The 7 Most Important Lessons from Reading Zero to One
If you're thinking about building a billion-dollar startup
Almost 20% of businesses fail in the first year, 45% fail within 5 years and 90% of small businesses fail. Period.
If you’re considering starting a business, you need to read what Peter Thiel, author of Zero to One, and co-founder of PayPal and Palantir Technologies has to say if you don’t want to crash and burn.
He’s worth $8 Billion, by the way.
These are the 7 best insights I learned for business start-ups in Zero to One.
Think Like a Contrarian
Avoid Competition
Dominate a Small Niche
Become a Monopoly
The Power Law
The Importance of Great Work
Sales
Let’s get into it.
1. Think Like a Contrarian
The blind lead the blind.
If you want to turn an idea into a successful business you need to stand out and as humans, we don’t particularly like this. People who stand out are oddballs or eccentric. When people see a queue, what do they do? They switch to automatic mode and get in it. The same goes for how we think. We all like to think we’re independent thinkers (see my article on herd mentality here) but we’re not. We’re biased in so many ways and if you’re thinking about starting a new business a good place to start looking is where nobody else is.
“The most contrarian thing of all is not to oppose the crowd but to think for yourself.” “If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.”
When Elon Musk started Tesla, electric cars had been around for decades but Elon took a conventional truth-electric cars were uncool and for eco-warriors and created the Roadster. He made electric cars cool and sexy. Nobody else was even thinking about that let alone attempting it.
When people say something that’s taken for conventional knowledge, consider whether it actually is. For example, electric cars can never be sexy because they’re not petrol, or you could never run a successful taxi company by creating an app and cashless payments (Uber).
2. Avoid Competition
Thiel analyses companies based on their differentiation. What does or does not make them unique. If you’re making something that somebody else is already making you won’t get far.
“Perfect competition is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down, and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they'll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.”
Think about when you shop online at Amazon or wherever and you type in the product you’re interested in buying. What typically happens is dozens if not hundreds of products all the same pop up leaving you with a mess to sieve through. If you’re on the other end of that business it’s a jungle out there. You have price competition, reviews competition, ad space competition and platform competition to wade through. What typically happens is that 90% of them will crash and burn eventually.
“The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don't build an undifferentiated commodity business.”
The worst thing you as a start-up founder can do is convince yourself that your product is different to everybody else’s in some way. If it looks, feels, tastes or acts the same as something else already out there it most likely is no matter how cute or clever you think you are when advertising it.
“Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.”
When we think of the word monopoly in business terms we typically think of a few old greedy men cornering a market and making extortionate profits at the expense of the general public. This has no doubt been the case at times in the past and it’s up to laws makers and government officials to govern this but Thiel thinks of monopolies in a completely different light.
“The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits”
“But that sounds exactly like the bad version of monopolies, Karl?” True, but keep reading below and you’ll see how the world only gets better because of monopolies.
3. Dominate a Small Niche First
“A valuable business must start by finding a niche and dominating a small market.”
Starting small is essential for a few reasons:
More likely to be less or zero competition.
It’s easier to dominate a small niche than a large niche.
Sequencing markets is easier when you're small.
By starting small you have more room to manoeuvre and expand when the opportunity arises.
But what sort of questions should you be asking yourself when you have an idea for a business?
“The most important question you should be asking: will this business still be around a decade from now? You must think critically about the qualitative characteristics of your business.”
That’s hard to know but an easy way to answer this question is to find something you would like to have/use but currently don’t have the option.
As Charlie Munger says “The safest way to try to get what you want is to try to deserve what you want. It's such a simple idea. It's the golden rule. You want to deliver to the world what you would buy if you were on the other end.”
“The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.”
Don’t be put off looking in places where nobody else is, or worse, things people believe to be the status quo. Be curious. Be a contrarian. Be an independent thinker.
“If you think something hard is impossible, you'll never even start trying to achieve it. Belief in secrets is an effective truth. If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
4. Become a Monopoly
So Economics 101 states that perfect competition is the ideal equilibrium where companies can turn a profit and customers can be happy with paying as low prices as possible. Even just saying that out loud sounds nonsensical. So how are monopolies good for us?
