Zero to One by Peter Thiel
Review & Rating - 8/10:
A short wonderful read to think about applying power-law thinking to not only startups but career, investing, and life in general.
The few companies that will redefine (or create anew) industries will follow the power law. There will be a small number of them. Each leader will have to be a monopoly (unregulated). A handful of industries will matter.
As much as the book seems to be designed to help entrepreneurs ask the critical questions necessary to build visionary companies….I found them just as powerful when thinking about analyzing businesses as an investor. It might be because Thiel is both an investor and entrepreneur but I enjoyed the continued application of models like the power law, the obvious secret/truths, and zero competition frameworks for investing and building a company.
Much of the book reads as if Thiel is giving a lecture to you directly and there are moments where his assertions seem too generalized. This required me to stop and try to put it into context that Thiel’s focus is to talk about companies that will change the future. Not a small business that churns cash flow. With that single focus, such a generalized framework might actually be a necessity as sometimes one needs to cut out all options (including explanations) and have that ‘cult like’ dedication to building the company. So though I initially disagreed with some of his premises, I think considering Thiel’s context would be valuable to keep in mind.
The rules and frameworks are simple. I think that’s the key thing to stress. He asks simple questions and makes simple assertions and it is up to the reader to sit and think deeply on them. It’s a book I can see myself coming down to throughout the course of my life. Whether it be for investing or career purposes.
Book Notes:
The key question is: “What important truth do very few people agree with you on?” Implicit in this is the need to do all the work required to get a grasp of what ‘truth’ is.
Two truths of the future are that 1) it’ll be different from the present & 2) it’ll be rooted in the present state of the world. In-line with what Dan Gilbert says to human imagination. It’s rooted in the present. Hence, it’s those who see something different in the present than others…that’s where the value of insight lies.
Being contrarian doesn’t mean opposing the crowd. It means thinking for yourself and that may result in opposing the crowd but that is never the primary intent.
Question what we think of the past to start thinking clearly. This puts into perspective all the stock market back tests people use to talk about regression. Anyone can make the data tell the story they want to show.
What is popular now?
Thiel believes Silicon Valley focuses on:
Make incremental advances
Stay lean and flexible
Improve on the competition
Focus on product, not sales
Instead, he thinks the opposite has greater merit:
Better to risk boldness than triviality
Bad plan is better than no plan
Competitive markets destroy profits
Sales matter just as much as profits
The best companies are probably those that change consumer behaviour without them realizing it.
Best companies are monopolies. Monopolies don’t advertise they are monopolies.
Competition is never good for the business. Capitalism and competition are antonyms. Hence, make your own category of one. How? By going super niche. Win the niche, then grow.
Now, some niches won’t grow and the super niche that is formed from the intersection of various industries might stay small but stay profitable. Thiel doesn’t care for those companies.
What companies are the unregulated monopolies of our day?
All failed companies are common in their failure to escape competition.
Play stupid games, win stupid prizes. Thus is the case for competing in crowded games….especially those instigated by social games.
When one works 100s of hours one needs to ask, what they are competing for and who they are competing against. Because doing that for a long time is unsustainable, suboptimal, and stupid. So it should be an indicator to stop and think. Something isn’t working.
A company must be able to grow AND endure for 10-15 years to see any fruit of its label. Most cannot endure. It’s a qualitative process to think about the staying power of the business. Will ie be around in 10 years?
Thiel’s four characteristics of monopolies: branding, economies of scale, network effects, prop. tech. The prop. tech angel Thiel takes seems akin to a new business model or customer experience as well. As he mentions AMZN’s bookstore as an example….they didn’t event books or the ability to buy books online….but a different customer experience. This would be a requirement indeed.
Of the four characteristics, I don’t think all are equal…and network effects seem to be the Pareto of them all. Ideally, the business dominates a small market to build out network effects there and as it expands to other markets, it gets branding (trust) and economics of scale….with CAC really being 0.
Brand probably comes last as trust is the hardest thing to earn but it lasts a long time once you do. But trust is earned after substance.
Something to look for in founder’s shareholder letters: Do they make reference to how they plan to (or have) dominate a niche and if they’ll scale into adjacent markets?
Look for companies that create win-win relationships with incumbents. Disruptive isn’t necessarily a good thing. If they make everyone better off, it’ll have greater staying power than the other way round.
“Shallow men believe in luck. Strong men believe in cause and effect.” - Ralph Waldo Emerson
Indefinite optimist => high achieving Ivy-league optionality-chasers. This is the path of those who bet on lottery tickets and randomly doing things without a vision and hoping for luck to randomly strike. They just try to gather more options but they don’t even know why or what options really matter.
A definite optimist has a vision, a plan, a design and executes towards that. That’s what a visionary entrepreneur is. Doesn’t mean that luck isn’t a factor but one does not build something that matters purely on luck and without plans and vision.
In investing, diversification should be the result of the process of looking for the best ideas. One shouldn’t start with the intent of diversification.
Given the power law of investment returns with a few companies providing outlandish returns, the intent for each idea should be for it to return the entirety of the fund. That’s how Thiel believes VCs should approach it but it’s a similar mindset for public investing. If one were to make a 10% investment, there should probably be a view that the investment could 10x.
It seems obvious, but worth iterating the obvious and important things: Every investment in a portfolio should have the potential for outsized returns. If not, why is it in there?
The power-law thinking should apply to one’s career. One should be doing work they believe will be valuable a decade from now. A career, field, skill worth compounding.
Life isn’t a portfolio. Focus. Focus on what you want to bet on for the next decade. It could be as simple as looking at industry that’ll matter more than most, where you live (i.e. cities), where you work…all are subject to the power law. This is how powerful environments are. The tide that lifts all boats.
Look for secrets. Examine things people are not allowed to talk about. Things that are taboo or forbidden. Look at important areas that are not popular or prestigious. An astrology professor at Harvard might be prestigious…but it might not be has important as someone in nutrition (which apparently you can’t major in at Harvard).
Thiel’s Law: a startup messed up at its foundation cannot be fixed.
Startup foundation begins with the founding team. Its prehistory and construct matter. It all starts with people.
Small boards are effective boards.
The CEO sets the tone with his pay. Low salaries say more than high ones.
“A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.”
The PayPal Mafia created: Youtube, SpaceX, Tesla, Linkedin, Palantir, Yelp, Yammer
Thiel puts culture on a spectrum of consultants at one end to cults at the other. Consulting firms lack a mission, people come in and out as they will float between the highest bidders of their salary, and it’s a mercenary organization with everyone out for the self. Cults have a single unquestioning dedication to the mission and this might turn negative but this extreme dedication can do wonders.
Look for companies with cult-like, mafia-like cultures. If people criticize it for being cultish, that’s better.
Remember that distribution has a power-law of its own.
The 7 questions are businesses should answer (also worth investors using for analyzing companies):
Can you create a breakthrough technology instead of incremental improvements?
Is now the right time to start your particular business?
Are you starting with a big share of a small market?
Do you have the right team?
Do you have a way to not just create but deliver your product?
Will your market position be defensible 10 and 20 years into the future?
Have you identified a unique opportunity that others don’t see?
When Jobs rejoined Apple in 1997….he went on to introduce the iPod in 2001, iPhone in 2007, and iPad in 2010 before resigning in 2011. After he had slashed most of Apple’s products in the late 90s.
Sometimes….more possibly often….great companies will look like monarchies with one leader ruthlessly steering towards a vision and not a happy go lucky place.