The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won't make a search engine. Doing what we already know how to do takes the world from 1 to n, adding more of somehthing familiar. But everytime we create smething new, we go from 0 to 1.
The Challenge of the Future
When we think about the future, we hope for a future of progress. That progress can take one of two forms:
Horizontal or extensive progress is easy to imagine because we already know what it looks like. Another word for horizontal progress is globalization - taking things that work somewhere and making them work everywhere.
Vertical or intensive progress means doing new things. This is harder to imagine because it requires doing something nobody else has ever done. The single word for vertical progress is technology.
Most people think that the future of the world will be defined by globalization, but the truth is that technology matters more.
In a world of scarce resources, globalization without new technology is unsustainable. Today our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th.
Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can. Positively defined, a startup is the largest group of people you can convince of a plan to build a different future.
A new company's most important strength is new thinking: even more important than nimbleness, the small size affords space to think.
Party like it's 1999
Dot-com mania was intense but short—18 months of insanity from September 1998 to March 2000. It was a Silicon Valley gold rush. When it collapsed, everyone learned to treat the future as fundamentally indefinite and to dismiss anyone with plans big enough to be measured in years instead of quarters.
Globalization replaced technology as the hope for the future. The entrepreneurs who stuck with Silicon Valley learned four big (mistaken) lessons that still guide business thinking today:
- Make incremental advances
- Stay lean and flexible
- Improve on the competition
- Focus on the product, not the sales
Those lessons have become dogma in the startup world, and yet the opposite principles are probably more correct:
- It is better to risk boldness than triviality
- A bad plan is better than no plan
- Competitive markets destroy profits
- Sales matter just as much as the product
We still need new technology. To build the next generation of companies, we must abandon the dogmas created after the crash. Ask yourself: how much of what you know about business is shaped by mistaken reactions to past mistakes? The most contrarian thing is not to oppose the crowd but to think for yourself.
All Happy Companies Are Different
This particular chapter highlights the similarities (and thus the differences) between happy companies and failing companies.
In Thiel’s opinion:
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.
Soon after describing the difference between a failing company and a happy one he asked another opposingly difficult question: “What valuable company is nobody building?”
To Thiel, a Valuable company is the summation of created value in addition to value captured.
The main takeaway here for aspiring entrepreneurs with the intention of changing the world (hopefully for the better) with your company is that you must create and capture value. You must not build an undifferentiated commodity business.
The author attempts to distinguish the differences between a Monopoly (inherently not evil) vs a Perfect Competition (arguably dangerous for businesses vitality). He further explains that both types of companies are trying to disguise themselves as something else as well (usually the opposite of what they are).
Firm A — disguised as a monopoly: Google has a monopoly on search but emphasizes the small share of global online advertising, and other miscellaneous business models.
Firm B — disguised as a perfect competition: A local restaurant tries to find fake differentiators by being the “only British restaurant in Palo Alto” yet they are using inaccurate metrics. The real marker would be “restaurants” not “Restaurant type”
The Ideology of Competition
This chapter explains that businesses that focus on their competitors are doomed to fail. Thiel, perplexed us with a promising question: “Why do people compete?”. He then suggests two models that discuss different perspectives in a competition:
- Marx model: People fight because we are different. The greater the difference, the greater the conflict
- Shakespeare model: All competitors are more-or-less similar. It’s not clear at all why they are fighting in the first place.
Placing emphasis on the wrong attribute in business (like in war) can lead to the toxic realization that the root problem truly lies in the similarities. For example, while Microsoft and Google were obsessively competing with each other Apple emerged and surpassed both.
He also suggested that the best way to resolve conflict (competition) is to merge with your competitors. This is when he decided to work with Musk, despite their initial differences. It’s easier to monopolize the bigger you are or the more targeted your audience.
Last Mover Advantage
There are some startup companies that don’t make much money, yet they are valued higher than established companies with good cash flows. This seems illogical on its face, but there are actually good reasons driving this reality.
An important part of the value of a company is how much potential it has for profit in the future. Established firms in established markets have competition; their margins are chipped away by market forces. Startups in innovative markets are more likely to have monopolies; their good days are still ahead of them. So even if the startup is losing money it may well be more valuable than the established company that turned a profit last year. Growth is fine, but for it to be any good, you have to endure. A company has to survive in order to succeed.
