“Zero to ONE: Notes on Start Ups, or How to Build the Future” is a great book by Peter Thiel (co-founder of PayPal and Palantir) about how to build the next Microsoft or Google. He has a pretty unique perspective on market and competition that are worth reading and knowing about. The book could be summarized as: to be successful, get a proprietary technology and find a small niche market, then expend from this.
Below are some notes I took while reading the book, they are meant for me, but sharing this here just in case it convinces anyone to read this book.
The challenge of the future
His point in this chapter is that despite the fact that computers and communications have really changed since the last midcentury, the remaining things around us still looks old. The challenge for the future is how to create new technologies that will make the 21st century more prosperous than the 20th.
Party like it’s 1999
Entrepreneurs learned four big lessons from the dot-com crash:
- Make incremental advances
Small incremental steps are the only safe path forward.
- Stay lean and flexible
You should not know what your business will do; planning is arrogant and inflexible. Trying things out and iterating is the way to go. Entrepreneurship is about experimenting.
- Improve on the competition
The only way to know you have a real business is to start with an already exciting customer, so you should build your company on recognizable products already offered.
- Focus on product, not sales
The only sustainable growth in technology is viral growth.
He then spins this around a bit proposing four principles:
- It is better to risk boldness than triviality.
- A bad plan is better than no plan.
- Competitive markets destroy profits.
- Sales matters just as much as product.
All happy companies are different
He basically differentiates monopolist companies and non-monopolist companies:
- Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets.
- Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets (helping to pretend for competition).
Last movers advantage
Four characteristics of a monopoly:
- Proprietary technology
Must be at least ten times better than its closest substitute in some important dimension to lead to a real monopoly advantage.
- Network effects
Make a product more useful as more people use it. They must start with small markets, the initial markets are so small that they often don’t even appear to be a business opportunities at all.
- Economies of scale
A monopoly get stronger as it gets bigger: the fixed cost of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly, however no technology company can be built on branding alone.
The way to build a monopoly is very deliberate and must be done carefully:
- Start small and monopolize
Every start-up should start with a very small market, always err on the side of stating too small, allowing the startup to be a position as a monopoly for this market. The perfect target for a startup is a group of particular people concentrated together and served by few or no competition.
- Scaling up
Once a specific niche is dominated, scale to adjacent markets.
- Don’t disrupt
Originally, disruption was about using a new technology to introduce low-end product at low prices, improve the products over time, and eventually overtake even the premium products offered by incumbent companies. However, this limit your vision to focus on the other company product, to create something really new, the act of creation is far more important than the old industries that might not like what you create. Avoiding competition is the safest road.
- The last will be the first
Be the one making the last great development in a specific market and enjoy years of monopoly profits. Start by dominating a small niche and scale up from there, toward your ambitious long-term vision.
Follow the money
We don’t live in a normal world; we live under a power law (“Pareto principle” – 20% of the company will out power the 80%). You should focus relentlessly on something you are good at doing, but before that you must think hard about whether it will be valuable in the future. In a power law world, you can’t afford not to think hard about where your action will fall in the curve.
Four social trends have conspired to prevent us to look for more secrets:
From an early age we are taught that the right way to do thinks is to proceed one very small step at a time.
- Risk aversion
People are scared of being wrong.
Why search for a new secrets if you can comfortably collect rent on everything that was already discovered.
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?
Thiel’s law: “a startup messed up at its foundation cannot be fixed”. Founders should know each other and work well together. This count as much as their technical ability and complementary skills.
Clarify this 3 concepts:
- Ownership: who legally owns a company’s equity?
- Possession: who actually runs the company on a day-to-day basis?
- Control: who formally governs the company’s affair?
The mechanics of mafia
Startups should make their early staff as personally similar as possible. Startups have limited resources and small teams. It is easier to survive when everyone shares an understanding of the world. Every employee in the startup should be responsible and evaluated for doing only one thing, this helps reduce conflicts.
If you build it, will they come?
Engineer are biased toward building cool stuff rather than selling it. Making customer come is harder than it looks (respect marketing). If you have invented something new but haven’t invented an effective way to sell it, you have a bad business (no matter how good the product).
Two metrics are important:
- Customer lifetime value (how much earn from a customer during the life of your relationship)
- Customer acquisition cost (amount spend to acquire the customer)
Of course, CLV must be > than CAC.
Man and machine
Big data is actually dumb data, computer don’t know how to compare patterns from different source or how to interpret complex behaviors. Actionable insights can only come from a human analyst.
Why did the green industry failed, because they didn’t answer the 7 questions every business must answer:
- Engineering question: “Can you create a breakthrough technology instead of incremental improvements”?
- Timing question: “Is now the right time to start your particular business”?
- Monopoly question: “Are you starting with a big share of a small market”?
- People question: “Do you have the right team”?
- Distribution question: “Do you have a way to not just create but deliver your product”?
- Durability question: “Will your market be defensible 10 and 20 years into the future”?
- Secret question: “Have you identified a unique opportunity that others don’t see”?