“Zero to One” Commentary & Summary
Notes on startups, or How to Build the Future
The book, “Zero to One” by Peter Thiel gave a uniquely impressive perspective on building a startup and the future. Thiel is considered a Shifter according to the characteristic metric constructed by Ray Dalio. Thiel has, over-time, continually proven his ability to perform successfully when executing a new objective. His engineering approach towards business with the lens of a data scientist allows him to both efficiently and effectively execute a strategy.
I challenged myself with finding key takeaways that I could start implementing today with our main business at PlutusX. So, I will outline those in the conclusion section below.
Peter Thiel, for those who are unaware, co-produced what we call PayPal today. He sold the company for a staggering figure. Although, his experience at PayPal led to the developments of a security protocol for flagging and detecting fraudulent activity. The software proved extremely promising, so much so that the FBI asked them to develop a similar software similar to their solution for multi-use purposes. After he left the company, he decided to use his network, experience, and newly earned capital to work by starting an investment syndicate and venture capital fund.
Here is a little more on Thiel.
Let’s just dive into it with the quick summary.
Summary
Peter Thiel exposes the evolution of his strategy and philosophy for composing a flourishing startup. He lends lessons acquired from personal experience as a co-founder of PayPal and a venture capital investor that lead him to amass an enormous wealth exceeding a billion thresholds.
Analysis
Here are some key elements for a successful startup or innovating the future that you should consider remembering while reading through the summary.
- Monopolies are good,
- Founders are Important,
- Cults aren't terrible, and
- Constituent elements of a thriving company.
Chapter 1: The Challenge of the Future
The introduction of the book begins with a favorite question of Thiel’s and that is “What important truth do very few people agree with you on?”
The question thought provokingly stimulates the interviewee to:
- Reflect and articulate self-generated wisdom (knowledge + experience), and
- Become socially ostracized by taking a divisive stance.
Thiel’s approach for this question stems from a phrase that he used, “brilliant thinking is rare but courage is in even shorter supply than genius.”
This reminded me of Mark Twain’s “If you find yourself on the side of the majority its time to pause and reflect.”
To help better visualize the intangible concept of going from zero to one by building a revolutionary startup or constructing the future he created a graph.
He ends the chapter by frankly asking: “Why Start-ups?” His definition and delineation was very simple.
A start-up is the largest group of people that you can convince of a plan to build a different future.
This definition was far from revolutionary but the concept was interesting none-the-less. The minority group tends to create the grandest scales of cascading movement in society. Check Sivers TED on “Starting a Movement” again.
Chapter 2: Party Like It’s 1999
This chapter begins with an abridgment of the economic landscape of the period in question.
- 1990 — economical migration of investments in USA “ from bricks to clicks”
- 1997- Economical crash in Thailand
- 1999- Launch of the Euro
- 1998- 2000 — Dot.com mania
PayPal was created with a goal to create a new digital currency. As the idea evolved the currency became a method for transferring funds via email. The concept was revolutionary. Many merchants would swarm towards the new product as the technology allowed them to receive funds more efficiently in juxtaposition with their former predecessors.
The company shortly after build established learned a hack for cultivating new clients by using $10 incentives and quickly gained enough traction to get significant funding in 2000 before the dot.com crash.
Chapter 3: All Happy Companies Are Different
This particular chapter highlights the similarities (and thus the differences) between happy companies and failing companies.
In Thiel’s opinion ”All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”
Soon after describing the difference between a failing company and a happy one he asked another opposingly difficult question: “What valuable company is nobody building?”
To Thiel, a Valuable company is the summation of created value in addition to value captured.
The main take away here for aspiring entrepreneurs with the intention of changing the world (hopefully for the better) with your company is that you must create and capture value. You must not build an undifferentiated commodity business (restaurant as we’ll see in the next example).
The author attempts to distinguish the differences between a Monopoly (inherently not evil) vs a Perfect Competition (arguably dangerous for businesses vitality). He further explains that both types of companies is trying to disguise themselves as something else as well (usually the opposite of what they are):
Firm A — disguised as a monopoly: Google has a monopoly on search but emphasizes the small share of global online advertising, and other miscellaneous business models.
