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Zero to One – Peter Thiel – Book Notes and Takeaways

Jun 23, 2020 | Book Notes

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Zero to One by Peter Theil

Book Notes and Takeaways via Duncan Kelm

  • Best question to ask someone:
    • “What important truth do very few people agree with you on?”
  • At the macro level, the single word for horizontal progress is globalization – taking things that work somewhere and making them work everywhere
  • Vertical process or intensive progress means doing new things
    • If you have a typewriter and build a word processor you have made vertical progress
  • Horizontal or extensive progress means copying things that work
    • If you take a typewriter and build 100 you have made horizontal progress
  • Vertical progress is 0 to 1
    • The single word for vertical progress is technology
  • If you want to create and capture lasting value, don’t build an undifferentiated commodity business
    • Must think creatively to define new businesses and new offerings
  • Monopoly and perfect competition
    • Most businesses will fall closer to one extreme than they often realize o Monopolies lie to protect themselves
      • They know that bragging about their great monopolies brings scrutiny
      • Google, for example owns 68% of search engine traffic, however they hold themselves out as an “advertising” company to avoid scrutiny ” Think Facebook, Amazon, etc.
    • Non-monopolies tell the opposite lie: “We’re in a league of our own.”
      • The fatal temptation is to define a market extremely narrowly so that you dominate it by definition
      • Entrepreneurs are always biased to understate their completion
      • Think of a British restaurant in Palo Alto, if they only consider their competition to be other British restaurants, than they may “dominate,” however in reality any other restaurant is realistically competition
    • Think of the competitive advantage between monopolies versus perfect competition
      • In a restaurant that is highly competitive, the owner may have to cut price and drop margin to stay in competition and attract customers, in turn they can only pay minimum wage to their employees
      • On the other hand, Google has very little competition, they have a wider latitude to care about its workers, its products, and its impact on the wider world
        • There is privilege in the monopoly
    • So a monopoly is good for everyone on the inside, but what does it do for everyone on the outside
      • Outsized profits tend to come out of the customer’s wallets, so those outside see marginal benefit
      • Monopolies also drive progress because the years or even decades of monopoly profits provides a powerful incentive to innovate
  • Economic theory would state that absolute competition is necessary for a thriving economy
    • Their theories describe an equilibrium state of perfect competition because it is easy to model, not because it represents the reality of business
      • In business, equilibrium means stasis, and in business, stasis means death
    • In reality, every new “creation” takes place far away from perfect competition and equilibrium
    • A monopoly is therefore not a pathology or an exception – Monopoly is the condition of every successful business
    • All happy companies are different: each on earns a monopoly by solving a unique problem
    • All failed companies are the same: they failed to escape competition
  • Rivalry the past
  • Competition can make people hallucinate opportunities where none exist
    • Think all the dot coms in the late 90s
  • There is no middle ground: Either don’t throw any punches, or strike hard and end it quickly
  • Great businesses must be defined by its ability to generate cash flow in the future
    • Aging industries and sectors are not as valuable
    • Example of New York Times versus Twitter in 2013 – Twitter was new age and betting heavily on future cash flow, where the New York times was stagnant and trying to defend their cash flows
    • Technology companies often lose money in the first few years, building towards value and delaying profits
      • Most of a tech companies value will come at least 10 to 15 years in the future
  • The overwhelming importance of future profits is counterintuitive
    • For a company to be valuable it must grow and endure
      • Growth is easy to measure, but durability isn’t
    • The most important question you should be asking is will this company be around a decade from now
  • What does a company with large cash flows far into the future look like?
    • A combination of: proprietary technology, network effects, economies of scale and branding
    • Proprietary technology – this is the most substantive advantage a company can have ” As a good rule of thumb, the technology must be at least 10X better than its closest substitute
      • Clearest way to create a 10X advantage is to invent something completely new
      • causes us to overemphasize old opportunities and slavishly copy what has worked in
    • Network Effects – makes a product more useful as more people use it
      • Network effects are powerful, but you’ll never reap them unless your product is valuable to its very first users
