Zero To One

Peter Thiel book.

=== Excerpts === *

Preface

it’s easier to copy a model than to 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 new, we go from 0 to 1

In a world of gigantic administrative bureaucracies both public and private, searching for a new path might seem like hoping for a miracle. Actually, if American business is going to succeed, we are going to need hundreds, or even thousands, of miracles

Zero to One is about how to build companies that create new things

1

THE CHALLENGE OF THE FUTURE

I like to ask this question: “What important truth do very few people agree with you on?”

What does this contrarian question have to do with the future?

Most answers to the contrarian question are different ways of seeing the present; good answers are as close as we can come to looking into the future

When we think about the future, we hope for a future of progress. That progress can take one of two forms

Horizontal or extensive progress means copying things that work—going from 1 to n

Vertical or intensive progress means doing new things—going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done

At the macro level, the single word for horizontal progress is globalization—taking things that work somewhere and making them work everywhere

The single word for vertical, 0 to 1 progress is technology

1815 to 1914 was a period of both rapid technological development and rapid globalization. Between the First World War and Kissinger’s trip to reopen relations with China in 1971, there was rapid technological development but not much globalization. Since 1971, we have seen rapid globalization along with limited technological development, mostly confined to IT

My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more

Our ancestors lived in static, zero-sum societies

the modern world suddenly experienced relentless technological progress from the advent of the steam engine in the 1760s all the way up to about 1970

New technology tends to come from new ventures—startups. From the Founding Fathers in politics to the Royal Society in science to Fairchild Semiconductor’s “traitorous eight” in business, small groups of people bound together by a sense of mission have changed the world for the better

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

2

PARTY LIKE IT’S 1999

what does everybody agree on?

If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth

when I arrived at Stanford in 1985, economics, not computer science, was the most popular major

When I was running PayPal in late 1999, I was scared out of my wits—not because I didn’t believe in our company, but because it seemed like everyone else in the Valley was ready to believe anything at all

PayPal had a clear path to profitability by taking a small fee on customers’ transactions. 　　We knew we’d need more funding to reach that goal. We also knew that the boom was going to end. Since we didn’t expect investors’ faith in our mission to survive the coming crash, we moved fast to raise funds while we could

Just as we closed the deal, the bubble popped

Globalization replaced technology as the hope for the future. Since the ’90s migration “from bricks to clicks” didn’t work as hoped, investors went back to bricks (housing) and BRICs (globalization). The result was another bubble, this time in real estate

The entrepreneurs who stuck with Silicon Valley learned four big lessons

1. Make incremental advances

2. Stay lean and flexible

3. Improve on the competition

4. Focus on product, not sales

These lessons have become dogma in the startup world

And yet the opposite principles are probably more correct:

1. It is better to risk boldness than triviality.

2. A bad plan is better than no plan.

3. Competitive markets destroy profits.

4. Sales matters just as much as product.

3

ALL HAPPY COMPANIES ARE DIFFERENT

THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building?

Creating value is not enough—you also need to capture some of the value you create

Google makes so much money that it’s now worth three times more than every U.S. airline combined. 　　The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly.

Under perfect competition, in the long run no company makes an economic profit

The opposite of perfect competition is monopoly

To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state, or innovates its way to the top

In this book, we’re not interested in illegal bullies or government favorites: by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute

How much of the world is actually monopolistic?

To the outside observer, all businesses can seem reasonably alike, so it’s easy to perceive only small differences between them

The confusion comes from a universal bias for describing market conditions in self-serving ways

Monopolists lie to protect themselves

Think about how Google talks about its business. It certainly doesn’t claim to be a monopoly

monopoly in what?

it owns about 68% of the search market

But suppose we say that Google is primarily an advertising company. That changes things

95% of Google’s revenue comes from search advertising

Non-monopolists tell the opposite lie: “we’re in a league of our own.”

If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive

Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets

Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets

The problem with a competitive business goes beyond lack of profits

“If I lose a star, I will commit suicide.”

A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world

So, a monopoly is good for everyone on the inside, but what about everyone on the outside?

profits come out of customers’ wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes

Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better

The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation

the history of progress is a history of better monopoly businesses replacing incumbents. 　　Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate

Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business

4

THE IDEOLOGY OF COMPETITION

we trap ourselves within it—even though the more we compete, the less we gain

aren’t you glad you didn’t get that clerkship?