Firm B — disguised as a perfect competition: A local restaurant tries to find fake differentiators by being the “only British restaurant in Palo Alto” yet they are using inaccurate metrics. The real marker would be “restaurants” not “Restaurant type”
Chapter 4: The Ideology of Competition
Peter describes the business world to be heavily analogous of war. MBA’s often attribute their tactful success to the knowledge acquired from books such as “The Art of War”. The analogy is further supplemented by the metaphorical wartime language.
Thiel, perplexed us with another promising question: “Why do people compete?”
- Marx model: Since we are inherently different and possess distinct goals, and
- Shakespeare model: All competitors are more-or-less similar (ex: Montague vs Capulet)
Placing emphasis on the wrong attribute in business (like in war) can lead to the toxic realization that the root problem truly lies in the similarities. For example, while Microsoft and Google were obsessively competing with each other Apple emerged and surpassed both.
This chapter referenced examples of Square competitors. This illustrated the negative consequences of competition. The act itself is likely to limit vision and focus energy on obsessive hostility. As a result, copying is promoted. : Square copycats.
He also suggested that the best way to resolve conflict (competition) is to merge with your competitors. This is when he decided to work with Musk, despite their initial differences. It’s easier to monopolize the bigger you are or the more targeted your audience.
Chapter 5: Last Mover Advantage*
There are two important time periods in the evolution of an emerging market for creating an effective monopoly; the first mover, and the last mover.
Thiel placed weight on understanding the proper business valuation process (and how to differentiate valid valuations compared to inflated valuations).
The equation for the value of a business today is the value of earnings in the future. Here is an example using the previous definition.
Twitter vs New York Times
Twitter $24Bn valuation (2013 IPO) = 12 * NYT market cap
Why does a new company surpass a veteran institution?
- Twitter is generating more cash flow (not even profit at times), and
- Twitter holds the monopoly of the future while publishing houses are failing to evolve effectively (improve or invent: “Anything You Want”).
What defines a monopoly?
- Proprietary technology (10 times better than any existing solution),
- Network effect (start with a hyper-niche market. If you think its too big it is),
- The economy of scale (SaaS vs employee labor intensive), and
- Excellent Branding (Apple Branding to stay continual trend).
How can we build a monopoly?
- Actively attempt to seek a hyper-niche target market that has little to no competitors. Serve them, and do it well (all that matters == customer: “Anything You Want”),
- Once you have dominated the market expands to the nearest adjacent market. Similar to Amazon selling CDs, DVDs then everything else,
- Do not disrupt current giants. PayPal worked with Visa. Everyone won, and
- Attempt to make the last great development in a specific market and reap all the benefits of a mature ecosystem.
Chapter 6: You Are NOT a Lottery Ticket
Thiel asks another rhetorical question: Can you control your future?
On the outlandish possibility that you are able to truly know the contents of the future with extreme accuracy then you may be able to control it. However, the reality is that the future is remarkably random and uncertain. So don’t attempt to master it.
Thiel draws a graph to help illustrate the outcome of the future; better or worse.
- Indefinite pessimism: Since the 70s most of Europe forfeited authority to join forces without proper structure and order. The inevitable crash is indefinite so they ensue into a vacation mania.
- Definite pessimism: Economic growth is not quick enough for China. The rich place money internationally, and the poor preparation for the definite inevitable (soon). Not sustainable growth.
- Definite optimism: The Western world before the 70s. Major milestones were executed: Empire State building, Panama Canal, Apollo program.
- Indefinite optimism: Effortless progress creates entitlement. Wealth accumulation overshadowed engineering innovation.
Thiel argues that to be successful one (a company) should not practice the development of a mediocre skillset and call it “well-rounded”. Rather focus, like the definite optimist, on one particular interest and dominate, build your monopoly.
