Book: Zero to One by Peter Thiel
Startups should plan long-term on a contrarian truth aiming for a monopoly, assemble a team of people obsessed with a mission, and have a clear sales plan with a targetable niche audience at the beginning.
Startups should plan long-term and aim for a monopoly
Initial costs of startups force them to innovate in new fields
- Startups requiring huge investments must innovate and be bold because we live under a power law, and everything conventional or average will fail to pay back huge investments. Therefore, startups investors and founders can’t afford to diversify, because there are not enough good opportunities.
- Competition kills profits. Stay away from undifferentiated commodity businesses.
- Also, be aware that both competition and the absence of competition don’t always mean that there is a viable market behind. Sometimes a crowd of hyped entrepreneurs is fighting hard for peanuts, and often no competition means no market.
Notes on monopolies
- There is 4 major kind of monopolistic advantages: proprietary technology, network effects, economies of scale, and branding.
- Even if monopolies succeed at the expense of the general public, they bring innovations that wouldn’t be otherwise possible.
- Monopolies try to conceal their monopoly by exaggerating the power of their competition and by painting themselves as small players in the biggest markets, like the worldwide advertising market. They also can afford to think about ethics or philanthropy. Non-monopolists do the opposite. They paint themselves as a leading player in irrelevantly smallest products categories.
Notes on bold long term planning
- Durability is key because the value of a business today is the sum of all the money it will make in the future. Yet, durability is hard to measure and requires critical thinking.
- Startup founders should have a 10, 20, 30 years vision, and shouldn’t limit themselves to short-term small increments.
- They should ask themselves: What important truth do very few people agree with you on? What valuable company is nobody building?
- According to Thiel, startup success is way less due to luck than bold long-term planning. But keep in mind that with all the planning and his experience, the vast majority of Thiel’s portfolio didn’t succeed, besides Facebook and Palantir.
- According to Thiel, baby boomers born between 1945 and 1960 were so used to progress in their childhood that they overplayed the role of luck in success and became naive optimists with no specific long-term plans.
- The Occident switched from long-term planning to short-term planning in the 1960s.
- A stark example of this is in the finance industry. They don’t plan because they don’t create wealth themselves. They bet on entrepreneurs with plans, and they diversify to limit the risk of their ignorance.
- The dot-com crash reinforced this quest for more prudent, short-term plans. This leads to the cleantech bubble, as an example of a lack of long-term planning.
The 7 dimensions of great startups
- Technology. Aim for a solution that is 10x better than the current alternative. 20% better won’t compensate for the costs and risks of switching.
- Timing. Make sure the timing is right
- Monopoly. Aim for a big share of a small market
- Team. Recruit the right team
- Distribution. Have a clear distribution and sales plan, aimed at a targetable audience
- Durability. Make sure your company has good chances to still be there in 20 years. Aks questions like what will the world look like 10 and 20 years from now, and how will my business fit in? What will stop China from wiping out my business?
- Secret. Follow a contrarian truth. The best startups problems to work on are often the ones nobody else even tries to solve.
Assemble a team of people obsessed with a mission
Partners and employees should be excited and obsessed with the company’s mission
- Founders are like a marriage: beyond identical culture and complementary skills, they need to have worked together before.
Startup founders have extreme and paradoxical personalities
- 4 out of 6 PayPal founders had built bombs in high school.
- Startup CEOs can be cash-poor but millionaires on paper. They may oscillate between sullen jerkiness and appealing charisma. Almost all successful entrepreneurs are simultaneously insiders and outsiders.
Culture is the result of a band of brothers obsessed with a mission
- A good startup is a tribe of like-minded people fiercely devoted to the company’s mission.
- Culture is not created, it’s the resulting behavior of that tribe.
- At PayPal, Cryptonomicon was required reading. It’s a novel about building a gold-backed digital currency in a data haven that no government can control, to help genocide targeted populations. This novel is very appealing to geeks obsessed with freedom, independence, and saving the world with technology. At Paypal, they were all obsessed with creating a digital currency that would be controlled by individuals instead of governments, more or less the novel’s main idea. They required every new hire to be equally obsessed. Back then, Bitcoin and cryptocurrencies didn’t exist, but they essentially had the very same obsession as bitcoin evangelists.
