I was fortunate enough to get an advance copy of Peter Thiel’s new book Zero to One. I breezed through the book in a few days about a month or so ago, and now that the book is officially out, I thought I’d write a quick review1.
As the name suggests, the book is about going from “zero to one” or in other words building companies that are doing something completely new which impacts the future. The book covers a host of topics affecting startups including technology, philosophy, economics and quite clearly brings out Thiel’s very interesting contrarian view of the world. I would highly recommend the book to anyone interested in technology, entrepreneurship, economics or even just the future – the book makes some very interesting and thought provoking arguments and is full of advice from one of the most fascinating minds in technology .
Conventional wisdom seems to suggests that when starting a company, one should look for very large markets that have competitors (so you know there is an actual demand) and make something better than your competitors to capture a small piece of that large pie.
Thiel suggests that one should aim to start monopolies, and the best way to do so is to start with a very small market, and scale up once you’ve dominated that small market. (like amazon)
The reason being simple: there are two kinds of companies in the world, monopolies, which make a lot of money, and non-monopolies, which don’t make any money. Ironically, the monopolies pretend to not be monopolies (for regulatory and other reasons) while non-monopolies pretend to have some degree of monopoly power (for fundraising and other reasons).
Companies create X value in the world, and capture Y% of it. X and Y are independent variables, which means that to increase the revenue of a company, one can create more value (increase X), or capture more of the value one creates (increase Y).
Every monopoly is unique, but they tend to share some similar characteristics, though Thiel warns against looking at them as boxes to check off:
1. Proprietary technology: This makes a product difficult or impossible to replicate. To lead to a monopolistic advantage, a product should be 10 times as good as the existing ones, and offering a new solution is often the easiest way to be 10 times as good. Another possible way is by offering a completely different design (iPhone)
2. Network effects: a product with network effects becomes more useful as more people use it (Eg: Internet, Facebook, faxes, telephones, iMessage for iPhones)
3. Economies of Scale
4. Branding: branding tends to be important but is almost never enough on its own.
The above leads to pricing power, which allows companies to capture more of the value that it creates (i.e increase and maintain a high Y)
Durability is another important characteristic of a successful company because a good portion of the value of a company comes from the cash flows in the future i.e the value of being around 10-15 years from now. A company must therefore be able to grow and endure to be valuable.
Tolstoy’s Anna Karenina begins with the following line: “Happy families are all alike; every unhappy family is unhappy in its own way.”
Thiel believes the opposite is true for companies.
All happy companies are different, and all unhappy ones are the same. And happy companies are different because they are all monopolies in different fields.
On the state of the world
Thiel says that a key question one must think about is whether he/she can control or predict the future. The two stances on this question lead to two different world views – definite and indefinite. People with a definite world view tend to become good at one thing (because they believe they know what the future will look like and so plan for that). People with an indefinite world view tend to prefer to be well rounded.
Now, one also normally has an outlook on the future – whether they expect it to be good or bad. Those that expect a bright future ahead are optimists and those that expect a rosy future are pessimists.
Together, the above two questions lead to four different kinds of people: indefinite optimists, indefinite pessimists, definite optimists and definite pessimists.
Thiel argues that an indefinite view promotes iteration and “keeping options open”, which he believes won’t take someone from zero to one. To go from zero to one, one must have a definite optimistic view of the future, which begins by rejecting the unjust tyranny of chance.
“Shallow men believe in luck. Strong men believe in cause and effect” – Ralph Waldo Emerson
There are three forms of knowledge: conventions which are easy to learn and known by many, secrets which are known by few and hard to learn and mysteries which are impossible to learn.
Monopolies have secrets which are hard to learn. The key to starting a successful company then, is to look for secrets.
But the issue is that we don’t believe in secrets anymore, for a number of reasons such as:
- Risk aversion: It’s hard enough to be lonely and right, let alone to be lonely and wrong
- Flatness of the world: We belief that wouldn’t someone smart around the world already have figured this out by now
- Complacency: we can collect rents on what has already been done and so don’t feel the need to go against the crowd and look for something hidden
But Thiel believes that there are many more secrets still left to discover. A good way to look for secrets is to ask yourself the question: “What is the hard truth you know which no one else does?”
Said differently, ask yourself:
“What important truth do very few people agree with you on?”