There are some characteristics that are typical features of monopolies. Every company is different, but spotting these elements should help you to identify monopolies when you see them. Proprietary technology, for example, can give a company a major advantage. Companies with technology that offers something much better than the nearest competitor are well positioned to become monopolies. If the technology is only moderately better, however, then it will be seen as a marginal improvement. In a crowded market, it won’t impress anyone.
Network effects make a product better. For example, the more friends you have on Facebook, the more valuable Facebook becomes to you. Network businesses usually need to start small and scale up, because it’s hard to get millions of people to join at once. Many firms miss opportunities to get in on these types of businesses when they start up, because they are so small that they don’t look very promising.
Companies get stronger when they get bigger. Economies of scale means that the cost of running a business, like office space and engineering, doesn’t increase proportionally when the company gets bigger. Monopolies scale up well. Labor intensive industries, for example those that depend heavily on customer service, don’t scale well.
A strong brand image can also strengthen a monopoly. Of course, there has to be substance behind the brand. One reason Apple has strong brand appeal is the high quality of its products. If a brand is little more than a cool name, it’s possible for its product to become a temporary fad, but it won’t have staying power.
The lesson is to start small and monopolize. Once you have found your niche, scale up. But don’t intentionally set out to be disruptive. The whole idea of disruptive technology is totally overvalued. First-mover advantage is another. Sometimes it’s better to have the last significant boom and ride it longer.
Think of business as a game of chess — your strategy is important; you have to consider the endgame in order to succeed.
You Are Not a Lottery Ticket
Some people say that success is the result of luck. Others attribute success to hard work. But if success really were just a matter of luck, there wouldn’t be those who have been successful in a series of enterprises. The argument may never be completely resolved; it’s not possible to run the kind of experiments that would be necessary to empirically prove whether success is the result of luck or hard work. Historically, however, most great thinkers say that success comes from hard work.
People today pay too much attention to process and not enough to substance. People follow the rules for success, because they lack the inspiration to work toward a substantive goal.
You can be an optimist or you can be a pessimist. You can have a concrete image of the future or one that’s fuzzy. And so, you can have these things in different combinations — for example, you can be a definite optimist or an indefinite pessimist.
Indefinite pessimists believe the future will be dark, but they don’t have any ideas of how to change that. Decline is inevitable, so you might as well enjoy yourself in the meantime. Indefinite pessimists are certain the future will be bad, so people should prepare.
Most of the western world was in a state of definite optimism from the 17th century until the 1960s or so. Scientists, engineers and businessmen knew they were making the world a better place. Things were great and constantly improving. Men dreamed big dreams and built big projects. The party ended in the 1970s, when indefinite optimism set in.
In our current era, people think the world will get better, but they don’t know exactly how that will happen. So they don’t make any plans. Indefinite optimism includes the world of finance, because nobody knows what the market will do, but nevertheless, people keep investing in it. Politics and government have become indefinite, too, through myopic focus on the short term.
Philosophers are mapped out on a definite/indefinite optimistic/pessimistic chart. Postmodern philosophers Nozick and Rawls share the indefinite optimistic quadrant. Although they may be different from each other, they’re products of this indefinite optimistic era that we live in. Another thing that’s indefinite? Biotech startups.
The problem is that indefinite optimism isn’t sustainable. The future can’t get better if no one plans for it. We need to get back to a definite future. We have little power over philosophers or political pollsters, but we can return agency to our lives, according to Thiel, through the creation of startups.
Follow the Money
There is a pattern that’s consistent across many different areas of human endeavor: there are usually a few players whose productivity eclipses those around them. It’s called the 80–20 rule. This tendency for the few to dominate the many is known as the power law. It describes the exponential increase of effect at scale.
The power law is the backbone of venture capitalism. Venture capitalists aim to find, fund and profit from early stage companies. These are high-risk investments, and many of the companies will fail. But high risk can bring high rewards. Eventually some of the enterprises will succeed splendidly. They will become part of the dominant 20% that win 80% of the earnings. This will cover the costs of the less successful investments and bring in a healthy profit, or so it’s hoped.
It takes time for venture funds to pick a winner, and it takes more time for that winner to emerge from the rest of the pack. There are usually lots of early failures, which means that venture funds usually lose money at first. Venture capitalists just try to hang in there for the first few years, waiting for the kind of successes that will launch them into exponential growth.
