by I.K. Mullins
Copyright©2014 I.K. Mullins. All Rights Reserved. No part of this book may be reproduced or retransmitted in any form or by any means without the written permission of the author.
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Preface: The Summary of Key Ideas and Facts
Peter Thiel and Blake Masters’s book is based on the course about startups that Thiel taught at Stanford University in 2012. Blake Masters was Thiel’s student and took class notes. Thiel and Blake used those notes when writing their book.
By “zero to one,” Thiel means the act of creating something new and original. He opposes it to copying something that already exists (“1 to n”). In his book, Thiel discusses how to build companies capable of achieving that “zero to one” moment and creating new things.
Thiel emphasizes that, in order to be successful in the future, US companies have to invest in creating something new. If companies limit themselves to just refining their existing business models, they will find themselves at a point where no further progress is possible.
Thiel believes that technology is the key to further progress because it allows for doing more with less and shaping a better future for the world. Thiel points out that there is no defined, specific formula for business success.
This is because a successful business has to be innovative, and there are no definite prescriptions telling people how to innovate. It is certain, however, that businesses can achieve success only when their founders and team members learn to view the world with a new perspective.
Chapter 1: The Summary of Key Ideas and Facts
Thiel distinguishes between two different modes of progress:
- Horizontal progress implies repeatedly copying what already exists and works (“going from 1 to n”). Globalization, which stands for a replication of the same products worldwide, represents horizontal progress.
- Vertical progress refers to doing something new (“going from 0 to 1”). New technology, described as the new way of doing something, represents vertical progress, and, when it comes to transforming the world’s future, technology is more important than globalization.
Sometimes, horizontal progress and vertical progress can co-exist.
In Thiel’s opinion, when it comes to the world’s future, technology is more important than globalization. He argues that utilizing the old ways to produce wealth worldwide will create devastation instead of riches. Yet, a better future cannot arrive automatically. For example, people who lived in the 1960s believed that anybody would be able to travel to the Moon in the near future and that energy would be very cheap. Neither of these things happened. In fact, only information and communication technologies have improved drastically since that time.
New technology usually originates from startups, small groups of people whose new ideas can improve the world. Big companies remain sluggish as they are burdened by their own bureaucracies. New thinking is a new company’s strongest feature. Thiel argues that a startup company, a group of people capable of working together, has to rely on vertical progress in order to become a success.
Chapter 2: The Summary of Key Ideas and Facts
Traditional beliefs are perceived as wrong and arbitrary in retrospect. When a conventional belief collapses, people call it a “bubble.”
In order to think clearly, one has to start with analyzing the past. Whereas the 1990s are sometimes considered as a flourishing decade, the Old Economy of that decade was unable to endure the challenges of globalization. The New Economy of the internet turned out to be the only way of moving forward.
Dot-com mania lasted for only 10 months, from September 1998 until March 2000. With many companies adopting the anti-business model of losing money during their growth, dot-com mania had become unsustainable.
The internet boom and bust at the end of the 1990s taught everybody that no one can know the future with any certainty. Development of new technology was replaced with a business focus on globalization. Entrepreneurs who survived the dot-com crash learned four lessons that are accepted as general rules for the business world even today:
- Advance forward only by taking small steps.
- Keep your business flexible and lean.
- Do not attempt to create a new market. Instead, build your company by improving products that are already being made by other successful companies.
- Focus primarily on the product, instead of sales.
Thiel proposes that the opposite of these four rules might be found in these principles:
- A company has to be willing to take bold risks.
- A company has to have a plan.
- A company has to create new products instead of competing with nearly identical products produced by other companies.
- A company has to recognize that sales are just as important as the product.
Chapter 3: The Summary of Key Ideas and Facts
Besides creating value, a successful company has to be able to capture some of the value it creates.
To illustrate his point of view, Thiel compares US airline companies to Google in terms of captured value. In 2012, for example, Google created less value than the airline companies, but it captured a greater share of the value created. Thiel points out at an important difference between Google and the airline companies. That is, the airlines are competing against each other, while Google has no serious competitors in its market. It certainly distances itself from Yahoo and Microsoft and focuses on its own innovation projects.
In economics, two simplified models describe such a difference: perfect competition and monopoly. In perfectly competitive markets, companies sell nearly identical products at the price determined by the market, and they cannot make profit in the long term. A monopoly, on the other hand, is a business that has no competitors. It owns its market, and it can set its own prices.
