I recommend reading Zero to One
. The concepts introduced throughout the book are thought provoking and often counterintuitive. You’ll likely find yourself disagreeing with some points and thinking deeply about his ideas. It’s clear that Peter Thiel has thought a lot about innovation and creating a successful company.
Below I’ve outlined some key ideas from the book that I found interesting.
Innovation – Moving the World Forward
The title of the book emphasizes innovations that Peter Thiel considers the most important for improving the future and by extension creating successful startups. It is one of two types of innovation:
- Horizontal (1 to n) – Innovations that build off existing ideas
- Vertical (0 to 1) – Innovations based on an entirely new idea
Horizontal innovation is almost by definition easier and is certainly more common. In order to drastically change the future we need to create something entirely new, we need to go from zero to one. Making a product 10x better than the competition, like Google did with search, is considered vertical innovation along with creating an entirely new product.
What valuable company is not being built?
That’s a tough question! But it’s the question that should be driving your startup. Thiel suggests that a company creates value through vertical innovation – going from zero to one. He also mentions that creating value doesn’t always result in a valuable company. Many innovations have resulted in no real monetary value for the creators but immense value for society as a whole (the internet for example). To become a valuable company you need to extract some of the value that is being created. Peter Thiel believes this is achieved by creating a company with monopoly power.
The Value of a Monopoly
There are two market structures discussed in the book:
- Monopolistic Competition (i.e. Google) – Where one or a few firms control their market and therefore their price and production level.
- Perfect Competition (i.e. Airlines) – A market with many players who complete on price. This eventually results in the elimination of any economic profit.
Going from zero to one allows you to enter a market with no competition and therefore gain monopolistic power. Peter Thiel describes these companies as “creative monopolies” since they gain their monopoly status from innovation rather than government policy.
Having this power allows you to generate large profits. Profits that allow you to worry about things besides money: treating your employees better, reaching out to the community and innovating for the future. Firms in perfect competition can only worry about one thing, cash. If they don’t, competitors will put them out of business.
The book goes on to discuss how competition should be viewed as a negative force on business rather than positive. Competition, almost by definition, means that we are trying to improve on what other people are already doing. For example, Google and Microsoft spent years competing in areas such as search, office software, internet browsers and operating systems. During this time Apple created the iPhone and went from being worth less than either company to being worth more than both combined.
So don’t focus on competing. Focus on creating significant improvements to current products (10x) or completely new products. This will put you out of the competitions reach completely.
Growth and Sustainability – The Value Drivers
Note that the majority of a startup’s value is driven by their growth. This explains why companies with little or no profit today (i.e. Twitter, Linkedin) can be more valuable than profitable companies. Their value is in their exponential growth and the resulting cash flows available down the line.
Since a startup’s value is often to be realized in the future you need to make sure that the company can hold onto it’s market position. If it loses it’s monopoly power then cash flows will stop growing as competition increases. This is often overlooked while the focus is entirely on short term growth. Short term growth is useless if the market position can’t be sustained.
It’s difficult to determine how sustainable your market position is but you should consider the following four factors:
- Technology – Creating new technology that is difficult to replicate is one of the best ways to create and hold onto a monopoly market position (i.e. Google’s algorithms)
- Network effect – The network effect means that your product becomes more valuable as more people use it (i.e. Facebook and Twitter)
- Brand – Great branding will help hold onto customers and make it difficult for other companies to steal market share (i.e. Apple)
- Scale – Being able to grow revenue faster than you grow costs will help to generate large profits in the future
Starting Out – Starting Small
Start small. It’s much easier to gain monopoly power in a small market then it is in a large market with lots of competitors. Focusing on a small market will make it easier to sell your product and cater to user needs. Amazon started off only selling books before slowly introducing other products. Paypal only marketed to E-bay power sellers before growing into other markets.
Once you’re dominating a small market you can begin to expand into the broader market with a product that has been refined by user input. When you start out it’s alright to do things that don’t scale. Once you have a foothold in a market you’ll gain leeway to branch out to new customers and scale.
Definite vs. Indefinite – Change the Way You Think
Thiel goes on to discuss the mindset that will help entrepreneurs create a successful company. It involves the distinction between the definite mindset of the 50’s and 60’s and the indefinite mindset prevalent today.
A definite mindset leads people to believe the future can be improved through planning and hard work. The United States in the postwar period displayed this mindset clearly. Technological advancement was extremely fast and people were excited about the future. When people were faced with challenges they worked hard to come up with great solutions. A perfect example is the NASA space program. Within 12 years of defining their goal of landing a man on the moon Neil Armstrong took his famous step. That doesn’t happen by accident.
On the other hand an indefinite mindset leads to the belief that the future will get better without knowing how. This is exemplified by the flight of bright minds from technological jobs to financial jobs on Wall Street. These jobs provide money which creates a safety net when you’re not sure what the future will bring. The money can be invested in a diversified portfolio – since people have a bad record of choosing which companies will outperform others. These action are all indefinite because there is no action taken to address the challenges of the future. People are just along for the ride.
Peter Thiel suggests that as an entrepreneur you should have a definite mindset. He emphasizes the important of having a plan and goal to work towards. Creating a minimum viable product and hearing back from customers is important but their comments shouldn’t be the deciding factor of the companies direction. The founders should have a strong idea of where the company is going and how they will get there. Otherwise, you’re setting yourself up for failure.
Do yourself a favor and pick up the book. You’ll learn a lot more than you did here and get a better understanding of the topics discussed. Happy reading!