Fragments of the book, “Zero to One”, written by Peter Thiel.
Party It’s Like 1999
We still need new technology, and we may even need some 1999-style hubris and exuberance to get it. To build the next generation of companies, we must abandon the dogmas created after the crash. That doesn’t mean the opposite ideas are automatically true: you can’t escape the madness of crowds by dogmatically rejecting them. Instead ask yourself: how much of what you know about business is shaped by mistaken reactions to past mistakes? The most contrarian thing of all is not to oppose the crowd but to think for yourself.
All Happy Companies are Different
Their theories describe an equilibrium state of perfect competition because that’s what’s easy to model, not because it represents the best of business. But it’s worth recalling that the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest – also known as the heat death of the universe. Whatever your views on thermodynamics, it’s a powerful metaphor: in business, equilibrium means statis, and statis means death. If your industry is in a competitive equilibrium, the death of your business won’t matter to the world; some other undifferentiated competitor will always be ready to take your place.
Perfect equilibrium may describe the void that is most of the universe. It may even characterize many business. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.
Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in its own way.” Business is the opposite. 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.
The Ideology of Competition
Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. So why do people believe that competition is healthy? The answer is that competition is not just an economic concept or a simple inconvenience that individuals and companies must deal with in the marketplace. More than anything else, competition is an ideology – the ideology – that pervades our society and distorts our thinking. We preach competition, internalize its necessity, and enact its commandments; and as a result, we trap ourselves within it – even though th emore we compete, the less we gain.
Last Mover Advantage
A great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade, while newspaper’s monopoly days are over.
Simply stated, the value of a business today is the sum of all the money it will make in the future. (…) Most of the value of low-growth businesses is in the near term. An Old Economy business (like a newspaper) might hold its value if it can maintain its current cash flows for five or six years. However, any firm with close substitutes will see its profits competed away. Nightclubs or restaurants are extreme examples: successful ones might collect healthy amounts today, but their cash flow will probably dwindle over the next few years when customers move on to newer and trendier alternatives.
Technology companies follow the opposite trajectory. They often lose money for the first few years: it takes time to build valuable things, and that means delayed revenue.
You’ve probably heard about “first mover advantage”: if you’re the first entrant into a markeet, you can capture significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do any good if someone else comes along and unseats you. It’s much better to be the last mover – that is, to make the last great development in a speciific marked and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision. Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else”.
You are not a Lottery Ticket
To an indefinite optimist, the future will be better, but he doesn’t know exactly how, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it accordingly.
Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones. Bankers make money by rearranging the capital structures of already existing companies. Lawyers resolve disputes over old things or help other people structure their ffairs. And private equity inverstors and management consultants don’t start new business; they squeeze extra efficiency from old ones with incessant procedural optimizations. It’s no surprise that these fields all attract disproportionate numbers of high-achieving Ivy-League optionality chasers; what could be a more appropiate reward for two decades of resumé-building than a seemingly elite, process-oriented career that promises to “keep options open”?
Secrets
Kaczynski claimed that in order to be happy, every individual “needs to have goals whose attainment requires effort, and needs to succeed in attaining at least some of his goals”. He divided human goals into three groups:
- Goals that can be satisfied with minimal effort
- Goals that can be satisfied with some serious effort
- Goals that cannot be satisfied, no matter how much effort one makes
This is the classic trichotomoy of the easy, the hard, and the impossible. Kaczynski argued that modern people are depressed because all the world’s hard problems have already been solved. What’s left to do is either easy or impossiblem, and pursuing those tasks is deeply unsatisfying, What you can do, even a child can do; what you can’t do, even Einstein couldn’t have done.
Along with the natural fact that physical frontiers have receded, four social trends have conspired to root out belief in secrets.
- First is incrementalism. From an early eage, we are taught that the right way to do things is to proceed one very small step at a time, day by day, grade by grade. If you over-achieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange ofr doing exactly what’s asked of you, yo’ll get an A. This process extends all the way up through the tenure track, which is why academics usually chase numbers of trivial publications instead of new frontiers.
- Second is risk aversion. People are scared of secrets because they are scared of being wrong. By definition, a secret hasn’t been vetted by mainstream. If your goal is to never make a mistake in your life, you shouldn’t look for secrets. The prospect of being lonely but rights is already hard. The prospect of being lonely and wrong can be unbearable.
- Third is complacency. Social elites have the most freedom and ability to explore new thinking, but they seem to believe in secrets at least. Why search for a new secret if you can comfortably collect rents on everything that has already been done?
- Fourth is flatness. As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace: the world is flat
A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
Life is a long journey; the road marked out by the steps of previous travelers has no end in sight. The road doesn’t have to be infinite after all. Take the hidden paths.
Foundations
Beginnings are special. They are qualitatively different from all that comes afterward. Bad decisions made early on are very hard to correct after they are made. It may take a crisis on the order of bankrupcy before anybody will even try to correct them. As a founder, your job is to get the first things right, because you cannot build a great company on a flawed foundation.
A general rule, everyone you involve with your company should be involved full-time. Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example. However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they”ll be biased to claim value in the near term, not to help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. (…) Ken Kesey was right: you’re either on the bus or off the bus.
Seeing Green
Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer.
- 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 Founder’s Paradox
Apple’s value crucially depended on the singular vision of a particular person. This hints at the strange way in which the companies that create new technology often resemble feudal monarchies rather than organizations that are supposedly more “modern”. 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.
The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyone mere incrementalism.
The lesson for founders is that individual prominence and adulation can never be enjoyed except on the condition that it may be exchanged for individual notoriety and demonization at any moment – so be careful.
Above all, don’t overestimate your own power as an individual. 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 this company.