In Thiel’s opinion, capitalism and competition are direct opposites because perfect competition erodes all profits, whereas one of the main objectives of capitalism is the accumulation of capital. Which is why Thiel warns business owners against building companies that produce undifferentiated products.
In Thiel’s opinion, it is difficult to say how much of the world is monopolistic. Whereas non-monopolists try to overstate their distinction and understate the extent of their competition, monopolists conceal their status by framing themselves in a certain way and by picturing their market as the combination of a few large markets. For example, Google avoids being called a monopoly in the search engine market by presenting itself as simply another consumer tech company.
Thiel thinks that monopolies provide customers with more choices because they can innovate, creating new categories of abundance for the world. Thiel also states that competition brings businesses to equilibrium, which means stillness. He compares it to the heat death of the Universe. Which is why he thinks that monopolies are better for the economy and society.
To be successful, a company has to become a monopoly. And it can accomplish this by solving a unique problem or creating a unique product.
Chapter 4: The Summary of Key Ideas and Facts
A creative monopoly produces new things that benefit all while bringing a profit to the company. In a competitive market, companies create products with few differences, earning little profit; and they struggle in order to stay in business. Rivalry also prompts people to copy strategies that used to work in the past. Competition has transformed into an ideology that confines businesses and interferes with people’s thinking. Yet, our educational system continues to rely on this ideology.
Business is frequently compared to war. Thiel claims that, according to Karl Marx, “people fight because they are different.” Thiel also comments that, according to Shakespeare, similar people fight each other.
Thiel finds that Shakespeare’s observation describes better the competitive market, where companies focus on their competitors too much, meanwhile missing new opportunities. In some situations, a merger of rivals can be much more profitable for companies.
Chapter 5: The Summary of Key Ideas and Facts
A successful company is characterized by its ability to generate future cash flow. That is, the current value of a company equals the sum of all the money that the company will make in the future. Of course, one has to account for inflation in order to determine the real value of the company.
Technology companies typically lose money during their first few years of operation. Their revenue is delayed because building valuable products requires time; sometimes it can take more than 10 years. A company has to grow in order to be valuable, and it has to focus on the qualitative long-term features of the company.
Whereas individual monopolies differ from each other in many ways, they do have such similar characteristics as:
- proprietary technology,
- network effects,
- economies of scale.
A company is more resilient when it has proprietary technology, which is much better than the technology of other companies. Network effects allow a company to create new customers, making a more useful product. Economies of scale allow monopolies to grow stronger during their expansion because the costs of creating a new product can be distributed over increasing sales. For example, in software companies, a small core group of people can create a product that brings value to millions of customers. Building a strong and recognizable brand is also an effective way to assert a monopoly.
The most successful companies begin their growth by building their dominance in a very small market first, and then scaling up to other adjacent markets. In order to expand to adjacent markets, a company should avoid getting into competition with other companies. A company that advances greatly in a particular market will be earning profits as a monopoly.
Thiel thinks that it is preferable to be the last mover, offering the last great development in a particular market and developing a monopoly via such development.
Chapter 6: The Summary of Key Ideas and Facts
Business success originates from a mixture of both luck and skill. Different companies begin their operations under different and unique conditions, and each company goes through its startup period only once. Which is why it is difficult to judge how crucial the presence of luck was on a company’s path to success. Nevertheless, Thiel warns entrepreneurs against relying on luck. He recommends treating the future as something certain and working toward that future. He refers to Ralph Waldo Emerson, who said, “Shallow men believe in luck, believe in circumstances… Strong men believe in cause and effect.”
Indefinite attitudes toward the future typically prepare a person for “a completely unknowable future.” To illustrate his point of view, Thiel refers to the modern educational system whose graduates are not encouraged to focus and develop their particular strength.
Instead, they are encouraged to spread their efforts over various activities, making themselves “indistinguishable.” Thiel also characterizes the results of the educational system as “many-sided mediocrity.”
A more definite perspective allows people to develop a plan for the future, to choose the best thing to do and then do it. A monopoly is formed by being great at one thing.
Thiel distinguishes four different views of the future that people are likely to have:
- Indefinite pessimists view the future as hopeless, and they do not know what needs to be done, so that they passively react to events as they happen.
- Definite pessimists view the future as definite but miserable, yet they make an effort to get ready for it. Thiel considers the population of China to be the most definitely pessimistic as compared to people in other nations.
