- 1. Notes on Zero to One by Peter Thiel
- 1.1. Guidelines
- 1.2. Monopoly
- 1.3. Building a monopoly
- 1.3.1. Hesitate to found a new venture
- 1.3.2. A startup messed up at its foundation cannot be fixed
- 1.3.3. Have a unique founder
- 1.3.4. The seven questions that every business must answer
- 1.3.5. In the boardroom, less is more
- 1.3.6. A company does better the less it pays the CEO
- 1.3.7. Find a secret
- 1.3.8. Don’t disrupt
- 1.3.9. Start with a very small market (i.e. sequencing)
- 1.3.10. Definite Optimism (i.e. have plans)
- 1.3.11. Go from Zero To One
- 1.3.12. Operations
- 1.3.13. Distribution (Advertising, Sales)
- 1.4. Investing
- 1.5. The hybrid approach
- 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.
Capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. If you want to create and capture lasting value, don’t build an undifferentiated commodity business.
Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.
A monopoly allows a business that’s successful enough to take ethics seriously without jeopardizing its own existence.
Both inside a firm - people competing for career advancement - and in the marketplace. People lose sight of what matters and focus on their rivals instead.
A great technology company should have proprietary technology an order of magnitude better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
The clearest way to make a 10x improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite.
Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
Network effects businesses must start with especially small markets. Facebook started with just Harvard students.
A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
A good startup should have the potential for great scale built into its first design.
A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly – e.g. the perception that Apple offers products so good as to constitute a category of their own.
However, beginning with brand rather than substance is dangerous.
Every individual is unavoidably an investor, too. The power law means that differences between companies will dwarf the differences in roles inside companies. You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing).
An entrepreneur makes a major investment just by spending her time working on a startup. Therefore every entrepreneur must think about whether her company is going to succeed and become valuable.
Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they start a company together – otherwise they’re just rolling dice.
If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well–even in purely financial terms.
A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.
Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from everybody at his company.
The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
The Timing Question: Is now the right time to start your particular business?
The Monopoly Question: Are you starting with a big share of a small market?
The People Question: Do you have the right team?
The Distribution Question: Do you have a way to not just create but deliver your product?
The Durability Question: Will your market position be defensible 10 and 20 years into the future?
The Secret Question: Have you identified a unique opportunity that others don’t see?
The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight. However, that very effectiveness means that a small board can forcefully oppose management in any conflict.
This is why it’s crucial to choose wisely.
A board of three is ideal. Your board should never exceed five people.
That’s one of the single clearest patterns I’ve (Thiel has) noticed from investing in hundreds of startups. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.
A cash-poor executive, will focus on increasing the value of the company as a whole. Low CEO pay also sets the standard for everyone else.
Every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
- What secrets is nature not telling you?
- What secrets are people not telling you?
- What valuable company is nobody building?
If your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.
Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.
Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression – to first dominate a specific niche and then scale to adjacent markets – a part of their founding narrative.
Make the last great development in a specific market and enjoy years or even decades of monopoly profits.
The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.
Long-term planning is often undervalued by our indefinite short-term world, but indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it? Only in a definite future is money a means to an end, not the end itself.
Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum.
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.
Never underestimate exponential growth.
The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops.
People often find equity unattractive. It’s not liquid like cash. It’s tied to one specific company. And if that company doesn’t succeed, it’s worthless.
High cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future.
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.
As a general rule, everyone you involve with your company should be involved full-time.
…when she could go work at Google for more money and more prestige?
Because of your mission and your team. You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done.
Just cover the basics like health insurance and then promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.
Every individual should be sharply distinguished by their work. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing.
Most fights inside a company happen when colleagues compete for the same responsibilities.
Engineers are (usually) biased toward building cool stuff rather than selling it.
It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business–no matter how good the product.
It works on nerds, and 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 buy 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.
Even the agenda of fundamental physics and the future path of cancer research are results of persuasion. The most fundamental reason that even businesspeople underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.
Superior sales and distribution by itself can create a monopoly, even with no product differentiation.
People overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious.
Like acting, sales works best when hidden. This explains why almost everyone whose job involves distribution has a job title that has nothing to do with those things. People who sell advertising are called “account executives.” People who sell customers work in “business development.” People who sell companies are “investment bankers.” And people who sell themselves are called “politicians.”
In between personal sales (salespeople obviously required) and traditional advertising (no salespeople required) there is a dead zone. For a product priced around $1,000, there might be no good distribution channel to reach the small businesses that might buy it. Go over that, and the product needs a personal sales effort, but at that price point, you simply don’t have the resources to send an actual person to talk to every prospective customer.
Every entrepreneur envies a recognizable ad campaign, but startups should resist the temptation to compete with bigger companies in the endless contest to put on the most memorable TV spots or the most elaborate PR stunts.
A product is viral if its core functionality encourages users to invite their friends to become users too.
This isn’t just cheap–it’s fast, too. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth. The ideal viral loop should be as quick and frictionless as possible. Funny YouTube videos or internet memes get millions of views very quickly because they have extremely short cycle times: people see the kitten, feel warm inside, and forward it to their friends in a matter of seconds.
Even if your particular product doesn’t need media exposure to acquire customers because you have a viral distribution strategy, the press can help attract investors and employees. Any prospective employee worth hiring will do his own diligence; what he finds or doesn’t find when he googles you will be critical to the success of your company.
Only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments.
At Founders Fund, we focus on five to seven companies in a fund, each of which we think could become a multibillion-dollar business based on its unique fundamentals.
After all, the dozen largest tech companies were all venture-backed. Together those 12 companies are worth more than $2 trillion, more than all other tech companies combined.
The value of a business today is the sum of all the money it will make in the future, discounted those future cash flows to their present worth.
Also, will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.
Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market.
Never invest in a tech CEO that wears a suit
When a big company makes an offer to acquire a successful startup, it almost always offers too much or too little: founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough.
People compete for jobs and for resources; computers compete for neither.
People have intentionality–we form plans and make decisions in complicated situations. We’re less good at making sense of enormous amounts of data. Computers are exactly the opposite: they excel at efficient data processing, but they struggle to make basic judgments that would be simple for any human.
The stark differences between man and machine mean that gains from working with computers are much higher than gains from trade with other people.