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Notes on Zero to One

#Zero to One by Peter Thiel and Blake Masters

####Chapter Notes on the book Zero to One.

Chapter 1 - The challenge of the future

  • Doing something we already know is called 1 to N while doing something new is 0 to 1. Today’s so called best practices lead to dead ends. No formula exists and there’s no prescription for creating the future. The most powerful pattern is to think about business from first principles.
  • What important truth do very few people agree with you on? Brilliant thinking is rare but necessary. An appropriate way to answer this question is “most people believe in x, but the truth is the opposite of x”.
  • Horizontal progress can also be called globalization; taking something and distributing it everywhere. Vertical progress also called “zero to one” or new technology is any new way to do something.
  • 1970 is where technological advancement stopped. Computers and communication are the only thing to improve since mid-century.

Chapter 2 - Party like its 1999

  • Think clearly and question what we know of the past. The 90s were not cheerful or good (in review) despite people’s impression. 98 was when the Boom started and ended (technically 18 months later). The boom lasted from September 98 to March 2000.
  • 4 big lessons from the Dot Com Crash still guide SV today:
    • Make incremental advances / steps - grand visions get us into trouble.
    • Stay lean and flexible where lean means unplanned. Try things and iterate.
    • Improve on the competition. Don’t create a market prematurely.
    • Focus on products not sales
  • The opposite lessons are probably correct
  • The most contrarian thing to do is to think for yourself and not follow the crowd.

Chapter 3 - All Happy Companies are Different

  • What valuable company is no-one building? Companies need to capture lots of the value they create. Monopoly is a firm so good no one can offer a substitute. Capitalism and competition are opposites.
  • Monopolies claim to be in bigger markets to hide the reality. Non-monopolies claim to own more of the market than they do - they make the market look smaller where as Monopolies try to make the market look bigger.
  • The old idea of monopolies, in a static world, monopolies are rent collectors. However in a dynamic world, new things can be made an monopolists are rewarded for creating new abundance.
  • Monopoly is a condition of every successful business (a creative monopoly).

Chapter 4 - The Ideology of competition

  • War is like competition for business - it seems noble but in the long run no one ever wins. Competition is a destructive force. - Monopolies are only good if you can endure in the future.

Chapter 5 - Last Mover Advantage

  • Hard to do to Google what Google did to other search engines in the early days.
  • 10x closest substitute in some important dimension for proprietary technology to become a monopoly. Easiest way is to build something new - the increase in value is theoretically infinite.
  • Building a Monopoly (10x increases):
    • Technology - superior integrated design is an example. Tablet’s didn’t really exist until Apple made an order of magnitude improvement.
    • Network effects - make a product more useful as people use it. Must start with especially small markets, dominate them, and then increase the market size.
    • Economies of Scale - a monopoly business get stronger (gain advantages) as they get bigger.
    • Branding - monopoly over your own brand. Strongest tech brand right now is Apple. Beginning with brand rather than substance is dangerous - you need to have something for people to come for. What’s the product? What’s the 10x improvement? No company can be built on brand alone.
  • Always err on the side of too small (not nonexistent) of a market.
  • Scaling up - once you dominate a niche market; expand into near (adjacent) or broader markets.
  • Don’t disrupt - originally described how a firm could introduce a low end product and low end prices (using technology), improve the product and take over incumbents. Disruption is now a buzzword for new and trendy - it distorts an understanding. Disruption is a lens for older companies. Disruption also attracts attention bringing unduly attention. Avoid competition as much as possible.
  • Moving 1st is a tactic not a goal. It’s much better to be the last mover - the last one to make a significant advancement to take over the market. You must study the end game before everything else.