- Definite optimists believe in a better future and think that they have to plan and work in order to make it a reality.
- Indefinite optimists anticipate a better future, but they do not know how to make it a reality and they do not make plans for how to make it a reality.
Thiel argues that modern financiers, politicians, and philosophers have indefinite attitudes toward the future. When indefinite optimism dominates, progress takes the form of a Darwinian struggle for survival. He also warns that indefinite optimism encourages American households to save practically nothing, and it encourages American companies to hold on to cash instead of investing it in new projects.
Thiel praises long-term planning, and he points out that a company should not be run by an indefinite optimist who would expect the company to succeed without a plan. Intelligent design is very important for a company, and every successful entrepreneur has to be a designer.
Chapter 7: The Summary of Key Ideas and Facts
In 1906, Vilfredo Pareto, an Italian economist, noticed that 20 percent of peapods yielded 80 percent of all the peas in his garden and that 20 percent of Italy’s population owns 80 percent of the land in Italy. This is described as the “Pareto principle,” also known as the 80-20 rule. According to this power law, only a select few achieve extraordinary results. Thiel argues that both the natural world and human civilization obey this law. This law also describes, for example, how monopolies acquire more value than millions of undistinguishable companies that compete with each other.
The objective of venture capitalists is to find, fund and profit from startup companies that will become successful. It is wrong to expect the returns to be evenly distributed. Most startups fail, and the funds backing them fail too.
In reality, returns on investment obey the power law: out of a large number of startups, few companies will outperform all the other companies.
Only investors who understand the power law strongly limit the number of their investments. For example, we can consider our education and our lives as our investment. One certainly cannot diversify his or her life by investing into dozens of different careers.
Chapter 8: The Summary of Key Ideas and Facts
All ideas that are familiar or famous today used to be unknown in the past. Valuable companies have knowledge of a secret. It is something important and unknown, difficult but doable.
Thiel distinguishes four social trends that prevent people from believing in the power of secrets:
- Incrementalism—people are conditioned to do things a step at a time, usually following some instructions.
- Risk aversion—people are afraid of secrets because they fear to be wrong.
- Complacency—people are not motivated to look for secrets because they can do well by repeating what has already been done before them.
- Flatness—people assume that all the secrets have already been found by other people.
Thiel believes that secrets can be found by people who make an effort to look for them, and they look for secrets in places where no one else is looking.
Chapter 9: The Summary of Key Ideas and Facts
A successful company cannot be built on a faulty foundation. Thiel always emphasizes that a startup company with a faulty foundation cannot be “repaired,” which is why his friends call this “Thiel’s law.”
The most important decision for a startup is the choice of a co-founder. Founders of a company have to know each other well, and they should have complementary business skills and technical abilities. Choosing a person you do not know well as a co-founder of your company would be as risky as marrying a complete stranger.
Thiel makes a distinction among three concepts that might identify any possible misalignment in a company:
- control over the company.
Typically, the founders of the company, as well as its investors and employees, have ownership in a startup company. In small startups, ownership and possession typically belong to their founders. In larger organizations, possession goes to the managers and employees because they run the company on a daily basis. Thiel emphasizes that offering people some equity in the company as one kind of compensation can encourage people to create value in the company. Thiel also recommends that people involved in building the company have to be involved on a full-time basis.
The board of directors controls the company. Sometimes, the founders and the board of directors of a company might disagree about taking a company public too soon. A small board of directors works better when it comes to reaching a consensus and exercising appropriate oversight. Its members have to be selected thoughtfully since each member matters.
Chapter 10: The Summary of Key Ideas and Facts
It is not rational to create a workplace where people do not like each other and act like free agents working in accordance with some transactional scheme. Each company has to create its own culture, developing and supporting long-lasting relationships among people in the company.
It is also important to have talented employees who work together cohesively, and who feel enthusiastic about the company’s mission. That is why the company’s mission has to be persuasive. It has to represent something important that no one else is doing. Employees need to be like-minded and devoted to the mission. Each worker should have a well-defined role with specific responsibilities in the company, and Thiel advocates just one responsibility per employee.
In a way, a successful startup company should remind one of a cult, which Thiel describes as a close group of individuals with common faith in something important. For a startup company, such a belief can be the secret on which the company is based.
