Book Summary 2: Zero to One
As you may know, this year I’m reading/summarizing one startup book every two weeks on this blog. The second book I read is “Zero to One’ by Peter Thiel, the famous cofounder of Paypal and a renowned Silicon Valley investor. (His most famous investment was in Facebook.)
Here I’m going to summarize elements of the book as well as mix my own thoughts in this summary. I’ve only summarized some of the most profound ideas, leaving out ideas that are relatively common (such as ideas on stock division among employees, vested interests, ideas for venture capitalists, and on company culture.)
What does the book’s name mean?
The first few lines of the book talk about how every pivotal moment in business happens only once. The next Bill Gates will not make a computer operating system, the next Mark Zuckerberg won’t make a social networking website. If we just copy from them, we’re not really learning from them.
It is easier to copy than make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something truly new, we go from 0 to 1. The act of creation is singular, and the result is something fresh and strange.
The book is about how to build companies that create new things. This, to me, was even more striking as an Indian due to the prevalence of ‘me-too’ startups all around. Owing to my work as a mentor I get to interact with 100s of startups every year. Almost none of them go from zero to one. (Although they do try to define it that way – “My idea is completely new! I’m going to start a startup for grocery delivery… It has never been done before in India, and it will be a sure-shot success, because we will deliver the groceries on bicycles and not on scooters like Grofers does.” – True story of a conversation with a founder.)
If you have a typewriter, and you make 100, you’ve made horizontal progress. But if you have a typewriter and you build a word processor, you’ve made vertical progress.
The horizontal progress is globalization – taking things that work at one place and copying them everywhere else. The vertical progress is technology – creating something wholly new.
China (and India of today) is a great example of globalization- the copy-pasting of everything that worked in the ‘developed’ world. However, the author argues, that technology will play a bigger role than globalization going ahead. Globalization without new technology isn’t sustainable – if all the population of India and China start living by the standards of the United States, the result will be environmentally catastrophic.
There was enormous progress in technology from the advent of the steam engine in the 18th century to the first man-mission to moon in the 1960s. The generation of that time expected this progress to continue. (Look at the movie 2001: A Space Odyssey and various other books to get an idea of where the people of the 1960s expected technology to reach by our times.)
Since then, only computers and communications have improved dramatically. That doesn’t mean our parents were wrong to imagine a better future – they were only wrong to expect it as something automatic. Today our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th.
What is a Startup?
New technology tends to emerge from new ventures- startups. Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.
The Contrarian Question
The author goes on to talk about the question, “What important truth do very few people agree with you on?”
Although the question sounds straightforward, it has major implications. Most commonly, he says, the answers he receives include “Our education system is broken”, “There is no God” etc. These are bad answers – the first statement might be true but many people agree with that. The second statement just takes one side in a very old debate.
The question is significant because we know that the future will be different, and that difference is somewhere rooted in our present. If you have no answers to that question, you’re not going to find it easy to build the future.
However the question is difficult to answer – it may be easier to start with the preliminary: “What does everybody agree on?” If you find a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
Conventional beliefs only ever come to appear arbitrary and wrong in retrospect; whenever one collapses, we call the old belief a “bubble”. But the distortions caused by bubbles don’t disappear when they pop. The internet craze of the ’90s was the biggest bubble since the crash of 1929, and the lessons learned afterward define and distort almost all thinking about technology today. The first step to thinking clearly is to question what we think we know about the past.
After the internet bubble, where companies made ‘big plans’ for an indefinite future, everyone learned to treat the future as fundamentally indefinite, and anyone measuring plans in years or even quarters was an extremist. Globalization replaced technology as the hope for the future – leading to another bubble, the real-estate bubble that bust in 2008.
The entrepreneurs seemed to have learned four lessons from the dot-com crash:
- Make incremental advances (Grand visions inflate the bubble; small incremental steps are the only safe path forward.)
- Stay lean and flexible (You should not know what your business will do; instead you should try things out, “iterate” and treat entrepreneurship as an experiment. Ironically, this was the topic of our previous book summary – the Lean Startup.)
