Table of Contents
Zero to One explains how our business foundations are misplaced. We grow up to learn to embrace competition but is competition really good?
When we think of starting a business, we can’t help but think about how we’re going to be better than what’s already out there. We feel as if there is something truly special about the small way that we’ve managed to differentiate ourselves, and it’s going to be enough for us to build a successful business. Thiel suggests we throw that idea out the window.
Monopoly vs Competition
Capitalism’s essence is not competition, it’s in building a monopoly. The goal shouldn’t be to find a space we can compete in, it’s to create a new space altogether and dominate that space.
Ironically, businesses that are in a competitive market often try everything they can to make it seem like they’re differentiated (or more monopolistic). Whereas a business that is indeed monopolistic will do everything it can to make it seem like it’s in a competitive market. A fast food restaurant in a space of many restaurants will try to advertise how it is indeed different from all the other restaurants by focusing on how it’s better at one thing or another, giving the illusion that it’s monopolistic.
But a true monopolist like Google will try to define its market more broadly to make it seem like they have real competition. They do this as a smoke screen to evade scrutiny. The world is a dynamic place, unlike a board game – where fixed rules determine the outcome. In the real world, you have the ability to create new categories and new rules. All happy companies are different in that they don’t exist in the same market selling the same kind of product. All unhappy companies are the same in that they do exist in the same market selling the same kind of product. Microsoft and Google tried to out-compete each other by launching a series of products. Apple came along and overtook them. War is costly – it hurts everyone involved.
But markets don’t have to be non-existent for you to be able to create a monopoly, they just need to be small enough. The smaller the beachhead market, the better. Big markets getting served by multiple companies is a bad choice. The argument that “grabbing only 1 percent of this $100 billion market will make us rich” is a common thing you’ll hear many wantrapreneurs will say, but they’re only deluding themselves.
They would be right if business was democratized, but it isn’t. Many markets are “winner-take-all” and barriers to entries always exist to keep new entrants from earning market share too easily. The Pareto rule ensures that only a few players will dominate the lion’s share of the market, and most companies will compete for almost nothing.
Defining Value
The value of a business today is defined by how much it will make in the future. Tech companies, such as Twitter have healthy future cash flow but are losing money now. That’s the opposite of the typical newspaper/restaurant business today that isn’t losing money but will likely lose money in the future.
A lot of people today become obsessed with short-term growth numbers. But doing so might mask core underlying issues that might be much more pressing. Growth is easy to measure, Durability is not. Zynga had great short-term growth (Farmville) but their long-term challenge is the same one Hollywood studios face. How can they reliably produce a consistent stream of successes for a fickle, casual audience?
Below are four factors that propel companies to monopolize a market.
1. Proprietary technology: Either create new technology for an undiscovered market or create technology that is 10 times better than the competition. An important point Thiel makes here is that technology isn’t restricted to electronics, which is the first image most people get when they think of the term. But rather, technology can encompass any tool that allows us to do something better than if we didn’t have the tool at all.
2. Network Effects: Social networks are the most obvious example. The more friends you have on Facebook, the more difficult it is for you to use anything other than Facebook. The best way to capture network effects is to start with small markets and build something valuable for them.
3. Economies of Scale: Building software yields economies of scale. Every additional unit of software sold costs no additional money. Marginal cost is zero.
4. Branding; This is a tricky one. Having a strong brand gives companies the ability to create a monopoly, but that doesn’t happen without having a valuable core. A lot of companies try to emulate Apple’s marketing strategies to no avail. Apple’s marketing strategies don’t make it successful. But their marketing strategies, combined with a strong suite of proprietary products is a deadly combination. Start with substance, then build the brand, not the other way around.
Thiel’s Matrix
Definite Pessimism: You know you’re doomed. You’re scared to death, so you’re doing everything you can to just survive, not expecting much brighter days ahead.
Example: China today.
Definite Optimism: You have a plan, and you’re sure it’s going to work. You do everything you can today to make your plan real tomorrow.
Example: The USA in the 19th century.