Chapter 11: The Summary of Key Ideas and Facts
Sales and distribution of a product are very important. Silicon Valley typically underrates the importance of distribution because its people prefer building things instead of selling them, and they remain skeptical about marketing and sales. Yet, marketing and sales do matter because customers have to know about a product in order to want to buy it. In the US, more than 600,000 people work in the advertising industry and about 3.2 million people work in sales.
Superior sales can create a monopoly, even with an undistinguishable product. But developing a great and unique product will not build a monopoly without a strong and effective sales plan.
For complex sales, which require just a few deals per year and involve large amounts of money, it may take months to build the right relationships with customers. This type of sale generally involves direct contact between the CEO and customers. Personal sales are not complex sales, and a small sales staff can handle the sales of a product to a larger customer base.
A viral product is a product with core functionality that makes users spread the word about it, bringing in more customers. In this way, viral products can create a chain reaction that produces rapid growth. PayPal, for example, initially had as its user base the 24 people who actually worked at PayPal.
In addition to its product, a company must sell itself to its investors, employees, and the media. Selling a company to the media is considered an essential part of the selling process.
Chapter 12: The Summary of Key Ideas and Facts
Today, computers do many jobs that used to be performed by humans. As computers do more, some people are afraid of the possibility that, in the future, computers might completely replace humans and there would be no jobs left for humans. People feel that they have to compete with computers for their jobs in the same way that they compete and lose to foreign workers who take jobs from Americans in the course of globalization.
Thiel argues that there is a difference between computers and foreign workers. Humans and machines are good at completely different tasks, and computers do not compete for resources the way humans do. Computers are tools that complement workers instead of substituting for them.
When people and computers collaborate, they are capable of achieving more than they could achieve working without each other. For example, advanced software can do many things, but it becomes even more useful with the help of human analysts. Moreover, humans can do more while using better technology.
Thiel believes that humankind will achieve utopia when smarter-than-man (artificial intelligence) computers are built.
Chapter 13: The Summary of Key Ideas and Facts
In this beginning of the 21st century, it has become widely accepted that clean technology (cleantech) will become the new big thing. However, so far, it is failing. For example, in 2012, more than 40 solar manufacturers closed their businesses or filed for bankruptcy. In Thiel’s opinion, many of these companies failed because they ignored one or more of the following 7 elements that are crucial for any company’s success:
- Can a company create breakthrough technology?
- Is it the right time for this particular business?
- Does the company start with a big share of a small market with an objective to become a monopoly in the future?
- Does the company have a great team?
- Does the company use proper distribution channels?
- Will the company have a strong position in the market 10 or 20 years from now?
- Has the company found a unique opportunity capable of meeting a need that other companies do not see?
Chapter 14: The Summary of Key Ideas and Facts
Personal traits of a startup company’s founder can influence the success of a company. When a company is led by a unique individual rather than an ordinary manager, such a leadership can be powerful; founders with a unique vision of the world can make a company successful.
Usually, successful entrepreneurs have unusual and even unique traits. Over time, these traits tend to become more extreme, being inflated by the entrepreneurs themselves and by other people.
Celebrities can be considered as founders since they develop their personal brand. Thiel considers Lady Gaga to be one of the most influential people of our time, and he describes her as a “self-manufactured myth.”
Just like celebrities, technology entrepreneurs can be adored and hated. For example, Bill Gates, Howard Hughes and Steve Jobs have gained and lost favor with the general public.
Conclusion: The Summary of Key Ideas and Facts
In his book, Thiel refers to Nick Bostrom, a philosopher, who described four possible scenarios for the future:
- A recurring collapse, which comprises fluctuations between prosperity and ruin,
- A plateau, with the future being very similar to the present,
- Extinction caused by a large-scale disaster which the world will not survive and
- A future that is much better than the present.
Thiel thinks that recurrent collapse most likely will not happen, and complete destruction of humankind could more likely a recurrent collapse. Many people envision reaching a certain plateau. Thiel does not think that a plateau would last for a long time because consumption of scarce resources would cause serious conflicts.
Thiel calls the most dramatic version of the last scenario (the future that is much better than the present) the Singularity. He argues that this better future will occur because of new technologies that will change the limits of our understanding. Thiel refers to Ray Kurzweil, who proposes that “the Singularity is near,” and that humans have to be ready to accept it.
Thiel points out that the future cannot just “happen” to us. Which is why people and companies have to plan and work in order to create a better future.