WAR AND PEACE

War metaphors invade our everyday business language

But really it’s competition, not business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive

Inside a firm, people become obsessed with their competitors for career advancement

As a startup, each clan had been content to leave the other alone and prosper independently. But as they grew, they began to focus on each other

Just as war cost the Montagues and Capulets their children, it cost Microsoft and Google their dominance: Apple came along and overtook them all

The hazards of imitative competition may partially explain why individuals with an Asperger’s-like social ineptitude seem to be at an advantage in Silicon Valley today

5

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 newspapers’ monopoly days are over

Most of the value of low-growth businesses is in the near term

Technology companies follow the opposite trajectory

many entrepreneurs focus only on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t

For example, rapid short-term growth at both Zynga and Groupon distracted managers and investors from long-term challenges

CHARACTERISTICS OF MONOPOLY

Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding

1. Proprietary Technology

As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension

2. Network Effects

Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small

Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard

3. Economies of Scale

fixed costs

Service businesses especially are difficult to make monopolies

4. Branding

Beginning with brand rather than substance is dangerous

BUILDING A MONOPOLY

to get them to work, you need to choose your market carefully and expand deliberately

Start Small and Monopolize

Small doesn’t mean nonexistent. We made this mistake early on at PayPal

Nobody needed our product, so we had no customers. 　　With that lesson learned, we set our sights on eBay auctions

Scaling Up

gradually expand into related and slightly broader markets

Amazon shows how it can be done

eBay also started by dominating small niche markets

Once it monopolized the Beanie Baby trade, eBay didn’t jump straight to listing sports cars or industrial surplus: it continued to cater to small-time hobbyists

Don’t Disrupt

startups’ obsession with disruption means they see themselves through older firms’ eyes

if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create

Indeed, if your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly

THE LAST WILL BE FIRST

You’ve probably heard about “first mover advantage

It’s much better to be the last mover

6

YOU ARE NOT A LOTTERY TICKET

THE MOST CONTENTIOUS question in business is whether success comes from luck or skill

When we debate historical questions like these, luck is in the past tense. Far more important are questions about the future: is it a matter of chance or design?

CAN YOU CONTROL YOUR FUTURE?

You can expect the future to take a definite form or you can treat it as hazily uncertain

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

No one gets into Stanford by excelling at just one thing

You can also expect the future to be either better or worse than the present. Optimists welcome the future; pessimists fear it. Combining these possibilities yields four views

Indefinite Pessimism

This describes Europe since the early 1970s

Definite Pessimism

China is probably the most definitely pessimistic place in the world today

Definite Optimism

From the 17th century through the 1950s and ’60s, definite optimists led the Western world

In the 1950s, people welcomed big plans and asked whether they would work. Today a grand plan coming from a schoolteacher would be dismissed as crankery, and a long-range vision coming from anyone more powerful would be derided as hubris

Indefinite Optimism

After a brief pessimistic phase in the 1970s, indefinite optimism has dominated American thinking ever since 1982, when a long bull market began and finance eclipsed engineering as the way to approach the future

To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans

The strange history of the Baby Boom produced a generation of indefinite optimists so used to effortless progress that they feel entitled to it. Whether you were born in 1945 or 1950 or 1955, things got better every year for the first 18 years of your life, and it had nothing to do with you

Then, when technological progress stalled in the 1970s, increasing income inequality came to the rescue of the most elite Boomers. Every year of adulthood continued to get automatically better and better for the rich and successful. The rest of their generation was left behind, but the wealthy Boomers who shape public opinion today see little reason to question their naïve optimism

OUR INDEFINITELY OPTIMISTIC WORLD

Indefinite Finance

At no point does anyone in the chain know what to do with money in the real economy

Indefinite Politics

Indefinite Philosophy

The philosophy of the ancient world was pessimistic

Modern philosophers have been mostly optimistic

In the late 20th century, indefinite philosophies came to the fore. The two dominant political thinkers, John Rawls and Robert Nozick

In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future

Indefinite Life

Our ancestors sought to understand and extend the human lifespan

today it’s possible to wonder whether the genuine difficulty of biology has become an excuse for biotech startups’ indefinite approach to business in general

IS INDEFINITE OPTIMISM EVEN POSSIBLE?

how can the future get better if no one plans for it?

progress without planning is what we call “evolution

Even in engineering-driven Silicon Valley, the buzzwords of the moment call for building a “lean startup” that can “adapt” and “evolve” to an ever-changing environment

iteration without a bold plan won’t take you from 0 to 1

THE RETURN OF DESIGN

the most important lesson to learn from Jobs has nothing to do with aesthetics. The greatest thing Jobs designed was his business

YOU ARE NOT A LOTTERY TICKET

A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.

7

FOLLOW THE MONEY *