Zero to One [Review]

Apr 13, 2016

Table of contents:

1. About Peter Thiel and Blake Masters
2. What important truth do very few people agree with you on?
3. What valuable company is nobody building?
4. What are the characteristics of a monopoly?
5. Secrets
6. Conclusion

The premise of Zero to One is to be a guide for building companies that create new things.

Whilst the world is copying the great technology companies of today through globalisation, the next great technology company will not look like Microsoft, Apple, Google, or Facebook.

When you copy something that already exists you are going from 1 to n, whereas every new creation goes from 0 to 1. This book is a guide to going from 0 to 1.

Zero to One is written by Peter Thiel and Blake Masters and is derived from a course on startups that Thiel gave at Stanford University in 2012.

About Peter Thiel and Blake Masters

Peter Thiel is an entrepreneur and investor. He was one of the founders of PayPal, one of the few internet technology companies to survive through the dot com crash of 1999. Thiel took PayPal public in 2002, and eventually sold the company to eBay later that same year.

Thiel made the first outside investment in Facebook in 2004, as well as providing early funding for companies such as LinkedIn, Yelp, and Yammer.

Thiel also founded Founders Fund, a venture capital firm investing in companies building revolutionary technologies. Founders Fund has invested in Airbnb, Spotify, Stripe, and SpaceX.

Blake Masters was a student at Standford Law School in 2012. He began posting his detailed notes from Thiel’s lectures online, which almost instantly became an internet sensation.

What important truth do very few people agree with you on?

Thiel opens Zero to One by posing the question he most often asks in job interviews. It’s difficult to answer this type of question because you have to say something that is against popular opinion.

Thiel’s own answer to this question is, “most people thing the future of the world will be defined by globalisation, but the true is that technology matter more”. A future of globalisation looks a lot like the world does today. Developing countries will simply catch up to developed countries, but the world would become unsustainable.

Instead, we need technology breakthroughs to continue the progress that we’ve enjoyed since the Industrial Revolution.

We need to go from 0 to 1.

What valuable company is nobody building?

The business version of the contrarian question is “what valuable company is nobody building?”. A big business can create a lot of value, but not be valuable if it does not capture that value.

Collectively airline companies generate hundreds of millions of dollars of value every year, but they capture very little. In contrast, Google creates relatively a lot less value, but captures a lot of it.

There are two models for these types of companies in economics, perfect competition and monopoly.

A company that successfully goes from 0 to 1 achieves a monopoly through innovation. When a company achieves a monopoly they can set their own price and control supply because no other company can come close to them. Being a monopoly also gives you the time and resources to invest in future innovation.

Thiel’s lesson is “if you want to create and capture lasting value, don’t build an undifferentiated commodity business”.

If you want to build a successful business, you need to create a monopoly.

What are the characteristics of a monopoly?

In order to build a valuable company that doesn’t succumb to competition you must create a monopoly. So what are the characteristics of a monopoly?

Propriety technology

Propriety technology is the probably the most important characteristic of a monopoly because it makes your product difficult or impossible to replicate. Propriety technology should be at least 10 times better than its closet rival. Anything less will be seen as a marginal improvement.

The easiest way to make a 10x improvement is to invent something completely new for a problem that no one has solved. On the other hand, you can also radically improve an existing solution.

Network Effects

Network effects make a product more useful as more people use it, however this posses a chicken and egg problem. How do you create the network in the first place. The answer is to start with an especially small market.

Economies of Scale

A monopoly gets stronger as it gets bigger because the fixed costs of creating a product can be spread out over great quantities. This is especially true for software businesses as the marginal cost of producing another copy of a product is close to zero.

A good startup should have the potential for great scale built into its first design.

Branding

The final characteristic is branding. Creating a strong brand is a powerful way to claim a monopoly, but a strong brand can only be achieved as the byproduct of great work. Apple has strong branding because of their excellence in software, hardware, and operations, not because of other easy to copy properties of the company.

Staring small and monopolising

Every startup should start with a very small market. It’s easier to dominate a small market than a large one. You should always err on the side of starting too small.

It is much easier to reach a few thousand people who really need your product than to try and compete for the attention of millions of scattered individuals.

The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.

Once you have dominated a single niche you can start to expand into related broader markets.

Secrets

Every correct answer to “what valuable company is nobody building?” is a secret. Something that is important and unknown, hard but doable. If there are secrets left in the world, there are many world-changing companies yet to be started.

If you think something hard is impossible, you will never even start in trying to achieve it. You need to have faith in secrets.

Conclusion

Whilst many business books profess a great new found insight, Thiel does not try to offer a guaranteed formula for success.

Instead, Thiel offers a contrarian philosophy for thinking about technology and the future and how to frame the right mindset to build a business from first principles.

The vast majority of business books are 80% fluff and 20% useful. I don’t think I’ve read a business book that had so little fluff since Getting Real.

If you are interested in starting a technology business, this is probably one of the best books ever written on the subject.z