“So, a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsized profits come at the expense of the rest of society? Actually, yes: profits out of customers' wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes. In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. But the world we live in is dynamic: it's possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better.”
Think of Uber again. Before Uber, you rang your local taxi company or worse, stood in a taxi rank and waited for your taxi. You had to make sure you had cash and you never knew the exact price, when it would turn up and most likely got taxied around in a piece of shit. Then came along Uber with cashless payments, an app to tell you exactly how much it was going to be, how far away your taxi was, how long it would take to get you to your destination, car choice and even reviews of how your driver typically drives. Next time you need a taxi I can almost guarantee you’ll use Uber or another online taxi service.
Uber is a monopoly. It made taxing around infinitely better.
“AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cell phone plan from any number of providers. If the tendency of monopoly businesses were to hold back progress, they would be dangerous and we'd be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents.”
Let’s think of Steve Jobs, Apple and the iPod. Before the iPod, we walked around with a cassette or CD player limited to what little each could hold. Then came along the iPod with its ability to hold thousands of songs, ability to create playlists and its minute size. It changed the way we listen to music forever and then he built it into our phones.
Apple is a monopoly. It changed the way we use personal devices forever.
“In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place. Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.”
This quote beautifully sums it up:
“Tolstoy opens Anna Karenina by observing: "All happy families are alike; each unhappy family is unhappy in its own way." Business is the opposite. All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”
5. The Power Law
We like to think of the world as predictable and linear but again this isn’t the case. It isn’t the case for scheduled buses and trains and it certainly isn’t the case for businesses. So why do we have this error in our judgement?
“The error lies in expecting that venture returns will be normally distributed: that is, bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and hope that winners counterbalance losers.”
Here’s another misinterpretation of how we see effort:
Hard effort = desired outcome
Low effort = undesirable outcome
How many times have you tried something really hard only to come out with an undesirable outcome? When sports teams compete and one loses we exclaim that the other team just ‘wanted it more.’ If all we had to do in life was try harder to get better results people would just do it but they don’t. People excrete every drop of sweat and blood from their bodies and still come up short all the time.
So what’s happening with these businesses that are all trying equally hard but where results are disproportionate?
“They follow a power law: a small handful of companies radically outperform all others. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you'll miss those rare companies in the first place."
The world is governed by power laws and as a soon-to-be monopolistic founder, you need to find ideas where you can leverage this. This is why it’s important to start small and dominate a small niche first before sequencing to other markets. Think Google (search engine) but now with smart wearables, AI, and software (technology).
6. The Importance of Great Work
It does matter what you do, you should focus relentlessly on something you're good at doing and have a natural curiosity for. But, before that, you must think hard about whether it will be valuable in the future.
“The best place to look for secrets is where no one else is looking. Most people think only in terms of what they've been taught; schooling itself aims to impart conventional wisdom.”
People who do great work all have a natural curiosity for whatever it is they’re pursuing. It makes it a hell of a lot easier to get the work done when you’re not motivated if you’re naturally interested in it.
You might not think that there’s a market for what it is you’re interested in but just look around you. Thiel made billions by creating a company where you could pay for things online using your email (PayPal). The idea can be that simple.
Easier said than done though, I know.
Doing something different is what's truly good for society-and it's also what allows a business to profit by monopolizing a new market. The best projects are likely to be overlooked, not trumpeted by a crowd; the best problems to work on are often the ones nobody else even tries to solve.
It’s easy to take for granted the things around us and think that there aren’t many frontiers of knowledge and exploration left for us to uncover but, if you have this attitude starting out you may as well hang up your hat and let somebody else create something great.
From reading Charlie Munger, Nicolas Taleb, Elon Musk and other great entrepreneurs and thinkers it’s clear they all have an ick for traditional ‘education’. They’re street-smart people. If everybody else is reading from the same textbook and listening to the same teacher you don’t have progress, you don’t have innovation you have stagnation.
“I would rather be a failed entrepreneur than someone who never tried.”
