By Peter Thiel, Blake Masters June 15, 2022 ⋅ 17 min read ⋅ Books
Preface: Zero to One
Every moment in business only happens once.
E.g. The Microsoft operating system, Google search engine, and Facebook social network.
If you are copying from the greats, you aren’t learning from them.
Copying is easy and takes the world from 1 to n by adding more of something familiar.
However, creating something new, going from 0 to 1, is much more challenging.
The best future paths are those that are new.
Technology is miraculous because it allows us to do more with less.
This book is about how to build companies that create new things, but offers no formula for success.
The paradox of teaching entrepreneurship is that no such formula can exist because every innovation is new and unique.
Chapter 1: The Challenge of the Future
What important truth do very few people agree with you on?
This question is difficult to answer because most people’s knowledge is from school, so by definition agreed upon, and it’s difficult to say something unpopular.
Brilliant thinking is rare, but courage is in even shorter supply than genius.
A good answer takes the form: “Most people believe in x, but the truth is the opposite of x and is y.”
The future, in the simplest sense, is a time when the world will look different from today.
Nobody can predict the future, but we know two things about it: it’s going to be different, and it must be rooted in today’s world.
Two types of future progress
Horizontal: copying things that work; going from 1 to n.
E.g. Building 100 typewriters from one prototype.
Vertical: doing new things; going from 0 to 1.
E.g. Building a word processor from the typewriter.
Technology: any new and better way of doing things.
New technology has never been an automatic feature of history.
E.g. After 10,000 years of slow progress from agriculture to windmills, humanity suddenly experienced relentless technological progress from the advent of the steam engine in the 1760s all the way to about the 1970s.
New technology tends to come from new ventures, aka startups.
Small groups of people bound together by a sense of mission have changed the world for the better.
It’s hard to develop new things in big organizations and it’s even harder to do it by yourself.
A startup has to question received ideas and rethinking business from scratch.
Chapter 2: Party Like It’s 1999
The first step to thinking clearly is to question what we think we know about the past.
Review of the 1990s.
When the author arrived at Stanford in 1985, economics, not computer science, was the most popular major. The internet changed all this.
Review of the author running PayPal in late 1999 and the popping of the dot-com bubble.
Four lessons from the dot-com crash
Make incremental advances
Small and incremental steps are the only safe path forward.
Stay lean and flexible
Treat entrepreneurship as experimentation.
Improve on the competition
The only way to know you have a real business is to start with an already existing customer.
Focus on product, not sales
Technology is primarily about product development, not distribution.
To build the next generation of companies, we must abandon the lessons created after the dot-com crash.
How much of what you know about business is shaped by mistaken reactions to past mistakes?
Chapter 3: All Happy Companies Are Different
What valuable company is nobody building?
This question is hard because your company could create a lot of value without becoming very valuable itself.
Creating value isn’t enough, you must also capture some of the value you create.
E.g. Airlines create a lot of value but don’t capture much of it (they have low profit margins). In contrast, Google creates less value but captures far more.
The difference lies in their competitors, airlines exist in a ‘perfect competition’ while Google exists as a ‘monopoly’.
Under perfect competition, in the long run no company makes an economic profit.
Under monopoly, a company can set its own prices and thus maximizes its profits.
Monopoly: the kind of company that’s so good at what it does that no other firm can offer a close substitute.
The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an non-unique commodity business, build a monopoly.
Our perception of firms is that they’re similar on the spectrum of perfect competition to monopoly, but the reality is that firms are much closer to one extreme.
This is due, in part, because monopolists lie to protect themselves.
E.g. Lying about the power of their nonexistent competition or framing itself as just another company.
On the other side of the spectrum, non-monopolists exaggerate their distinction by arguing that they’re unique.
E.g. Non-monopolists define their market as the intersection of various smaller markets, while monopolists define their market as the union of several large markets.
A competitive ecosystem pushes people to ruthlessness or death.
A monopoly is successful enough to care for it’s employees and care about ethics.
Only one thing can allow a business to transcend the daily struggle for survival: monopoly profits.
A monopoly is great for the company, but bad for everyone else as profits come at the expense of the rest of society.