Chapter 7: Follow the Money
I won’t bore you down on this. I’ve written on this far too often haha. The 80/20 rule is applicable for startup success as well.
The Pareto principle is evident when observing the money trail. Venture capitalist aims to profit from companies in round series funding. Yet few companies achieve exponential growth. Most fail while few essentially breakeven.
Chapter 8: Secrets
This chapter talks about the elusive topics of hidden secrets that need discovering.
The author uses geography as an illustration to demonstrate the lack of discovery needed, no secrets are left.
He asks another daunting question. What happens when a company stops believing in secrets?
Here is what happens to a company that stops believing in secrets. Let’s examine Hewlett-Packard:
- 1990 company worth $9Bn
- 2000 after a decade of inventions (first affordable color printer, first super-portable laptops) worth $135Bn
- 2005 worth $70Bn (failed merge with Compaq, failed consulting/support shops)
- 2012 worth $23Bn as a result of an abandoned search for technological secrets.
The emphasis of this section is not to have secrets and hide or protect them from others, like some sort of IP. Rather, I believe that Thiel is teaching you that a company conspiring to change the world is a company that will have secrets that once revealed will revolutionize a whole industry. Advancing the movement towards an optimistic future.
Every great business is built around a secret that’s hidden from the outside. Inner workings of Google’s PageRank algorithm, Apple iPhone in 2007, etc…
Chapter 9: Foundations
Distinctively exceptional experiences often are consequences of special identifiable moments in life. Typically the inception of the company is rather significant. Yet, one specific element from the origin is extremely important.
The complimentary personalities and subsequently their skill sets allow for the elixir of success to emerge. Thiel stresses the importance of the co-founder’s compatibility and often overlooks companies with co-founders who do not have prior history beforehand.
- Ownership: Who legally owns a company’s equity? (founders, employees, investors)
- Possession: Who actually runs the company on a daily basis? (managers)
- Control: Who formally governs the company affairs? (board of directors which includes founders)
He talks about the appeal of having fewer heads on the board. Public companies are mandated to have a minimum amount but Thiel often prefers to have a board of 3.
Thiel uses another incredibly easy to comprehend the analogy for startup culture. You are either on the bus or off the bus. An individual who prioritizes the drawing of salary over the positive contribution to the growth of the value of the company’s equity is an individual who is seeking to extract value otherwise.
The association with the value being given by a cash salary creates short term thinking with an employee. Drawing a high salary as a CEO creates the concept of attachment towards the title as it is correlated with such money (wrong mindset) and also promotes other employees to desire such payment (wrong mindset). The goal is for a company to proportionally give the right amount of equity to promote long term thinking and incentivize the employee to build value with the future in mind and the right amount of cash salary to keep the immediate now satisfied (basic needs + lil extra).
Chapter 10: The Mechanics of Mafia*
The purpose of this chapter is to create and foster a strong culture within the companies ecosystem. Company culture is similar to a cult, minus the overzealous dogmatism.
I have a lot of thought on building a cult-like company culture given to us by sociologist and evolutional psychologist alike, but this is for another topic. Now we will explore the 4 integral dimensions used to construct an effective company culture.
- Imagery: Using branded clothing, merch, stickers and other miscellaneous items/events help show others in your company that you belong in the same tribe and shows commitment,
- Slogans: Slogans, catch-phrases, and idioms are great tools to build strong relations among members of the team. Think also of a group focused exercise where you may participate in a saying or exercise in unisons to trigger that hive mentality,
- Advocacy: This is essentially advocating and broadcasting the main problem you aim to focus on tackling (usually mission), in addition to philanthropic-like activities, and
- Obsession: Find like-minded people — simple. Use active employees to recruit other like-minded people who are equally obsessed with solving the same problem as you.
The goal is to create and foster a strong company culture. Cult participants are usually misinformed fanatics. We want fanatics who are enthusiastic about our problems and mission. You don’t mind others calling you a mafia of sorts either.
Chapter 11: If You Build It, Will They Come?
