big business can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the airline airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (verses $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year. Google makes so much money that it’s now worth three times more than every U.S. airline combined.
The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns the market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.
To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state, or innovates its way to the top. In this book, we’re not interested in illegal bullies or government favorites: by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.
Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. 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.
The problem with a competitive business goes beyond lack of profits. Imagine you’re running one of those restaurants in Mountain View. You’re not that different from dozens of your competitors, so you’ve got to fight hard to survive. If you offer affordable food with low margins, you can probably pay your employees only minimum wage. And you’ll need to squeeze out every efficiency: that’s why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. Restaurants aren’t much better even at the highest rungs, where reviews and ratings like Michelin’s star system enforce a culture of intense competition at that can drive chefs crazy. (French chef and winner of three Michelin stars Bernard Loiseau was quoted as saying, “If I lose a star, I will commit suicide.” Michelin maintained his rating, but Loiseau killed himself anyway in 2003 when a competing French dining guide downgraded his restaurant.) The competitive ecosystem pushes people toward ruthlessness or death.
In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.
If the tendency of monopoly profits were to hold back progress, they would be dangerous and we’d be right to oppose them. But the history of progress is a history of better monopoly businesses replacing the incumbents.
In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is the condition of every successful business.
Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in its own way.” Businesses are the opposite. 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.
Ch.4 The Ideology of Competition
Professors downplay the cutthroat culture of academia, but managers never tire of comparing business to war. MBA students carry around copies of Clausewitz and Sun Tzu. War metaphors invade our everyday business language: we use headhunters to build up a sales force that will enable us to take a captive market and make a killing. But really it’s competition, not business, that is like war: allegedly necessary, supposedly vigilant; but ultimately destructive.
Ch.5 Last Mover Advantage
Escaping competition will give you a monopoly, but even a monopoly is only a great business if it can endure in the future. Compare the value of the New York Times Company with Twitter. Each employs only a few thousand people, and each gives millions of people a way to get news. When Twitter went public in 2013, it was valued at $24 billion—more than twelve times the Times’ market capitalization—even though the Times earned $133 million in 2012 while Twitter lost money. What explains the huge premium for Twitter?
The answer is cash flow. This sounds bizarre at first, since the Times was profitable while Twitter wasn’t. But a great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade, while newspapers’ monopoly days are over.
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 competition companies is even worse. This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or will be open to competition, so it’s hard to ever reach that 1%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero.
Ch.6 You Are Not A Lottery Ticket
It’s true that every great entrepreneur is first and foremost a designer. Anyone who has held an iDevice or a smoothly machined MacBook has felt the result of Steve Job’s obsession with visual and experimental perfection. But the most important lesson to learn from Jobs has nothing to do with aesthetics. The greatest thing Jobs designed was his business. Apple imagined and executed definite multi-year plans to create new products and distribute them effectively. Forget “minimum viable products”—ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.
Ch.7 Follow The Money
In 1906, economist Vilfredo Pareto discovered what became the “Pareto Principal,” or the 80-20 rule, when he noticed that 20% of people owned 80% of the land in Italy—a phenomenon that he found just as natural as the fact that 20% of the peapods in his garden produced 80% of the peas. This extraordinarily stark pattern, in which a few radically outstrip all rivals, surrounds us everywhere in the natural and social world. The most destructive earthquakes are many times more powerful than all smaller earthquakes combined. The biggest cities dwarf all mere towns put together. And monopoly businesses capture more value than millions of undifferentiated competitors. Whatever Einstein did or didn’t say, the power law——so named because exponential equations describe severely unequal distributions——is the law of the universe. It defines our surroundings so completely that we usually don’t even see it.
Every one of today’s most famous and familiar ideas was once unknown and unsuspected. The mathematical relationship between a triangle’s sides, for example, was secret for millennia. Pythagoras has to think hard to discover it. If you wanted in on Pythagoras’ new discovery, joining his strange vegetarian cult was the best way to learn about it. Today, his geometry has become convention—a simple truth we teach to grade schoolers. A conventional truth cam be important—it’s essential to learn elementary mathematics, for example,——but it won’t give you an edge. It’s not a secret.