Monopolies deserve their bad reputation, but only in a static world where they just take money without using it.
But in a dynamic world like ours, creative monopolies use their profits to innovate.
Even the government knows this, which is why it grants patents or a monopoly to produce a specific invention.
If the tendency of monopoly businesses were to hold back progress, they’d be dangerous and we’d be right to oppose them, but history tells us that old monopolies get replaced by new and innovative monopolies.
Monopolies drive progress because the promise and guarantee of years, or even decades, of profits provides a powerful incentive to innovate.
Profits enable a company to make long-term plans and to finance ambitious research projects that firms locked in competition can’t dream of.
Why then are economists obsessed with competition as the ideal state? It’s a relic of history.
Monopoly is the condition of every successful business.
All happy companies are different as each is a monopoly by solving a unique problem. All failed companies are the same as they failed to escape competition.
Chapter 4: The Ideology of Competition
No notes on the author’s opinion on competition, which isn’t favorable.
Winning is better than losing, but everybody loses when the war isn’t one worth fighting.
If you can’t beat a rival, it may be better to merge.
Sometimes you do have to fight and when that happens, you fight to win and to win quickly.
Chapter 5: Last Mover Advantage
Escaping competition will give you a monopoly, but even a monopoly will fail unless it can innovate.
A great business is defined by its ability to generate cash flows in the future.
E.g. The value of a business today is the sum of all money it will make in the future, discounted for future value though as money today is worth more than the same amount in the future.
Most of a tech company’s value comes at least 10 to 15 years into the future.
For a company to be valuable, it must grow and endure, but it’s difficult to measure the durability of a company in contrast to growth.
Will this business still be around a decade from now?
Common monopoly characteristics
Proprietary technology
The most substantive advantage a company can have because it’s difficult to replicate.
As a rule of thumb, proprietary technology must be at least 10 times better than its closest substitute.
Network effects
A product that becomes more useful as more people use it.
Economies of scale
A monopoly gets stronger as it gets bigger.
Certain businesses gain more advantages as they grow.
E.g. A yoga studio is difficult to scale compared to software.
Branding
Creating a strong brand is a powerful way to claim a monopoly.
A strong brand depends on a strong underlying substance.
E.g. Apple has proprietary technologies, manufactures at scale, and enjoys strong network effects due to its ecosystem.
Beginning with brand rather than substance is dangerous.
E.g. Yahoo!
No technology company can be built on branding alone, it must first have a great product.
Building a monopoly
Start small and monopolize
Err on the side of starting too small because it’s easier to dominate a small market than a large one.
The perfect target market for a startup is a small group of particular people concentrated together and served by no or few competitors.
A large market will either lack a good starting point or will be open to competition.
Scaling up
Once you’ve created and dominated a niche market, you should then gradually expand into related and slightly broader markets.
E.g. Amazon started as a book store but gradually expanded to include more products.
Sequencing markets correctly is underrated and it takes discipline to expand gradually.
The most successful companies make the core progression to first dominate a niche and then to scale to adjacent markets.
Don’t disrupt
Recently, the word ‘disruption’ has changed from its original meaning of applying new technology to create new products, to mean anything trendy and new.
Disruptive companies often pick fights they can’t win.
E.g. Napster’s struggle with the U.S. recording industry.
As you plan to expand to adjacent markets, don’t disrupt, instead, avoid competition as much as possible.
First mover advantage: when the first entrant into a market captures significant market share while competitors catch up.
The first mover advantage is a tactic, but not a goal.
It’s much better to be the last mover to enjoy future cash flows and years of monopoly profits.
Chapter 6: You Are Not a Lottery Ticket
Does success in business come from luck or skill?
The phenomenon of serial entrepreneurship suggests that success isn’t all the product of chance.
If success were mostly a matter of luck, serial entrepreneurs probably wouldn’t exist.
E.g. Steve Jobs, Jack Dorsey, and Elon Musk.
We don’t have a definitive answer to skill versus luck because companies aren’t experiments.
Statistics don’t work when the sample size is one.
People can treat the future in two ways
Definite: to understand the future and work to shape it.
Indefinite: believing that the future is completely unknowable.