The distribution mechanism for a startup is immensely crucial to the longevity of the company. Often the trope suggests that a product should sell itself. The marketing is almost negligible. They use companies like Facebook and Google as an example to justify their opinion. However, Thiel argues that the delivery system for a company’s service or good is of equal importance to the product itself.
Thiel gives a brief lesson on sales. If the CLV (Customer Lifetime Value) is greater than the CAC (Customer Acquire Cost) then you can learn how to sell with profit. The more expensive the product, the greater the sales costs then the more important to the sale.
Some products may require a team of salesmen who make sales look effortless to the programmers (2 hours lunches, etc). Other products may be less than $1,000 where they simply can use orthodox advertising. Sometimes the product may be such a big sale that the CEO or other officers may need to participate directly to the sale of the product. Regardless, the distribution system must be considered a fundamental aspect of a successful business.
Then there are dead zones. The target is usually SMEs (small medium enterprise, B2B) and they require unique marketing.
Look around, if you don’t see a salesperson, you’re the salesperson
Chapter 12: Man and Machine
This chapter can be summarized as the computer complimenting humans as a tool of technology vs robots taking over the workforce. There is a great fear that robots will inevitably make humans ineffective. Thiel argues that this is not the case. Instead, he believes that computers will empower the human race rather than make them obsolete.
Thiel offers an example of the complementary relationship computers will have with robots.
- In the summer of 2000 Paypal was losing $10Mn/Mo because of credit card fraud. It was nearly impossible for the human resources to flag and resolve every single transaction with brute force alone,
- Thiel hired an elite team mathematicians to solve the problem algorithmically,
- This solution worked, temporarily,
- The latest solution was to assemble a highly specialized team of human analysts to review most suspicious transactions flagged by the algorithm,
- This hybrid system was named “Igor” after the Russian fraudster who claimed he will never be caught, and
- Paypal records first profit in 2002 vs quarterly loss of $29.3Mn one year before.
This hybrid solution has been used by the FBI for detecting fraud and later inspired the creation of Palantir. The system uses sophisticated AI/ML to help create high-risk and high-probability flag cases to be reviewed by the human analyst in greater detail, “keeping the human in the loop”.
Chapter 13: Seeing green*
If 7 key questions fail to be met in an emerging industry then the eventual demise of the market is inevitable, as suggested by Thiel.
Here are those 7 questions:
- 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 starting with a big share from a small market?
- The people question: Do you have the right team?
- The distribution question: Do you have a way to 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?
These are the 7 constituent of elements that construct a successful company, according to Thiel. If the clean energy sector had the answers to these questions in the mid-2000s circa their death, then the answers were clearly wrong because they ultimately failed. Great lesson to learn what they did so that you do not repeat it.
One again Thiel references his co-founder and friend Musk with Tesla. He states, “One of the few cleantech companies that have found success is Tesla. This is because they got all of the basic issues right. This shows that the problem was never with the idea of cleantech by itself, rather the problem was how most of the cleantech startups ran their firms.”
Many social driven business fail to differentiate themselves form other entities and products and place emphasis on the wrong goal: “To do something good”. Set after the goal to do something different instead (maybe as a monopoly on a smaller scale). The success may come to you similar to it did to Musk with Tesla.
Chapter 14: The Founders Paradox
In his last chapter, Thiel draws up some interesting graphs that I don’t necessarily agree with 100%. I believe the underlying message is that successful companies tend to have a concentration of similar personality traits detected inside each founding member.
Here Thiel suggests that the average person falls in the middle of the spectrum and also believes that the inverse of the function is true for the founders. I believe that he is merely suggesting that founders tend to have “extreme” qualities.
I believe that he is also preparing the reader to understand that as an outlier, being placed on the extremities of cultural norms that you are subject to being in a paradoxical state that is you may be loved and hated, rich or poor, and genius or idiot at the same time in the eyes of the public.
He talks roughly about some philosophy about believing strongly in your own abilities. Read some of my other articles on mindset to better understand that portion. Basically, be humble, that’s all.
Conclusion: Stagnation or Singularity?