Along with the natural fact that physical frontiers have receded, four social trends have conspired to root out belief in secrets. First is incrementalism. From an early age, we are taught that the right way to do things is to proceed one very small step at a time, day by day, grade by grade. If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange for doing exactly what’s asked of you (and for doing it just a bit better than your peers), you’ll get an A. This process extends all the way up through tenure track, which is why academics usually chase large numbers of trivial publications instead of new frontiers.
Second is risk aversion. People are scared of secrets because they are scared of being wrong. By definition, a secret hasn’t been vetted by the mainstream. If your goal is to never make a mistake in your life, you shouldn’t look for secrets. The prospect of being lonely by right——dedicating your life to something that no one else believes in——is already hard. The prospect of being lonely and wrong can be unbearable.
Third is complacency. Social elites have the most freedom and ability to explore new thinking, but they seem to believe in secrets the least. Why search for a new secret if you can comfortably collect rents on everything that has already been done? Every fall, the deans at top law schools and business schools welcome the incoming class with the same implicit message: “You got into this elite institution. Your worries are over. You’re set for life.” But that’s probably the kind of thing that’s true only if you don’t believe it.
Fourth is “flatness”. As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace: the world is “flat”. Given that assumption, anyone who might have had the ambition to look for a secret will first ask himself: if it were possible to discover something new, wouldn’t someone from the faceless global talent pool of smarter and more creative people have found it already? This voice of doubt can dissuade people from even starting to look for secrets in a world that seems too big a place for any individual to contribute something unique.
There’s an optimistic way to describe the result of these trends: today, you can’t start a cult. Forty years ago, people were more open to the idea that not all knowledge was widely known. From the Communist Party to the Hare Krishnas, large numbers of people thought they could join some enlightened vanguard that would show them the Way. Very few people take unorthodox ideas seriously today, and the mainstream sees that as a sign of progress. We can be glad that there are fewer crazy cults now, yet that gain has come at great cost: we have given up our sense of wonder at secrets left to be discovered.
If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.
There are two kinds of secrets: secrets of nature and secrets about people. Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world. Secrets about people are different: they are things that people don’t know about themselves or things they hide because they don’t want others to know. So when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?
Secrets about people are relatively underappreciated. Maybe that’s because you don’t need a dozen years of higher education to ask the questions that uncover them: What are people not allowed to talk about? What is forbidden or taboo?
Sometimes looking for natural secrets and looking for human secrets lead to the same truth. Consider the monopoly secret again: competition and capitalism are opposites. If you didn’t already know it, you could discover it the natural, empirical way: do a quantitative study of corporate profits and you’ll see they’re eliminated by competition. But you could also take the human approach and ask: what are people running companies not allowed to say? You would notice that monopolists downplay their monopoly status to avoid scrutiny, while competitive firms strategically exaggerate their uniqueness. The differences between firms only seem small on the surface; in fact, they are enormous.
The best place to look for secrets is where no one else is looking.
There’s plenty more to learn: we know more about the physics of faraway stars than we know about human nutrition.
Equity is a powerful tool precisely because of these limitations. 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. Equity can’t create perfect incentives, but it’s the best way for the founder to keep everyone in the company broadly aligned.
Ch.11 If You Build It, Will They Come?
In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works on you. You may think that you’re an exception; that your preferences are authentic, and advertising only works on other people. It’s easy to resist the most obvious sales pitches, so we entertain a false confidence in our own independence of mind. But advertising doesn’t exist to make you but a product right away; it exists to embed subtle impressions that will drive sales later. Anyone who can’t acknowledge its likely effect on himself is doubly deceived.
Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution. Proctor and Gamble can’t afford to pay salespeople to go door-to-door selling laundry detergent. To reach its end user, a packaged goods company has to produce television commercials, print coupons in newspapers, and design its product boxes to attract attention.
Ch.13 Seeing Green
The ambiguity between social and financial goals doesn’t help. But the ambiguity in the word “social” is even more of a problem: if something is “socially good,” is it good for society, or merely seen as good by society? Whatever is good enough to receive applause from all audiences can only be conventional, like the general idea of green energy.