No notes on the four views of the future: indefinite pessimism, definite pessimism, indefinite optimism, definite optimism. This part reads as if written by a person bitter at politics.
Making small changes to things that already exist might lead to a local maximum, but it won’t help you find the global maximum.
Chapter 7: Follow the Money
Never underestimate exponential growth.
This chapter focuses on how the power law becomes visible when you follow venture capitalist money.
Venture capitalist (VC): people that identify, fund, and profit from promising early-stage companies.
Most venture-backed companies don’t IPO or get acquired, instead, most fail.
Since most startups fail, most funds fail with them.
Venture returns don’t follow a normal distribution where the bad companies fail, mediocre ones stay flat, and the good ones return x times the funding.
Instead, venture returns follow a power law where a small group of companies massively outperforms all others.
The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
Two rules for VCs
Only invest in companies that have the potential to return the value of the entire fund.
Don’t follow any other rules except the first one.
VCs must find the handful of companies that will go from 0 to 1 and then back them with every resource.
Why do VCs fail to see the power law? Because it only becomes clear over time and investors are often short-sighted and the law doesn’t reflect daily experience.
Given that we live in a power law world, too many people are starting their own companies today.
Chapter 8: Secrets
The difference matters between difficult and impossible.
You can achieve difficult things, but you can’t achieve the impossible.
What valuable company is nobody building? Every correct answer is necessarily a secret.
If there are many secrets left in the world, there are probably many world-changing companies yet to be started.
This chapter covers how to think about secrets and how to find them.
Why aren’t people looking for secrets?
Most people believe and act as if there were no secrets left to find; no treasure.
The loss of faith in the technological frontier is all around us.
Perhaps people have lost faith because of geography.
E.g. There are no blank spaces left on the map anymore, no more places to explore on Earth.
The unknown seems less accessible than ever.
Four social trends against the search for secrets
Incrementalism: to proceed one small step at a time.
Risk aversion: people are scared of being wrong.
E.g. Being lonely and right by dedicating your life to something that no one else believes is already hard. But the chance of being lonely and wrong can be unbearable.
Complacency: why search for a new secret if you’re living comfortably?
Flatness: as globalization advances, people perceive the world as one homogeneous, highly competitive marketplace.
E.g. If it were possible to discover something new, wouldn’t someone smarter and more creative already have found it?
The voice of doubt can dissuade people from even starting to look for secrets in a world that seems too big for any person to contribute something meaningful and unique.
You can’t find secrets without looking for them.
There are many more secrets left to find, but they will only yield to relentless searchers.
Two kinds of secrets
Secrets of nature: some undiscovered aspect of the physical world.
Secrets of people: things that people don’t know about themselves or things they hide because they don’t want others to know.
So when thinking about what kind of company to build, we should ask ourselves two questions: What secrets is nature not telling you? What secrets are people not telling you?
It’s easy to assume that natural secrets are the most important, but they don’t help you understand people.
Sometimes, looking for natural secrets and looking for human secrets lead to the same truth.
E.g. Competition and capitalism are opposing forces.
The best place to look for secrets is where no one else is looking.
E.g. Fields where it won’t be easy, but it’s not obviously impossible.
Who do you tell your secret to? Whoever you need to but nobody more.
Every great business is built around a secret that’s hidden from the outside; a great company is a conspiracy to change the world.
Chapter 9: Foundations
Every great company is unique, but there are a few things that every business must get right at the beginning.
Thiel’s law: a startup messed up at its foundation cannot be fixed.
Bad decisions made early are very hard to correct after they’ve been made.
E.g. Choosing the wrong partners or hiring the wrong people.
As a founder, one of your main tasks is to get the first things right, to build a great company on a solid foundation.
The first and most crucial decision is whom to start with.
The process of choosing a co-founder is like getting married; you might win the lottery but you probably won’t.
You can forgo starting a company with a co-founder, but it’s very hard to go from 0 to 1 without a team.
Three sources of conflict
Ownership: who legally owns a company’s equity?
E.g. Founders, employees, and investors.
Possession: who actually runs the company on a day-to-day basis?
E.g. Managers and employees.
Control: who formally governs the company’s affairs?