Chapter 6 - You Are Not a lottery ticket

  • Does success come from luck or skill? Hundreds have started multi-million dollar companies and a few have started a few multi-billion dollar companies. Learning about startups is worthless if you believe it’s all just a lottery.
  • No way to experiment / prove. Scientific answer to prove Facebook was luck or a plan? Every company starts in unique instances.
  • Is the future a matter of chance or design? Definite form or hazy future? If it’s definite you can work to shape it. In an indefinite future people try to learn about everything - diversify their resume instead of firm convictions. A definite person determines the best thing to do and be a monopoly of one. Young people don’t do this today because we we don’t believe in a definite future. Lost faith in a definite world.
  • Future - better or worst than the past. 4 views are yielded:
    • Indefinite Pessimism - Decline from the peak. Looks out onto a bleak future but has no idea what to do with it. The eurozone is a good idea of this. Has no idea what to do about the inevitable decline - will it be fast or slow? (Self fulfilling)
    • Definite Pessimism - Believes the future can be known but since it may be bleak he can prepare for it. China is an example - American’s believe they are a confident but we are optimists. In China economic growth cannot come fast enough (China is afraid it won’t). They have to relentlessly copy everything that’s done well in the west.
    • Definite Optimism - The future is better than the present if he plans and makes it better. Made the world richer, healthier and long lived than every before. The 19th century business class did more than all preceding generations before. The U.S. has more definite Optimists than any other country in the world.
    • Indefinite Optimism - Has dominated American thinking since 1982. The future will be better but we don’t know how so we don’t make any specific plans. Profit from the future but no reason to shape it, no products to develop so they re-develop the existing plans. Optionality chasers? Process oriented career? This is the established path with effortless productivity (baby boomers are the fault because they saw advancement without them doing anything). Only way to make money when you have no idea how to create wealth. Founders who sell the company give the money to a bank or investors, they don’t know what to do, so they diversify in a large number of stocks, those companies don’t know what to do with the money so they start paying dividends and the cycle repeats. Money is the most important thing - instead of a means towards an end.
      • Indefinite Philosophy - indefinite politics where you don’t try to solve large problems, instead you keep kicking the can down the road. Process people (like lawyers) start to dominate and statisticians predict what people want and only produce politicians who can respond to that instead of longer / more fundamental problems. Indefinite life - death is enviable and random but we should try to solve it.
      • Indefinite Optimism - Is it possible? Inherently unsustainable - how can it happen if no one plans for it.
      • The greatest thing Steve Jobs designed was his business - sustained multi-year plans to build things effectively. Jobs saw you could change the world through long term planning. The power of planning is the way to move into an indefinite optimism?
  • Find our way back to a definite future. Reject chance - you are not a lottery ticket.

Chapter 7 - Follow The Money

  • Matthew, chapter 25, verse 29 "For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.”
    • Never underestimate exponential growth
  • Paretto found the 80/20 rule. This is well known but not this does not work while investing in companies. Most people miss the power law.
  • Power law - the law of the universe
  • Power Law of VC - usually take 20% of the return. Venture funds usually have 10 year life spans. Venture’s funds usually loose money in the future and make money by the one or two companies take off. Good companies return 2-4x. Spray and pray approach doesn’t work. They don’t follow a normal distribution but a power law - a few outperform most in a massive way. Facebook returned more than all others returns combined. Best company will outperform and return more money than all the other companies funded combined.
    • Rule #1: Only invest in companies that have the potential to return the value of the entire fund.
    • Rule #2: No other rules.

Chapter 8 - Secrets

  • Conventional truths are important but they aren’t secrets
  • What important truth do very few people agree with you on?
  • You can achieve difficult but not impossible things (hard to do but doable)
  • Ted Kaczynski thought all the worlds difficult problems had been solved and the others were too difficult - so destroying all technology and institutions were the answer.
  • 4 social trends route out secrets (they exist)
    1. Incrementalism - academics
    2. Risk aversion - scared of secrets because they are scared of being wrong.
    3. Complacency - collect rents on everything that has been done, why do anything else?
    4. Flatness - globalization allows people to see the world as flat. Wouldn’t someone else have already found the secret given the large world? Unorthodox ideas are less accepted - we’ve given up our sense of wonder.
  • Patricia Dunn (a banker) convinced HP’s board that charting a plan to develop new technology was outside the scope of their board. This is an example of the world according to convention.
  • Belief in secrets is an effective truth. The actual truth is there are many more secrets to find but rely on searchers (diligent searchers). We will never learn these hard secrets unless we demand to know them and look.
  • If insights that look so elementary in retrospect are invaluable businesses, there must be many great businesses ready to start.
  • 2 kids of secrets - nature and people.
    • What secrets is nature not telling you? (sometimes people and natural secrets can meet)
    • What secrets are people not telling you? (under-appreciated because they seem obvious)
  • The best place to look for secrets is where people aren’t looking. Are there any fields that matter that haven’t been standardized and institutionalized? When you find a secret - do you tell anyone or keep it? Tell whomever you need to and no one more. Every great business is built on a secret, when you share the secret the recipient becomes a co-conspirator.