Indefinite Pessimism: You are lost. You don’t expect any good, and you will get exactly that. You’re kicking the can down the road, and will only react when things happen to you.
Example: Europe today.
Indefinite Optimism: Unsure why things are going well, but they seem to be. So ride the wave, always keep your options open.
Example: USA today.
Indefinite Optimism
Thiel is warning us of being indefinitely optimistic. People who are indefinitely optimistic are bankers or consultants. They aren’t trying to create value, but are only trying to “squeeze efficiencies”, profiting in the short term financially without much engagement with the long term. In this paradigm, the most valuable thing is money, since the creation of future value is uncertain.
His warning here isn’t just to entrepreneurs, but to people in general. People stopped dreaming of a future they can design. We live in a cynical time where we assume that progress is already happening and the smartest minds are thinking about how to take advantage of arbitrage opportunities instead of taking an active role in shaping the future.
In universities, students are advised to accumulate as many micro accomplishments as possible and stick them on their CV. That way, they’re increasing their options. This is shortsighted since the safest way to stand out and make a difference is to focus on one thing for a long time.
The danger in business is when a founder believes in his own myth too much. Such founders may easily overlook clear weaknesses, but equally dangerous is the opposite, thinking that no myth at all is a sign of intelligence. Thiel warns us of a danger that isn’t treated as such in society. It’s the danger of having false security in the non-imaginative practical way of thinking about business.
Evolutionary Comparisons
A lot of hype has surrounded the lean startup way of thinking about startups, but Thiel warns of taking this line of thinking too far. He isn’t dispelling the idea altogether, but he is stating that it’s insufficient on its own. Leanness is a methodology that improves the micro-details of the business and is useful for that purpose. It’s not, however, a substitute for a long-term vision or goal. It won’t lead to Zero to One. When it comes to goal creation, intelligent design works best. Steve jobs helped build the future by definite planning, not by listening to customers.
Secrets
There are two things to consider for your startup.
- What secrets is nature not telling you?
- What secrets are people not telling you?
Founder’s Dilemmas
Thiel’s law: a startup messed up from the start will fail.
Solo entrepreneur: More alignment, less chance of conflict, but harder to create Zero to One company.
- It’s easier to create a Zero to One company with a team, but be careful who you start a company with.
- It’s better to start a company with someone who you have a past with, or someone you share interests with.
- It’s never a good idea, both professionally and personally, to start a company with someone you don’t enjoy spending time with.
A CEO shouldn’t pay himself a high salary – he sets a bad example for the rest of the team. Forget being conventional and safe. It’s better to create a cult like culture than a lukewarm one.
Relevant Metrics for your Distribution Plan
Customer Lifetime Value must be higher than Customer Acquisition Cost.
Your distribution strategy should factor in CLV and CCA, and it will largely depend on the type of product you’re selling (price etc..)
The 7 questions every business must answer
1) Can you create breakthrough technology instead of incremental improvements (Engineering question)
2) Is now the right time? (Timing question)
3) Are you starting with a big share of a small market (Monopoly question)
5) Do you have the right team? (People question)
5) Do you have a way to create and deliver the product? (Distribution question)
6) Will your market position be defensible in future (Durability question)
7) Have you identified an opportunity that others don’t see? (Secret question)
If you have no good answers, then you will experience “bad luck”. Get at least 5-6 right and you’ll stand a chance. Social entrepreneurship is a myth, what is seen as good by society isn’t necessarily good for society The Cleantech industry had many companies doing the same things for a noble cause. People cheered them on, but to create value, you need to do something different. Tesla got the 7 questions right.
Evaluation
- Durability (I Will Read This Again): 9/10
- Originality (This Taught Me Something New): 9/10
- Experience (This Was Enjoyable to Read): 9/10
- Efficiency (This Was Concise): 8/10
- Shareability (I Will Recommend This Book to My Friends): 9/10
UW Score: 88/100
Thought-provoking, concise, and original. Just what you want from a good business book. This was one of the best I’ve read.
Read Zero to One
If you’re an entrepreneur and you want a quick guide to know what to think about before launching you business, check out The Myth of Entrepreneurship.