- Improve on the competition (Don’t try to create a market prematurely.)
- Focus on product, not sales (If your product requires advertising or salespeople to sell it, it’s not good enough. )
These lessons have become dogmas in today’s startup world, yet the opposite principles could be more correct:
- It is better to risk boldness than triviality.
- A bad plan is better than no plan.
- Competitive markets destroy profits.
- Sales matters just as much as product.
(How does this sync with the lessons from The Lean Startup? The author here suggests having a plan is better than no plan – The Lean Startup says we should experiment to figure out our market. However, these are not mutually exclusive ideas. The plan in case of The Lean Startup methodology is to first acknowledge our ignorance of the market, and then create a plan – through an MVP, for example – to learn about it. Once we have understood the market, whether a new one or an old one, we go full-throttle into it.)
Most people act like there are no secrets to be found in the world anymore. The common belief is: What’s left to do is either easy or impossible, 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. We assume that most discoverable things have been discovered. Social trends like risk aversion, complacency, flatness (the world is ‘flat’ – one homogenous highly competitive marketplace. So an entrepreneur could ask herself, “if it were possible to discover something new, wouldn’t someone from this global talent pool of smarter and more creative people have found it already?”), and incrementalism (we are taught that the way to do things is to proceed one very small step at a time, day by day; this approach is not conducive to discovering secrets.)
Yet it is ‘secrets’ that answer contrarian questions which lead to great business ideas.
Few people imagined that it was possible to build a billion-dollar business by simply connecting people who want to go places with people willing to drive them there. We already had state-licensed taxicabs and private limousines; only by believing in and looking for secrets could you see beyond the convention to an opportunity hidden in plain sight. The same reason that so many internet companies, including Facebook, are often underestimated— their very simplicity—is itself an argument for secrets. If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
Monopoly is better than perfect competition
The author has a contrarian view on monopoly. Traditional economists treat monopoly businesses as evil. The opposite of monopoly, ‘perfect competition’ is considered ideal. The author here suggests that monopoly businesses are the only truly 0 to 1 businesses.
Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down, and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.
On the other hand, since monopolies have no competition, they can produce at quantity and price combinations that maximize its profits. Google is a great example of such a business, which went from 0 to 1, and has enjoyed a monopoly position in the search engine market.
Capitalism and competition are opposites – capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.
The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.
Both monopoly and commodity (perfect competition) businesses lie about themselves. A monopoly business will try to distance itself from the monopoly tag, and try to define its market bigger than it actually is. For example, Google may be a monopoly in the search-engine advertising business, but it will try to define it’s industry as the ‘advertising’ business, in which it is a relatively smaller player.
On the other hand, a commodity business tries to narrow down its market to sound unique. An example is ‘the exclusive south indian restaurant in Lower Parel which offers a dosa-idli combo.” The geography (Lower Parel), the specific things offered etc are all narrowly defined to sound more exclusive; even though a restaurant in Mumbai is under close-to-perfect competition.
Monopoly businesses are perceived as evil. The reality is – in business, money is either an important thing or it is everything. The competitive ecosystem pushes people toward ruthlessness.
Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.
Also monopolies need to keep innovating as well. In a static world, they would be just ‘rent collectors’ and be truly evil. But the world is dynamic – it’s possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Even the government acknowledge this – they grant patents to new inventions!
The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation. For example, the rise of mobile computing has made Apple and Google at the forefront, reducing Microsoft’s decades-long operating system dominance. And Microsoft had trumped the IBM’s hardware monopoly of the 1960s and 70s.
War and Peace in Business
Managers frequently use war metaphors in business – we use metaphors like cut-throat competition, headhunters, sales force, captive market, and make a killing. But in reality it is competition, not business, that is like war.
Inside a firm, people become obsessed with their competitors for career advancement. Then the firms themselves become obsessed with their competitors in their marketplace. Amid all the drama, people lose sight of what really matters and focus on their rivals instead.
Winning is better than losing, but everybody loses if the war is not worth fighting. Sometimes you do have to fight, and if that’s true – you should fight and win. But if you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most. You will then use this clear head to build a monopoly business.