Chapter 9 - Foundations

  • Every great company is unique but there are things they need to get right, at the beginning. Beginning’s are special and are qualitatively different from all that comes after. (Thiel law).
  • Bad decisions made early on are very hard to correct after they are made. Can’t build on a flawed foundation.
  • Working for yourself gives you perfect alignment but it’s hard to go from Zero to One without a team
  • Ownership - who owns the equity (founders, employees, investors); Possession - who runs the company day to day (managers & employees); Control - who formally controls the affairs (BOD of founders & investors).
    • DMV is a good example of mis-alignment.
    • Big companies are better than DMV but still suffer.
    • Most conflicts are between Ownership & Control (founders & investors)
    • Every single person on the board matters & may jeopardize the company future
    • Ideal is 3 on the board, 5 maximum. The larger the worst because the exercise no effective oversight.
  • Anyone who doesn’t own stock options or drain a regular salary will be misaligned and biased toward claim value in the near term and not help you create value in the long term. Misalign can creep up if people aren’t next to each other.
  • Cash is not king. A company does better the less it pay’s the CEO.
    • Sets the standard for everyone else. Some CEO’s pay less than their lowest paid employe.
  • Giving everyone equal equity / shares is usually a mistake. Granting different amounts upfront usually seems unfair as well. Early employees get the most equity even though later employees might make a bigger impact.
    • Keep the details secret (don’t share)
    • Most don’t want equity at all

Chapter 10 - The Mechanics of Mafia

  • Think about the ideal culture and setup. Without substance perks don’t work. No company has a culture, every company is a culture. A startup is a team on a mission and the culture is what that looks like on the inside. Don’t fight the perk war; cover the basics and promise what no one else can (hard / interesting work).
  • Stronger relationships - happy and better at work, so you find people who enjoy working together. Talented and excited to be working together.
  • Recruiting should never be outsourced. People must work together in the long run, not short term. Why should the 20th employee work for your company? Why would someone join the company as your 20th engineer while they could instead work for Google for more money and more prestige?
  • Everyone in the company should be different in the same way.
  • Every individual should be distinguished by their work. Make everyone responsible for just one thing and that’s what they will be evaluated on. Defining roles also reduces conflict.
  • Better to be called a cult or a mafia then be a consulting firm and have no real purpose. (Startups are together because they believe something the outside world does not, don’t let that deter you).

Chapter 11 - If you Build it, Will they come?

  • Even though sales is everywhere most people underrate it’s importance.
    • Geek classic: Hitchhiker’s Guide to the Galaxy explains the founding of our planet as a reaction against salesman.
  • We underestimate the importance of distribution because we share the bias - sales people and other middlemen get in the way. It should flow from the creation of the product. Engineers like to build cool stuff not sell it. Customers won’t come - you have to make it happen.
  • Nerds vs. salesmen. Advertising $150 billion/year, $450 billion sales industry. Nerds are skeptical of advertising, marketing and sales because they seem superficial and irrational. Advertising works.
    • Nerds are used to transparency - engineering disciplines usually have a solution that works or fails and the evaluation is relatively straight forward (maybe not?)
    • Advertising / selling seems trivial
    • People overestimate the difficult of science and engineering. It takes hard work to make sense look easy.
  • Sales works best when hidden. Job titles that have nothing to do with those things (account executives, business development, investment bankers, politicians). No one wants to be reminded when we are being sold. Sales ability distinguishes companies.
  • Academic ideas don’t just sell themselves on merit - they are the results of persuasion.
  • The most fundamental reason that even business people underestimate the importance sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.
  • Distribution is essential to the design of your product. If you can’t sell it you have a bad business regardless of the product.
  • Superior sales and distribution can create a monopoly on their own.
  • Marketing and Advertising - work for relatively low priced products that have mass appeal but lack viral distribution.
  • Startups should resist the urge to put on PR stunts or try to compete with commercials. No early stage startup can match massive company advertising budgets.
  • Viral - Core functionality allows users to invite their friends too. The ideal viral loop should be as quick and frictionless as possible.
  • Everybody sells. Everyone wants to believe they make up their own mind and aren’t effected by advertising or sales but it’s not true. Everybody has a product to sale (employee, founder, investor). Even if its just you and your computer - if you don’t see any sales people, you are the sales person.