Just as most startups fail, most venture funds eventually fail. Fund managers usually aim for a diverse range of companies in their portfolio. Focusing on diversification makes it entirely possible that the few successful companies will be missed entirely. For this reason, venture companies should only fund enterprises that have the potential to pay off the entire investment of the whole venture company. This is a restrictive rule, and it means that venture funds will by necessity ignore a lot of promising businesses. It also means that venture companies can’t really afford to restrict themselves any further, because they risk overlooking the enterprise that will provide the big payoff. Venture companies need to find the businesses that can go from zero to one. Once they identify these businesses, they should back them with every resource at their disposal.
It can be hard to stick to the discipline of the power law. It only becomes evident over time. Day-to-day experience teaches that some companies are more successful than others and that most companies produce within the range of average performance. It’s easy to get lost in these weeds. It’s also hard to dump companies once you are emotionally invested in them.
In some respects, we are all investors, whether or not we’re venture capitalists. We invest a great deal of resources in pursuing a career. People try to stay diverse and try to avoid putting all their eggs in one basket. They hedge against uncertainty. Schools provide a generalized education. It is much better for people to focus relentlessly on something that will continue to be valuable in the future.
Before you start a company, consider that it will likely fail. It’s much better to hitch your star to a company that has rapid growth. You might own 100% of your very own startup, but there’s a big danger that you’ll end up owning 100% of nothing. It would be much better to own 0.01% of a company like Google
This chapter is about secrets. But not real secrets. Rather, secrets in the sense of discoveries.
Just about everything used to be unknown. Things that seem obvious today were not always so, they had to be discovered.
There’s a modern tendency to say there are no hard questions left. Technology has answered them. There are impossible questions that can never be answered. There are questions that can be answered easily, but answering easy questions isn’t very satisfying.
People may think that there are no mountains left to climb; there is nothing left to discover. But this is wrong. There are certainly secrets left. Injustice, for example, thrives in an environment of ignorance; justice is restored by the beacon of knowledge.
You’ll never find something if you don’t look, you’ll never succeed if you don’t try. If you believe it’s impossible, you won’t do it. You have to do it or it won’t be done.
We can do amazing things. There are still amazing discoveries to be done. But we have to try.
There are two kinds of secrets; there are secrets of nature and there are secrets about people. To find out about secrets of nature, you can study the physical world. Secrets about people are usually harder to find because they are either things that people don’t know about themselves or else they are things that people are actively trying to hide from others.
If you learn a secret, be careful who you share it with. It could be dangerous to reveal your knowledge. As a rule of thumb, it’s best not to share secrets with anyone except for those you need to tell.
Sometimes you can shorten your journey considerably by taking the hidden path.
The start of a thing, the foundations, are really important. Decisions made early on can be hard to change later. Early mistakes can prove fatal to startups. This is the time when the groundwork is laid when the rules are written. The beginning determines everything that comes after.
Be very careful who your co-founder is. Don’t do it with just anyone. It’s like getting married. Avoid an ugly divorce by being careful who you choose for a partner.
Starting with the right team is also important. Everyone on your team has to get along. There needs to be structure. Roles should be well-defined. Don’t worry about any of this stifling creativity. Creativity won’t thrive in a state of anarchy; having some amount of organization is critical.
Ownership, possession, and control are all different things. With startups, the owner usually has ownership and possession, while control often goes to the board. This can cause conflict.Small boards are better than big boards. It will be easier for them to reach decisions and manage conflict. Three board members are good. Don’t ever have more than five board members. Even small boards can bring problems for the firm, however. A small board can be quite effective in opposing management; for this reason, be very cautious about the people you choose to serve on the board of directors.Avoid outsourcing. Keep everyone together, working full time for the team. Avoid telecommuting and part-time workers. Everybody needs to feel like they are all pulling towards the same goal. It’s like Ken Kesey said, “You’re either on the bus or off the bus.”Keep the CEO lean and hungry. Low CEO pay keeps the CEO from getting stuck on defending the status quo. It also telegraphs to everyone else on the team how committed the boss is. A low CEO salary will make it easier to keep everyone else’s pay low as well.People need to be adequately compensated. Cash compensation tends to keep people focused on short-term value. For this reason, stock options are preferable to bonuses. Equity gives employees a part of the company and makes them feel they really have a stake in it. Just be careful to avoid letting people know the exact amount of equity their coworkers hold; it could trigger jealousy and hostility. Employee stock options are a good way to increase loyalty, but not everyone will like it equally, though. Some people have a strong preference for cash pay.Birth doesn’t have to be a temporary phenomenon. As Bob Dylan said, those who aren’t busy being born are busy dying. Beginnings are periods of flexibility and are characterized by openness. This openness can be institutionalized, instilling the company with a culture that encourages innovation. Your company can remain new and innovative indefinitely.