- Naval Ravikant
In the book, Thiel shares the story of the Unabomber, Ted Kaczynski who terrorised the American public for over 17 years murdering 3 people and injuring dozens more. An extremely intelligent man he obviously lost his way but his theory, or rather, his ‘manifesto’ was eerily cogent.
Kaczynski claimed that in order to be happy, every individual "needs to have goals whose attainment requires effort, and needs to succeed in attaining at least some of his goals. He divided human goals into three groups:
1. Goals that can be satisfied with minimal effort;
2. Goals that can be satisfied with serious effort; and
3. Goals that cannot be satisfied, no matter how much effort one makes.
One of the reasons he went off the rails is because he believed there was nothing left from point 2 that could be done leaving something everybody could do or things that nobody could do. No wonder he went mad.
It is interesting because you don’t have to be a mail-bombing nut job to see how if you believe that there is nothing left to pursue in point 2 you could lose hope.
7. Sales
“If you've invented something new but you haven't invented an effective way to sell it, you have a bad business—no matter how good the product.”
Sales. We all hate being ‘sold’ to, particularly by sleazy people who are clearly just out to make easy money from us but, we are all salespeople in one way shape or form.
When we go for a job interview we sell our working skills, ethics, rationality and intelligence. When we deliberate with our partners what takeaway to order at the weekend we sell them the idea of the takeaway we would prefer. When we buy a car we sell them the idea that we simply NEED to have heated seats, even when they’re an extra 2 grand.
The truth is we sell all the time but particularly comes to ‘selling’ online it’s icky. We do not like it.
Who likes ads when they're scrolling? Hands up…
Nobody does. If you do you’re weird.
It’s impossible to know how many impactful and world-changing ideas or products have died because the person/s didn’t know how to sell them to people.
“Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately you must still support it with a strong distribution plan.”
So we don’t see the genuine world-altering products that haven’t made it because they weren’t sold well enough to us but the inverse is not true. We see plenty of crappy, undifferentiated products in our feeds daily exactly because the person behind the product knows how to sell them to us.
“Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure.”
Getting your distribution channel right is critical. Don’t spray and pray on every platform you can think of. Like dominating a small niche first find something that works for you and then double, triple quadruple down on it first.
“If you can get just one distribution channel to work, you have a great business. If you try for several but don't nail one, you're finished.”
If you can create a product that leverages ease of duplicity (digital products, apps, software etc) with network effects (think Facebook, Uber, Monzo etc) you could be on to a viral product.
Thiel grew PayPal users by 7% a day by offering them a $20 finders fee for recommending their friends to the platform (you would need a hell of a lot of cash to do it this way).
“A product is viral if its core functionality encourages users to invite their friends to become users too. This is how Facebook and PayPal both grew quickly: every time someone shares with a friend or makes a payment, they naturally invite more and more people into the network. This isn't just cheap-it's fast, too. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth.”
A Checklist
Here’s a ‘starter for 10’ checklist you can use when you have an idea you’re thinking of turning into a business. You don’t need all 7 but you do need at least a few. You can figure the rest out as you get feedback.
1. The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
2. The Timing Question: Is now the right time to start your particular 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 deliver your product?
6. The Durability Question: Will your market position be defensible 10 and 20 years into the future?
7. The Secret Question: Have you identified a unique opportunity that others don't see?
Final Thoughts
As a business co-owner, I found this book brilliant and easy to read. It’s pocket-sized, under 200 pages, and has zero fluff and a heavyweight knockout punch to it. If you’re a business owner already or somebody who wishes to be in the future this book should be bought, studied, studied some more and implemented to the best of your abilities.
Remember, 90% of small businesses fail.
If you’re not a business owner or not somebody who plans to be but wants to build a personal brand then I would still recommend reading it because having a personal brand requires just as much thought, application and nouse as running a business. You are the product and you need to know how to sell that to the world just as much as Steve Jobs did the iPod.
Choose to see the world through a different lens, good luck.
Until next time, Karl (The School of Knowledge).
“Our task today is to find singular ways to create the new things that will make the future not just different, but better-to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.”
- Peter Thiel
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Nice article 👍 👏 👌