Chapter 12 - Man and Machine

  • Self driving cars could drive the next wave of unemployment. Some wonder if there will be anything else for people to do. Marc Andreessen says software is eating the world. Futurists can seem like they want computers to replace humans, luddites would rather we stop building new technology.
  • We need to challenge the premise that computers are substitutes for humans. Computers are compliments for humans, not substitutes. Those who seek to empower people will be the future.
  • Humans can substitute for each other. People compete for resources and jobs while computers compete for neither.
  • Globalization means substitution. It’s not clear how globalization has worked for most workers. People will demand ever more as consumers purchasing power grows.
  • Technology means complimentarily. Not same as human workers. Good and fundamentally different things. We form plans in complicated situations; less good at making sense of lots of data. Computers are the opposite. Humans and computers are categorically different. Gains from working with computers will be much higher than computers working with humans. Computers won’t compete with humans for more resources (different specialization).
  • Complementary (humans & computers) is the future of business. PayPal tried automating fraudulent transactions at PayPal but they ended up using a Hybrid approach between computers and humans. Business principle (human/computer hybrid) eventually became the basis for software of Palantir.
  • Why do so many miss the power of complementarily? Education does this. Trendiest fields in CS evoke replacement of humans (machine learning). The other buzzword - Big Data (usually means dumb data). Actionable insights have to computer from human analysts. We exoticize technology - we are impressed by small feats done by computers alone, but ignore complementarity because humans make them less uncanny.
  • There’s room in-between Skynet and Luddites. Computers will help us do what was previously un-imaginable.

Chapter 13 - Seeing Green

  • People got busy with cleantech and investors put tons of money. It didn’t work. We got a massive clean tech bubble. 40 solar manufacturers failed in 2012.
  • Good reasons for making energy a priority. The truth about clean tech is more complex than most governments or people understand.
  • 7 questions every business must answer:
    1. The engineering question. Can you create breakthrough technology instead of incremental improvements?
    2. The timing question. Is now the right time to start the business?
    3. The monopoly question. Are you starting with a big share of a small market?
    4. The people question. Do you have the right team?
    5. The distribution question. Do you have a way to not just create but delivery your product?
    6. The durability question. Will your market position be defensible 10 and 20 years in the future?
    7. The secret question. Have you identified a unique opportunity most don’t see?
  • You can’t dominate a submarket if it’s fictional.
  • Few clean tech companies could answer the durability question.
  • Cleantech was the biggest hype and flop in social entrepreneurship (do well by doing good).
  • Tesla went 7 for 7 on the questions.
  • The tech bubble was bigger than clean tech.
  • Valuable businesses must find a small niche (market) and dominate it before expanding.

Chapter 14 - The Founder’s Paradox

  • Of the 6 people who founded PayPal, 4 born outside the US, 4 had built bombs as kids, etc. Could have been seen as eccentric. One signed up for Cryonics. One from a trailer park; one from a privileged home (eagle scout).
  • Which personal traits matter as a founder?
  • Difference engine. Founders oscillate between ends of the spectrum. Insiders and outsiders. Attract fame and infamy (when successful). They tend to follow an inverse normal distribution; extreme characteristics on the outside.
  • Example: Richard Branson, how much of his personality or a PR maven that comes naturally? Or Sean Parker: started out with a criminal past (outsider) and is now the ultimate insider.
  • The most famous people are founders (brands like Lady Gaga)
  • Mythology is filled with extreme personalities - the famous and infamous like romulus & remus.
  • Celebrities are supposedly American Royalty - The King, King of Pop, Pop Princess, etc - until they weren’t.
  • Gates embodied the typical founder archetype.
  • Gates and Jobs were both insiders / outsiders and pushed their companies in ways that no one could match.
  • Founders are important, not because they only have value, but because great founders can bring the value out of everyone in their company. Divine self-sufficiency is a mistake (weak).
  • The single greatest danger for a founder is to become so certain of their own myth that he looses their mind. Equally dangerous is to loose all sense of myth and mistake disenchantment for wisdom.

Conclusion: Stagnation or Singularity?

  • If the most far-sighted founders can’t plan for the next 20 to 30 years. We can make out the broad patterns.
  • Contemporary thinking: The whole world will converge towards the development of the richest countries.
  • Recurrent collapse seems unlikely that complete annihilation seems unlikely (extinction more likely).
  • Most people expect coming decades to be globalization and plateau. Hard to believe a global plateau is likely; more likely is eruption of global unrest.
  • Two most likely scenarios - nothing or something. We need to work together today to create the future. Our task today is to create singular ways to make the future different and better. To go from Zero to One. Seeing our world as new. Recreate it to preserve it.
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ckenst commented Jan 19, 2015

This is what I thought were the main points / summary from Zero To One. If I missed anything important, mis-interpreted things, please leave some feedback and I'll make updates.

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