Zero to One

  

Zero to One 

By Peter Thiel, with Blake Masters 

 

 

 

Preview 

 

Who will be the next Bill Gates? Which Company will he or she build? Will the next big thing be an OS, a social network, or a search engine? Theil asserts that the future Titans of the industry would create something entirely new, and not copy existing ideas. 'Zero to One' is therefore about why to build companies that create new things.  

 

About the Authors 

 

Peter Thiel is an American businessman, philanthropist, political activist, and author of Zero to One, who co-founded PayPal and who was the first professional investor in Facebook. He has invested in several start-ups and is also the co-founder of Palantir, the data analytics company, focusing on security threats and financial crimes. Blake Masters is a J.D from Stanford Law school and a former student of Thiel. He currently serves as a Principal at Thiel Capital. 

 

The Big idea: The leap from nothing to something can change the world! 

 

All of us find comfort in the familiar, the known, and place a high value on the tried and tested. While experience and the refuge in the familiar is an evolutionary trait we are endowed with; our capacity to imagine something which has never been imagined before, and create new and unprecedented things, has been responsible for our progress and dominance as a species. The pioneers have always led the way for the rest of mankind, and it is they, who have built the past and the present, and will build the future.  

 

Copying existing ideas and adding value to them in increments can be a successful method of building a business, but, the actual hallmark of progress is breaking through new frontiers.  

This quid will help you learn the following: 

• Why technology is more important than globalization 
• How the dot-com bubble manifested itself 
• Why a monopoly is an entrepreneur's best friend 

 

 

A brave new world. Technology matters more than Globalization 

Progress can be horizontal as well as vertical. What can be termed as horizontal progress is copying existing technologies and ideas and implementing them in different parts of the world. Vertical Progress, on the other hand, is enabled by new technologies, which lead to radically new ways of doing things. Globalization leads to normalization, not to a giant leap forward. This does not mean that Globalization is bad, just that it is not what would give rise to a better future in light of finite resources. 

 The emerging Asian giants like China and India would not be able to raise their standards of living by replicating existing technology without also catastrophically impacting the environment. Thus, new technologies which enable the creation of new resources and mining of extant resources in a far more efficient manner, are much more important than Globalization.  

Conventional wisdom is good for horizontal progress, but, status quo-ists do not change the world for the better. Thiel often asks interviewees about some popular truths over which they have a contrarian view. This is important because to be able to imagine and create new technologies, one must be able to look at the status quo critically. The present is where we find ourselves, but to achieve unprecedented progress, one must be able to think objectively of the present. The truth of the matter is that our presentism acts as a hindrance to our ability to imagine a future. Only the ones who can challenge the status quo and question existing beliefs can build something unprecedented. 

 

 A brief history of the start-up phenomenon. The craze, and the bubble. 

In large companies, it is easy to get lost in the crowd, and even breakthrough ideas may be frittered away due to bureaucratic inefficiencies. While a lone-ranger may be a genius and courageous, it is overwhelming for a single person to create an entirely new industry that can have a significant impact. Thus, start-ups should take a middle ground and leverage the union of brilliance and flexibility to achieve their aims. However, it has not always been rosy for the "start-up scene." 

The startup "craze" so to speak, started in the 1990s. There was not much to look forward to in those days. With the East Asian monetary crisis, the American recession, the fall of the Russian Ruble, and a plethora of government bailouts, the world was in disorder. The only thing which was working and held great promise was the internet.  

The advent of the internet had ushered in unprecedented access to information and new markets. Netscape leveraged this boom, by launching their web browser and soon captured nearly 80% of the market. Companies like Yahoo and Amazon went public with very high valuations. However, very soon things became free for all. "Founders" realized that just by floating a venture which had a dot-com attached to its name, they could achieve success in the form of crazy valuations in the "new economy."  