E.g. Board of directors.
Unlike large corporations, early-stage startups are small enough that founders usually have both ownership and possession.
A board of three directors is ideal and should never exceed five unless your company is publicly held.
A smaller board makes it easier for the directors to communicate, to reach consensus, and to exercise oversight.
A huge board is inefficient and will exercise no effective oversight at all.
Anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned.
That’s why hiring consultants and part-time employees doesn’t work.
You’re either on the bus or off the bus.
For people to be fully committed, they should be properly compensated.
A startup does better the less it pays the CEO, at least that’s the author’s experience with investing in hundreds of startups.
Startups don’t need to pay high salaries because they can offer part ownership of the company itself.
Since it’s impossible to achieve perfect fairness when distributing equity, founders should keep the details secret.
Anyone who prefers owning a part of your company instead of being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future.
Founding a startup lasts as long as a company is creating new things, and it ends when creation stops.
Chapter 10: The Mechanics of Mafia
What would the ideal company culture look like?
Company culture doesn’t exist separately from the company; every company is a culture.
And the culture is just what that looks like on the inside.
Simply hiring the best talent doesn’t make for a better culture.
E.g. Great people that have thin and weak relationships between them.
Why work with a group of people who don’t even like each other?
Since time is our most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together.
Recruiting is a core competency for any company and it should never be outsourced.
Why would someone join your company as its 20th engineer when they could go work at Google for more money and more prestige?
The only good answers are specific to your company and not generic and universal statements.
E.g. Poor answers are: “Your stock options will be worth more here”, “You’ll get to work with some of the smartest people in the world”, “You can help solve the world’s most challenging problems”.
You’ll attract the employees you need if you can explain why your mission is compelling; why you’re doing something important that no one else is doing.
Don’t fight the perk war as anybody who would pick a company because of free laundry or pet day care would be a bad addition to your team.
Promise them the opportunity to do irreplaceable work on a unique problem alongside great people.
From the outside, everyone in your company should be different in the same way.
Startups have limited resources and small teams, so the early staff should be as similar as possible to be efficient and reduce conflicts.
On the inside, everyone should be distinguished by their work.
As a manager, make every person in the company responsible for doing just one thing.
Every employee had one unique role which reduced conflict.
Eliminating competition makes it easier for everyone to build the kinds of long-term relationships that go beyond mere professionalism.
In the most intense kind of culture, members only hang out with other members, ignoring family, friends, and the outside world.
In exchange though, the members experience strong feelings of belonging and get access to truths denied to others.
Such organizations are called ‘cults’, people extremely devoted to a mission.
The extreme opposite of a cult is a consulting firm. Individual consultants are regularly dropping in and out of companies to which they have no long-term connection with.
The best startups might be considered slightly less extreme kinds of cults.
Chapter 11: If You Build It, Will They Come?
Most people underrate the importance of sales.
Distribution: everything it takes to sell a product.
Silicon Valley engineers are biased towards building cool stuff rather than selling it.
But customers will not come just because you build it.
Advertising matters because it works. It doesn’t make you buy a product right away, but instead embeds a subtle impression that will drive sales later.
Sales is the opposite of engineering, an orchestrated campaign to change surface appearances without changing the underlying reality.
People overestimate the relative difficulty of science and engineering because the challenges are obvious.
What nerds miss is that it takes hard work to make sales look easy.
All salespeople are actors, their priority is persuasion not sincerity.
Like acting, sales works best when it’s hidden.
The most fundamental reason that even business people underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.
A great product doesn’t sell itself and the best products don’t always win.
It’s better to think of distribution as something essential to the design of your product.
E.g. If you’ve invented a great product but you haven’t invented a way to sell it, you have a bad business no matter how good the product.
Great sales and distribution by itself can create a monopoly, even with no unique product, but the reverse isn’t true.
Two types of sales
Complex sales (big business and government)
If your average sale is seven figures or more, every detail of every deal requires close attention.
You might only make a sale once or twice a year, but the magnitude of the sale makes up for the lack of sales.
For these sales, it’s best to not use salesmen as at this price point, buyers want to talk to the CEO and not the VP of Sales.
