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Notes from Zero to One

Just finished reading a book, Zero to One, written by Peter Thiel with Blake Masters.

“Doing what we already know how to do takes the world from 1 to n….But every time we create something new, we go from 0 to 1”.

Here’s what I learned.

4 Lessons from the Dot Com Crash

  1. “Make incremental advances”
  2. “Stay lean and flexible”
  3. “Improve on the competition”
  4. “Focus on product, not sales”

Just kidding. In fact, the opposites are more true.

  1. “better to risk boldness than triviality”
  2. “A bad plan is better than no plan”
  3. A successful startup destroys profits in other markets
  4. Sales is just as important as product development

Competition and Monopolies

Competition reduces profits. A perfect competition is where all competitors make close to no profits. On the other hand, a monopoly dominates their own market and rakes in all the profits from the said market.

Both the non-monopolies and monopolies lie about themselves. The non-monopolies want to seem like a monopoly to potential investors, so they exaggerate their presence in the market by “defining their market as the intersection of various smaller markets”. The monopolies do the opposite; they define their markets “as the union of several large markets” to make themselves seem smaller in the eyes and ears of anti-monopoly legislation and congressional hearings.

The non-monopolies emphasize efficiency to bring up their earnings. These companies can’t afford to invest in futures. For them, the bottom line every quarter and/or year is all that matters. But the monopolies can afford to explore; they can afford to invest in a future.

2 Types of Monopolies

There are 2 types of monopolies. There are the monopolies that thrive on creating “artificial scarcity” and then there are monopolies that thrive on creating “greater abundance”. The latter are denoted as “creative monopolies”.

Companies like Comcast (as of this post) qualify as monopolies that thrive on “artificial scarcity”. They are the only internet service provider in several parts of the USA, they throttle people’s internet, carefully word their plans so their not lying when they throttle one’s internet, and charge relatively, asurdly high prices. They don’t bring new things to the table. They lobby to limit the choices of US citizens. This is an example of a bad monopoly; a monopoly that only hurts consumers.

Companies like Apple, Google, and Microsoft are monopolies (in some way or market at the time of this post) that thrive on creating “greater abundance”. These are companies that became monopolies by providing a new product or service. These are creative monopolies and they tend to be good for consumers.

(note that the last 2 paragraphs included examples of my own)

“Monopoly is the condition of every successful business.”

“All Rhodes Scholars had a great future in their past”

Thiel concluded a section with a roast. The purpose of the section is high performing students compete for the same positions and “standard badges of success”. As a result, most of them go on to do what’s already been done: clerkship, investment banking, management consulting, etc.. Therefore, high performing students tend to follow the same well worn path.

I think most Rhodes Scholars have a bright future ahead of them.

Why rivals aren’t worth the trouble

“Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past.”

Thiel points out that most people are focused on rivals and career advancement. No one gets very far from copying others. So long as one copies and imitates another, their progress is limited by what’s already been done over and over.

And this “may partially explain why individuals with an Asperger’s-like social ineptitude seem to be at an advantage in Silicon Valley today. If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you.”

Characteristics of a Monopoly

  1. Propietary Tech
  2. Network Effects
  3. Economies of Scale “A good startup should have the potential for great scale built into its first design”
  4. Branding (e.g. Apple)

Building a Monopoly

Monopolize a small market and then gradually expand.

Avoid “disrupting”; avoid having to compete.

Definite and Indefinite Optimism

Definite optimism is when one is sure the future will be better than the present if they have a plan of action and execute on it.

Indefinite optimism is when one is sure the future will be better than the present but one neither knows how it will be better nor has a plan of action.

Thiel argues most Americans today have indefinite optimism. Middle schoolers and high schoolers work hard to diversify their resume to look good at multiple things and “to keep options open”. Ivy Leaguers do the same and many will go on to take “a seemingly elite, process-oriented career that promises to ‘keep options open’”. Thiel goes on to argue that we can find the same indefinite optimism in finance, politics, and life.

Definite optimism is needed for a start up to be successful. Without a purposeful design/plan, how can one be sure their business will succeed?

The Power Law

A select few will radically outperform the rest combined. Venture capitalists look for this radical few. Here’s a great excerpt from the book:

….less than 1% of new businesses started each year in the U.S. receive venture funding, and total VC investment accounts for less than 0.2% of GDP. But the results of those investments disproportionately propel the entire economy. Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP. Indeed, 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.

Secrets

Look for the secrets, work hard to find those secrets, because they’re out there.

In hindsight, many secrets that have been discovered look rather, well, simple. The notion that slavery is bad was once a secret but now seems obvious. Airbnb, Facebook, and Uber are rather simple ideas (in terms of abstraction). The simplicity of secrets in hindsight suggests that there are many more secrets to be found.

Once you find a secret, you form a company; a company of people with a secret kept to themselves.

“A great company is a conspiracy to change the world”

Whom to share the secret(s) with?

Share it with a small group of people you get along with, presumably your friends. Keep the group small and everyone should be committed full-time.

Paying the team

In cash

Paying high salaries will incentivize short-term thinking. A CEO paying himself large sums of money is incentivized to keep the status quo. But a CEO paying himself a low salary will show that he’s committed, sets an implicit salary cap for other members of the start up, and incentivizes the CEO to think far, far ahead.

In equity

When people own a share of the company, they are incentivized to work to increase the value of their share. This makes equity a better incentive to hand out than cash.

However, the distribution of equity can be messy. It’s almost always bad to give everyone equal amounts. Early team members generally get more equity for taking on the early risks. Team members can have different talents and not all early team members deserve the same equity.

Equity can also be a filter. People who prefer cash over equity don’t have faith in the company.

Recruiting

Don’t outsource recruiting. Convince people to join your team by telling something specific to your company. A bunch of companies already say stuff like “You’ll work with bright individuals” or “You’re stock options will be worth a lot later”.

Hoodies in Silicon Valley

Many start ups in Silicon Valley have their own branded tees or hoodies.

“The startup uniform encapsulates a simple but essential principle: everyone at your company should be different in the same way—a tribe of like-minded people fiercely devoted to the company’s mission.”

“Do One Thing”

Thiel argues that one should clearly define specific roles for early team members. The roles are subject to change, and will change, but Thiel points out that “defining roles reduced conflict” and individuals can be held accountable for their task(s).

Sales

Find a niche market, a small, related group of people, that are in dire need of your product. There needs to be a reason for people to share the product (if applicable) and continue using your product. Expand your distribution channels after you have one nailed down.

Consider both the cost to acquire a new customer and the revenue generated from one customer when determining distribution channels.

Bonus points if you can sell your company to the media for free attention.

“Everybody sells”

“Nerds might wish that distribution could be ignored and salesmen banished to another planet. All of us want to believe that we make up our own minds, that sales doesn’t work on us. But it’s not true. Everybody has a product to sell”

Man and Machine

Thiel argues that technology will grow to complement humans in their tasks. Computers are “categorically different” from humans. Thiel argues that globalization replaces humans.

Examples provided of companies built on technology aiding humans include LinkedIn and Palantir. When determining how to build a valuable company, ask the following:

“how can computers help humans solve hard problems?”

“questions that every business must answer”

The following list is verbatim from Zero to One:

  1. The Engineering Question
  2. The Timing Question
  3. The Monopoly Question
  4. The People Question
  5. The Distribution Question
  6. The Durability Question
  7. The Secret Question
Written by Omkar Konaraddi. Published on December 20, 2017.

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