The market was flush with funds for all kinds of internet ventures with initial exuberance later being prefixed with "irrational." Thiel notes that in this scenario, his own Company Paypal emerged as a venture which wanted to create a mechanism to effect payments leveraging the power of the internet. After a few hiccups, their focus on payments via email gained ground, and the Company started growing. The growth came at an increased cost of customer acquisition, and the Company just managed to close a large funding round before the Dotcom bubble burst in 2000.  

 

After the shakeup of the dot-com bubble, the start-up world embraced the mantra of incremental improvements which prevented them from effecting radical breakthroughs. 

While Paypal emerged unscathed and went from strength to strength, eventually being acquired by eBay in 2002 for 1.5 billion dollars, the end of the Dot-com craze was marked with numerous failures in the internet space. The Nasdaq plummeted by 34% within a month and eventually bottomed out in 2002 to almost 20% levels of its peak value achieved in March 2000. Gradually, as sanity prevailed, new learnings and rules for the start-ups emerged. 

 The bold was replaced with the steady. Incremental advances became the new buzzword for start-ups, throwing away the prospect of radical change. Emphasis on being lean, which was a euphemism for being unplanned, started taking root. The focus was heavily skewed towards products, and farther away from sales. The virtue of the tried and tested, and the presence of competition became the dominant guideline for new ventures. If you have competition then it means that the business idea is viable, otherwise, why should anyone want to work on it? However, Thiel considers these learnings as mistaken. He asserts that it is better to be bold than trivial, and focus on a future sales plan as well as the product. 

 A plan is always better than no plan, and competition always erodes profits, which in the long run hinders investments in new technologies. While the dot com bubble was characterized by unsubstantiated arrogance amongst the founders and investors alike, the truth was that most of the start-ups which went bust had not answered key questions which are necessary for a grand vision to be successful. 

 

Without having answers to certain key questions, a start-up is unlikely to be a big success. 

Any business must be able to envision its position in the industry and its impact on it. Immaterial of the industry a start-up or a business belongs to, if it cannot answer certain key questions, then it is likely that it will fail. What are these secret questions which if answered, can provide a blueprint for success? Thiel considers seven key issues for any start-up to answer before it considers the possibility of going from zero to one.  

Do you have proprietary technology? The technology must be at least ten times better than the existing one, to be able to create any significant value.  

The timing of the business is also of paramount importance, because a good idea backed by new tech, may fail to take off, due to it being anachronistic. For example, Andrew Wilson, the CEO of a cleantech Company called SpectraWatt, had claimed in 2008, that their industry was at a similar point in history as the microprocessor industry was in the late 1970s. However, the analogy was false since the speed of the microprocessors had grown exponentially in the '70s, while cleantech was still experiencing gradual linear growth. 

 Another question to ponder over is the nature of your market. Can you hope to extract a significant share of a small market, or is the market so big that the competition is immense? Getting a significant proportion of a small market with no competition or limited competition is always better than getting a tiny share of a huge market and hoping to get a larger share while rivals erode your profits.  

While businesses emerge from ideas, those ideas are put into practice by humans. So, another important thing to consider is your team. Who are the ones behind the idea, who is going to run the business? In the case of a technology company, it is vital to have a tech team running it, so that they can build the product that they and their customers want. Most of the cleantech Companies before they went bust, were being run by a nontechnical MBA-type team, and not surprisingly they failed during the cleantech bubble post-2008.  

While the focus on product is essential, the sales can also not be ignored. It is imperative to figure out a distribution mechanism for your product or technology. You must focus on how your customers will get access to your product, and how it will generate value. The Israeli Company "Better Place," raised about 800 million dollars in 5 years between 2007-2012. It ended up selling itself for a paltry sum of 12 million dollars because even though their technology was good, they had failed to market it properly, and could not get traction in sales.  

Businesses should also be able to answer what the future will look like in a decade or two, and if their idea or technology be still relevant. For example, Iridium was the world's biggest satellite phone company and was doing pretty well for a few years. However, they had failed to answer the question of technological durability, and their products were replaced by the much cheaper, and more efficient technology of GSM Phones.  

