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Zero to One: Notes on Startups, or How to Build the Future, by Peter Thiel and Blake Masters
ONE of the authors of this book, Peter Thiel, started the worldwide online payment system PayPal, together with Max Levchin, Luke Nosek, Ken Howery and later Elon Musk.
Thiel, a formidable intelligence, has pulled together an insider’s insights into building a startup that will add significantly to the business environment. While his focus is technology and “building the future”, his thoughts are relevant to any startup, in any field.
The Dot Com crash of 2000 led many to reconsider their thinking about creating new businesses. The euphoria of the Dot Com era was followed by huge losses and a sobering of the irrational enthusiasm. However, the lessons many learned from this fall were the wrong ones, says Thiel, and they could easily mislead future entrepreneurs.
These “lessons” included the warning that anyone who wants to change the world should be more humble; the future is unknowable so do not make plans; build on what others have already achieved; and so on.
The opposite of this timidity is probably more correct, Thiel believes. It is better in every way to risk boldness than to make only slight, trivial changes to what has already proven to be successful. While the future cannot be known with certainty, it is clearly better to plan than to have no plan.
During the Dot Com bubble there was an unbridled belief in the value of products, with little or no significant thought given to the sale and distribution of these products. “Sales matters just as much as product”, we learned the hard way.
When hiring new staff, Thiel explains, he asks candidates what contrarian idea they hold that no one else seems to believe. That contrarian idea is also applicable to companies: “What valuable company is nobody building?” This is a powerful starting point for any startup.
To this value-adding benefit to people, the accompanying question should be added: “How much value can I keep from this company?” Thiel compares US airline companies to Google to illustrate this point. Google’s revenues in 2012 were one-third those of the airlines at $50bn, but it made 21% of those revenues as profits compared to the airlines’ 0.002%.
Monopolies have a bad reputation. While they dominate, they draw excessive profits for shareholders (very good) but hurt consumers, which is why they are always under attack by regulators. Thiel favours monopolies, not of the kind protected by legislation, rather those that achieve this status because they are so good at what they do.
'Good' monopolies
However, those who accept Thiel’s view of “good” monopolies often delude themselves with the “We’re in a league of our own” deception. Too often startups are in a league of their own, but the league is so small that dominating it is not financially viable.
If you are not significantly different to your competitors, you will always struggle to survive. The only way to avoid this daily struggle, Thiel suggests, is to produce the profits that a monopoly commands. This is no easy matter because in a dynamic business environment, it is always possible for your competitors to invent new and better offerings.
“Creative monopolists give customers more choices by adding entirely new categories of abundance to the world,” Thiel explains.
Creative monopolies are not only good for society, it is they who make the future so much better than the past.
There is a set of characteristics that is shared by all creative monopolies. The proprietary technologies these companies hold must be very difficult to replicate and provide a substantive advantage – they must be “at least 10 times better”. Google’s algorithms produce results 10 times more efficiently than any other search engine. Amazon has in excess of 10 times as many books as any other bookstore.
A further characteristic of creative monopolies is their network effect. This effect makes the product more useful as more people use it. What is paradoxical is that these businesses must be valuable to the few first users in order for the business to survive. Recall that Facebook started with Harvard students to whom it offered value.
A software startup has the additional advantage of dramatic economies of scale because the marginal cost of expansion is close to zero.
Branding has always been and remains an important characteristic of any creative monopoly. However, as we have seen clearly from the outrageously successful Apple products, the branding has to be substantive, not an add-on. Their products are fundamentally better.
Thiel’s book on building successful startups holds far more valuable insights than I could possibly include in a column. Nissim Taleb (author of The Black Swan) put it succinctly: "When a risk-taker writes a book, read it. In the case of Peter Thiel, read it twice. Or, to be safe, three times. This is a classic."
Readability: Light ---+- Serious
Insights: High +---- Low
Practical : High --+-- Low
* Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.