Four common traits of a monopoly business
- Proprietary technology – example, Google’s search engine algorithm, patents held by Apple, etc. As a rule of thumb this technology should be at least 10x better than its alternative.
- Network effects- something that becomes more useful as more people use it. For example, if I create a better social networking site than Facebook, you may still not move to it because your friends are on Facebook; and they won’t move to it because you and their other friends are on Facebook. Similarly, if I create a better OS than iOS the developers of the AppStore wont start making apps for my OS, as the customers are on iOS. And the customers won’t move to my OS, as the app developers are working on apps for iOS.
- Economies of Scale- The fixed costs of creating a product can be spread out over ever greater quantities of scale, thus making per unit cost lower; making it harder for a new entrant to match. This is why Apple has a huge advantage in it’s per-sale margin of an iPhone.
- Branding- A strong brand is a powerful way to claim a monopoly. Apple is the strongest tech brand: its products, aesthetics, Steve Jobs’s charisma, its ads, the price positioning as a premium product, etc all add to this brand. However, only polishing a company’s surface through these things doesn’t work without an underlying product that is truly valuable.
How to Build a Monopoly
- Start small and monopolize: Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. It’s easier to dominate a small market than a large one. Facebook started only for students of Harvard University, and didn’t expand until it was a monopoly there.
- Scale up: Once you dominate a niche market, then you should gradually expand into related and slightly broader markets. Amazon started as a bookstore, and then expanded to keep CDs, videos and software; gradually becoming the everything store.
- Don’t disrupt: While the jargon is to ‘disrupt’ existing industries, if your company can be summed up by its opposition to already existing firms, it can’t be completely new and so is probably not going to become a monopoly. Don’t disrupt, avoid competition as much as possible.
The Last will be First
The “first mover advantage” is the advantage of the first company that enters a market. However, it is much better to be the last mover- that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. Google wasn’t the first search engine, but it certainly has been the last-mover!
Can you control your future?
You can either expect the future to have a definite form or you can treat it as hazily uncertain. If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it
Indefinite attitudes to the future cause problems such as ambiguous careers and a focus on various “extracurricular activities” in education, and becoming an omnicompetent, an “all-rounder”. By the time a student gets to college, he’s spent a decade curating a bewilderingly diverse résumé to prepare for a completely unknowable future. Come what may, he’s ready—for nothing in particular.
A definite view, by contrast, favors firm convictions. Instead of pursuing many-sided mediocrity and calling it “well-roundedness,” a definite person determines the one best thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one.
You can also expect the future to be either better or worse than the present. Optimists welcome the future; pessimists fear it.
An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it.
A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.
To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely.
To a definite optimist, the future will be better than the present if he plans and works to make it better.
Most of the startup world today is indefinitely optimistic. Yet a company is the strangest place of all for an indefinite optimist: why should you expect your own business to succeed without a plan to make it happen? Darwinism – the idea that life tends to progress without anybody intending it
If you build it, will they come?
Many startup founders are skeptical of advertising, marketing, and sales because they seem superficial and irrational. Building great products is all they care about. But advertising matters because it works. Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan. Sometimes selling has to be done to non-customers too, such as to early employees, or to investors to whom you lure with the idea of how ‘hot’ your company’s equity is.
Seven questions 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?
A Final Note to Entrepreneurs
The author concludes his book with the four possibilities of the future- recurrent collapse (the world keeps going through cycles or prosperity and ruin), plateau (the world reaches a peak of development and stays there), extinction (though nuclear war, epidemics, artificial intelligence going wrong, etc. the world comes to an end), or take-off (an accelerating takeoff toward a much better future.)
The author argues that the fourth scenario is the only likely one that doesn’t lead up to a total collapse. But no matter what, the future won’t happen on its own.
Our task today is to find singular ways to create the new things that will make the future not just different, but better—to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.
Peter Thiel seems to be have incorporated a lot of ideas of Rene Gerard’s Mimetic Theory. He has frequently spoken about Rene’s influence on his thinking. If you’d like to learn the basics of this theory to explain various phenomenon among humans, you may like to watch this video.