    • Economies of Scale – a monopoly business gets stronger as it gets bigger
      • The fixed cost of creating a product can be spread out over ever greater quantities of scale
      • This is why it is very hard to build a monopoly is service businesses
      • A good startup should have the potential for great scale built into its first design
    • Branding – Creating a strong brand is a powerful way to claim a monopoly
      • Always begin with substance to create a brand
  • Building a monopoly
    • Start small and monopolize
      • Every startup should start with a very small market ” Always err on the side of starting too small
    • Scale up
      • Once you create and dominate a niche market, then gradually expand into related and slightly broader markets
        • Think Amazon
      • There are always hidden obstacles when scaling – be dynamic when encountered and do best to plan for known constraints
    • Don’t disrupt
      • This is not a self-congratulatory buzzword to be used for “trendy and new” ” Rather than disrupt, focus on creating
        • The act of creation is far more important o The last will be first
      • What really matters is generating cash flows in the future
      • First mover advantage, not as important as people think
      • It is much better to be a “last mover” meaning making the last great development in a specific market
  • “Victory awaits him who has everything in order – luck people call it” Roald Amundsen South Pole explorer
  • You can expect the future to take a definite form or you can treat it as hazily uncertain
    • If you treat the future as something definite, it makes sense to understand it in advance and work to shape it
    • If you expect an indefinite future made up by randomness then you’ll give up on trying to master anything
    • You have what it takes to shape your destiny it takes planning and resilience
    • Process trumps substance
  • Reject the unjust tyranny of chance – you are not a lottery ticket
  • Follow the money
  • “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.” (Matthew 25:29)
    • Never underestimate exponential growth
    • The power law: a small handful of companies radically outperform all others
      • Diversification will cause you to miss out on great opportunities
      • 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
    • Whether you like it or not, every individual is unavoidably an investor
      • Invest in career and jobs that will create money and safety
  • The road does not have to be infinite after all – take the hidden path
  • Thiel’s Law: A startup messed up at its foundation cannot be fixed
    • Apply same principle to any existing business
  • Choosing a partner or co-founder in a business is like getting married, and conflict can be just as ugly as a divorce
    • Founders and partners should share prehistory before they start a business together – otherwise they are just rolling the dice
  • You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done
  • Do one thing well – On the inside, every individual should be sharply distinguished by her work
  • From the outside, everyone in your company should be different in some way
  • Nerds versus salesmen
    • Nerds are skeptical of advertising, marketing, and sales because they seem superficial
    • Nerds are used to transparency – they add value by becoming an expert at a technical skill
    • What nerds miss is that it takes a lot of hard work to make sales look easy
  • The engineers grail is a product great enough to “sell itself”
    • But anyone who would actually say this about a real product is delusional or flat out lying to themselves
  • Superior sales and distribution by itself can create a monopoly, even with no product differentiation
    • Customer Lifetime Value (CLV) can be a very useful tool to determine what is an appropriate amount to spend on marketing and sales
  • All of us want to believe we make up our own minds, that sales doesn’t work on us – this is simply not true
    • Everybody has a product to sell – no matter where you’re an employee, a founder, or an investor
  • Computers should be seen as tools to systematize and scale never as a rival
    • Don’t be threatened of an AI takeover anytime in the near future, instead think how can computers be used to help humans solve hard problems
  • Seven questions
    • Engineer question – can you create breakthrough technology instead of incremental improvements?
    • The timing question – is now the right time to start a particular business
    • The monopoly question – Are you starting with a big share of a small market
    • The people question – Do you have the right team?
    • The distribution question – do you have a way not just to create but deliver your product?
    • The durability question – will your market be defensible 10 and 20 years into the future?
    • The secret question – Have you identified a unique opportunity that others don’t see?

The financial consultants at Arrow Point Wealth Management are registered representatives with and securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC

This material has been prepared for informational purposes only, and is not intended as specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.