Good enterprise sales strategy starts small as it must; new customers are rarely comfortable signing a deal completely out of scale with what you’ve sold before.
Once you have a pool of reference customers who are successfully using your product, then you can start the long process of working towards even bigger deals.
Personal sales (consumers)
Most sales aren’t complex sales and are between 10,000and100,000.
If consumers like your product, the sale may scale to complex sales as the organization buys your product in place of the consumer.
Between personal sales and complex sales is a dead zone.
E.g. For sales around $1,000, small businesses may not hear about it but also it’s too costly to hire sales people.
A product is viral if its core functionality encourages users to invite their friends to become users too.
Distribution follows a power law as most businesses get zero distribution channels to work.
Poor sales rather than bad product is the most common cause of failure.
Your company needs to sell more than just its product, it must also sell itself to employees and investors.
The HR version of “great products sell themselves” is “a company so good that people want to join it”.
Selling your company to the media is a necessary part of selling it to everyone else.
Chapter 12: Man and Machine
The most valuable businesses of the coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
Globalization means substitution because people can replace each other.
E.g. A programmer in America can be replaced by a programmer in Canada.
Technology means complementation because men and machines are good at different things.
The differences between man and machine mean that gains from working with machines are much higher than gains from working with other people.
Machines are tools, not rivals.
Technology is one way for us to escape competition in a globalizing world.
How can computers help us solve hard problems?
Chapter 13: Seeing Green
Review of the cleantech bubble.
Most cleantech companies failed because they neglected one or more of these seven questions.
Can you create breakthrough technology instead of incremental improvements?
Is now the right time to start your business?
Are you starting with a big share of a small market?
Do you have the right team?
Do you have a way to not just create, but deliver your product?
Will your market position be defensible 10 and 20 years into the future?
Have you identified a unique opportunity that others don’t see?
Companies must strive for a 10x improvement because incremental improvements often end up as no meaningful improvement for the customer.
Exaggerating your own uniqueness is an easy way to fail the monopoly question.
Cleantech entrepreneurs would define their uniqueness based on a smaller market but ask to be valued based on huge, supposedly lucrative markets.
Selling and delivering a product is at least as important as the product itself.
Many cleantech companies deluded themselves into believing that an overwhelming social need for alternative energy solutions implied an overwhelming business opportunity for cleantech companies.
Social entrepreneurship, a business that pursues both a profit motive and public interest, usually end up doing neither.
The ambiguity between social and financial goals doesn’t help.
Doing something different is what’s truly good for society. The best problems to work on are often the ones nobody else even tries to solve.
Review of how Tesla is one of the few cleantech companies to be thriving today.
No sector will ever be so important that just participating in it will be enough to build a great company.
Paradoxically, the challenge for future cleantech entrepreneurs is to think small.
Chapter 14: The Founder’s Paradox
What personal traits matter in a founder?
Review of how founders are like scapegoats.
We worship and despise technology founders just as we do celebrities.
The most important task in business, the creation of new value, can’t be reduced to a formula and applied by professionals.
We should be more tolerant of founders who seem strange or eccentric; we need people to lead companies beyond mere incrementalism.
Conclusion: Stagnation or Singularity?
Four possible outcomes for the future of humanity
Recurrent collapse: an eternal cycle between prosperity and ruin.
Seems unlikely given how distributed humanity is. More likely is a long period of darkness followed by recovery.
Plateau: the slowing down of progress.
Most people expect the future to bring more globalization, convergence, and sameness.
Poorer countries catch up to richer countries, but the world as a whole will reach an economic plateau.
Economic competition would be more intense than ever before.
Given that resources are scarce, it’s hard to see how a global plateau could last forever as we either head to extinction or takeoff.
Extinction: a collapse so devastating that we don’t survive.
Takeoff: accelerated takeoff towards a much better future.
Which of the four will it be?
No matter how many trends are traced, the future won’t happen on its own.
Every day, we face the choice between two likely scenarios: nothing or something. It’s up to us.
We can’t take for granted that the future will be better, and that means we need to work to create it today.
Our task today is to find ways to create new things that will make the future not just different, but better; to go from 0 to 1.