- As a reference, Thiel was a conservative-libertarian student at Stanford, then a derivatives trader in currency options for Credit Suisse between 1992 and 1998, before founding Paypal, initially to help people easily exchange their currencies online to escape inflation, devaluation, and other governmental monetary actions.
Recruit yourself, and focus on people excited and obsessed with your unique mission no one else will work on.
- Recruiting is a core competency for any company. Never outsource it.
- Pitch opportunity to do irreplaceable work on a unique and important problem, with an equally unique and talented team, and why no one else is working on this mission.
- Talented people don’t need to work for you; they have plenty of options. Ask yourself why would someone join your company as its 20th engineer when he could go work at Google for more money and more prestige.
- Avoid undifferentiated pitches like valuable stock, smart people, or pressing problems because they don’t say anything about why a recruit should join your company instead of many others.
- Above all, don’t fight the perk war.
- A startup is about speed, so you want only full-time and on-site employees
- Each employee should be responsible, and evaluated, on just one thing. This will reduce conflicts, a common and hidden cause of company failures.
- You need a small board of ideally 3, max 5 people unless publicly held.
- Avoid consultants. You can’t learn any secrets from them, only conventional wisdom.
How much you should pay your employees
- CEO should be paid low, should be passionate about the mission, and make the bulk of his income from the company value. He sets an example for others.
- Cash bonuses are a bit better because it’s contingent on a job well done, but all forms of cash compensation encourage short-term thinking.
- Favor people who prefer equity to cash because it reveals a long-term preference and commitment.
- Keep ownership details secret because perfect fairness is impossible.
Computers are tools to help humans, not replace them
- Computers and humans are radically different. The cheapest computer can beat the best mathematicians at calculus, while the best super-computers can’t beat a 4-year-old at visual recognition.
- You should ask yourself: how can computers help humans solve hard problems?
- Strong AI replacing humans is a worry for the next century. it won’t happen anytime soon.
- Indefinite fears about the far future shouldn’t stop us from making definite plans today.
Have a clear sales plan addressing a targetable niche audience
Sales and advertising are important
- Distribution, which includes marketing and sales, can be a competitive advantage in itself, even with no product differentiation. You can’t do the reverse; a good product still needs a good distribution.
- You must also sell your company to employees, investors, and the media.
Engineers misunderstand sales
- Many engineers think selling is superficial, irrational, or easy, but not only does it work, even on engineers themselves, and it’s not easier to do than solving hard engineering problems.
- Good salesmen don’t trigger negative reactions. Only the bad ones.
- Good salesmen hide. Since their goal is to change your mind, they need to avoid triggering your defenses against influence.
Distributions depend on your prices
- Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC) limit distribution.
- Below $100 CLV, typically targeting individuals, you can do marketing and advertising.
- Above $10,000 CLV, typically medium to big businesses, you can afford salesmen.
- Between $100 and $10,000, there is no easy distribution channel, since your product cost too much to sell itself just after seeing an ad, and yet costs too little to pay for salesmen’s cost.
Aim for a targetable audience
- In all cases, you need a communication channel where your target is in high enough concentration.
- You need a target who congregates to a particular place, online or offline.
- Paypal first targeted PalmPilot owners but had to pivot to eBay PowerSellers because PalmPilot’s owners weren’t concentrated in a particular place and had little in common.
Aim for a niche
- It was much easier for Paypal to contact a few thousand of PowerSellers than millions of scattered PalmPilot’s owners.
- Target a small group of particular people concentrated together and served by few or no competitors.
- An entrepreneur can’t benefit from macro-scale insight unless his own plans begin at the micro-scale.
- No sector will ever be so important that merely participating in it will be enough to build a great company.
- Start by finding a niche and dominating a small market.