Debating the contents of the future with high-level accuracy is a feeble task. However, we can anticipate four likely scenarios, as some sort of catch-all.
Four scenarios for the future:
- Recurrent collapse (likely considering the ebb en flow cycle as seen in history: William Durant),
- Plateau (technological stagnation),
- Extinction (man-made or natural), and
- Takeoff (essentially hybrid where technology pushes advancement forward exponentially).
So, effectively we can decide how to shape the future. How will you do your part?
Conclusion
Lesson One: Create a Monopoly
We learned that creating a monopoly is great for business and still can be fair in an open market. Let’s define it and learn how to build one.
What defines a monopoly?
- Proprietary technology (10 times better than any existing solution),
- Network effect (start with a hyper-niche market. If you think its too big it is),
- The economy of scale (SaaS vs employee labor intensive), and
- Excellent Branding (Apple Branding to stay continual trend).
How can we build a monopoly?
- Actively attempt to seek a hyper-niche target market that has little to no competitors. Serve them, and do it well (all that matters == customer: “Anything You Want”),
- Once you have dominated the market expands to the nearest adjacent market. Similar to Amazon selling CDs, DVDs then everything else,
- Do not disrupt current giants. PayPal worked with Visa. Everyone won, and
- Attempt to make the last great development in a specific market and reap all the benefits of a mature ecosystem.
Lesson Two: Co-Founders are important
Thiel quantitatively analyses the founders with more scrutiny than the business model or product itself.
The complimentary personalities and subsequently their skill sets allow for the elixir of success to emerge. Thiel stresses the importance of the co-founder’s compatibility and often overlooks companies with co-founders who do not have prior history beforehand.
Defining these components clearly will help mitigate future uproar:
- Ownership: Who legally owns a company’s equity? (founders, employees, investors)
- Possession: Who actually runs the company on a daily basis? (managers)
- Control: Who formally governs the company affairs? (board of directors which includes founders)
Thiel uses another incredibly easy to comprehend the analogy for startup culture. You are either on the bus or off the bus. An individual who prioritizes the drawing of salary over the positive contribution to the growth of the value of the company’s equity is an individual who is seeking to extract value otherwise.
I believe that he is also preparing the reader to understand that as an outlier, being placed on the extremities of cultural norms that you are subject to being in a paradoxical state that is you may be loved and hated, rich or poor, and genius or idiot at the same time in the eyes of the public. So be humble because you may be celebrated one day and notorious the next.
Lesson Three: Create a Cult
Company culture is similar to a cult, minus the overzealous dogmatism.
I have a lot of thought on building a cult-like company culture given to us by sociologist and evolutional psychologist alike, but this is for another topic. Now we will explore the 4 integral dimensions used to construct an effective company culture.
- Imagery: Using branded clothing, merch, stickers and other miscellaneous items/events help show others in your company that you belong in the same tribe and shows commitment,
- Slogans: Slogans, catch-phrases, and idioms are great tools to build strong relations among members of the team. Think also of a group focused exercise where you may participate in a saying or exercise in unisons to trigger that hive mentality,
- Advocacy: This is essentially advocating and broadcasting the main problem you aim to focus on tackling (usually mission), in addition to philanthropic-like activities, and
- Obsession: Find like-minded people — simple. Use active employees to recruit other like-minded people who are equally obsessed with solving the same problem as you.
The goal is to create and foster a strong company culture. Cult participants are usually misinformed fanatics. We want fanatics who are enthusiastic about our problems and mission. You don’t mind others calling you a mafia of sorts either.
Lesson Four: Piece it Together
Let’s create a list of elements needed to create a successful company according to Thiel.
Here are those 7 questions:
- 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 starting with a big share from a small market?
- The people question: Do you have the right team?
- The distribution question: Do you have a way to 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?
These are the 7 constituent of elements that construct a successful company, according to Thiel.
That’s my take and my lessons Hope this was valuable. Remember I have video descriptions of the major lessons found on my Instagram as well. Be sure to follow me for more content there.