The final question to answer is: Is there any unique thing about your Company, or a unique value which you can identify, which others in your field cannot. This is also a critical question to answer since all successful Companies have reasons unique to them for their success. 

 

The best thing for a business is to be a monopoly! 

For a business, competition is the biggest danger to profitability. Competitors erode profitability and reduced profitability means a reduced ability to invest in new technologies. 

Start-ups are small organizations; hence, they do not have the wherewithal to tackle and compete in large markets where there may be a lack of differentiation and numerous competitors. Hence, they should target a small market which they can hope to rule. A monopolized small market enhances and protects profitability, and the resultant strong financial and market metrics can give a start-up, the ability to scale up and garner new and complementary markets. 

 There are four key traits of a monopoly, and start-ups should consider all these aspects while hoping to build and sustain a monopoly: 

1) Technological Edge: Do you have technology that no one else can replicate? Either the technology should be completely new, or at least ten times better than the nearest competition. Even a superior design that is ten times better than the competition can achieve the same effect as proprietary technology, as was the case with Apple when it successfully launched the first iPad.  

2) The network: Why is it that you mostly use Whatsapp or Facebook, and not any other messenger or social network? The answer is that your friends are on those platforms, so it makes sense for you also to be there. This dynamic of the network is very powerful in the case of a start-up. To realize the true power of the network, your product must be of value to its early adopters.  

3) Economies of scale: The bigger the monopoly, the lower the fixed costs. A promising business must be inherently scalable. 

4) Branding: A brand is a promise of trust. A brand can command immense loyalty from its customers, and thus, the creation of a brand can enable a business to become a monopoly. Take the example of Apple or Google. They are monopolies in their fields, and their profitability shows it. 

 

A weak foundation can make or break a start-up. Choose the right co-founders. 

Foundations are just as important for a start-up, as they are for a building. If the foundation is weak, the future will suffer. Choosing and zeroing in on cofounders is the most critical factor in a start-up's journey. Often the "wrong" cofounders lead to the failure of a new Company. It is important that not only do the founders share the same vision, but also have complementary skill sets. 

 Thiel also places much value on how much history do the cofounders have with each other, that is, whether the co-founders have been associated with each other professionally and personally. Besides differences cropping up amongst founders over direction and control of a Company; often there is also a clash between investors and the founders. Investors may want monetization and revenues much earlier than what the founders foresee, or they may want the Company to steer in a different direction than the founders' vision. The best way to reduce such friction is to have a small Board that governs the Company. The larger the board, the more ineffective it is.  

The problem of paying high salaries also arises on many occasions and Thiel prefers the founders paying themselves a lower salary than what they may command in a regular job. A higher salary incentivizes the perpetuation of the status quo, which can be a death knell for a start-up. Founders should be compensated more in equity, than cash. However, allocation of equity should also be done carefully, and by the value, one brings to the table. While granting an equal split of equity to founders is often a mistake, an arbitrarily allocated unequal amount can also cause friction.  

Should you consider people as cofounders or employees if they are not fully committed to the idea? No, everyone involved with the Company should be full-time, except perhaps for certain service professionals like lawyers and accountants. Anyone who does not have ownership, or only draws a salary from your Company, would tend to focus on the near term, and hence, would be bad for long-term value creation. 

 

Final Summary 

We hope you enjoyed this quid on Zero to One. Peter Thiel emphasizes the value of imagining and doing a business that has never been done before. The impact such a business has is always significant and changes the world for the better. While Thiel does not berate Globalization, he manages to take the sheen off it and focuses more on technology as a way of progress.  

The book lays down a blueprint for success in the form of questions that any start-up should ask itself. Avoiding elaborating on any formula, he offers a perspective that founders and even investors should consider while embarking on the risky journey of a start-up. While most of us associate the word monopoly with negative connotations, Thiel asserts the opposite. Monopolies are the best thing that can happen to a business, and every startup should aim at becoming one.