The Mechanics of Mafia
Thiel built a team at PayPal that included many people who went on to start all sorts of successful companies. After they left PayPal, they founded well-known startups including Tesla Motors, LinkedIn and YouTube. This cohort became known as “The PayPal Mafia.” Thiel didn’t follow the standard playbook of looking at resumes when he built his team. He wanted to put together a group of people who genuinely liked each other. He felt a fresh approach to hiring was needed.
When you think about ideal company culture, maybe you imagine a place where not only do people love their work, but the place is also a fun place to be. Silicon Valley has been known for the firms that have ping pong tables and sushi chefs in the workplace. But these fancy perks do not make culture. In essence, the company is the culture.Build a team. Don’t outsource core functions. Keep your group tight.
To hire a good team, look at it from the prospect’s point of view. Think about why they should want to work for you. They probably hear from recruiters at other companies that they will make a lot of money, that they’ll work with smart people and that they’ll help solve important problems. All of these are nice things, but they are the things that potential employees hear from everyone. You aren’t giving them a reason to pick your company over a different one when you use these reasons.
When prospects ask you why they should want to work for you, the answer should be specific to your company. To draw talented employees, tell them why your company is unique and important. Don’t try to sway anyone on the benefits of perks. You want loyal employees, not people who really care about free parking. Give your employees a standard benefits package that’s typical in your industry.
To start, everyone should be as similar as possible. They need to work well together. They should all be different in the same way; if they all love comic books or something like that it will help them to get along and to work together.Roles should be well-defined. This reduces conflict. People won’t be as inclined to compete over turf. Internal conflict can be deadly to a startup.You want really dedicated people, but you don’t want to start a cult. Not too much, anyway. People in cults are usually misinformed fanatics. You want a certain level of fanaticism in your group, but not the misinformation. You want a sense of specialness and separation from the outside world. You shouldn’t mind too much if people say that your group is a mafia.
If You Build It, Will They Come?
Sales are important. Middlemen have a bad name, but they are crucial. Distribution is crucial. Many people, especially tech people, don’t understand the importance of this. But it’s important.
Marketing is important because it helps people discover products. Advertising is useful because it works. It puts ideas in the consumer’s mind. You might think that you personally have some immunity to advertising that other people lack, but you would be wrong.
People are suspicious of sales staff because it isn’t always so easy to tell how hard they are working. All that schmoozing looks an awful lot like socializing. However, a good salesperson is like a good actor, they perform so well that it’s difficult to see how hard they work.
Excellent sales and distribution can create a monopoly even if the product itself isn’t much different from its competitors. You need to have a strong distribution plan in order to succeed.
Distribution is measured with two numbers. The Customer Lifetime Value (CLV) is the average amount of profit you can expect to gain from a customer. This figure has to be greater than the amount you spend to get that new customer; a figure known as the Customer Acquisition Cost (CAC). The more expensive your product is, the more you should be willing to spend to get new customers. You should also be willing to devote more time to each of them.
On one end of the scale there are personal scales, where sales people deal directly with customers to sell expensive products. Really big deals are performed by CEOs more than salespeople.
There’s a dead zone between the expensive products that call for personal sales strategies and inexpensive products that can do fine with traditional advertising. A product selling for, say, $1,000 isn’t really worth the expense of paying sales staff. The ideal customer for the product is probably the small business owner; mass marketing is a very inefficient way to reach this market.
Marketing and advertising are for low-priced products, where there’s not enough payoff for salespeople to sell them. Advertising might be appropriate for startups where the numbers aren’t there for other distribution channels. But don’t try to compete with big companies through advertising campaigns.
Viral marketing lies at the far end of the scale with the most inexpensive products. It’s viral if it makes users draw in other users. For example, if someone sends money via PayPal, the recipient is exposed to the service automatically when they receive their money.
You have to get at least one distribution channel to work or else you’ll fail.
Not only do you have to sell to customers, you also have to sell your idea to investors and employees. And the media. Don’t expect that your product is so wonderful that investors and everyone else will beat a path to your door. Develop a public relations strategy. Decide how you want to tell your story.
Man and Machine
Information technology has become so dominant that it has become synonymous with the very word “technology.” Computers continue to grow in power. Many functions once performed by humans have been taken over by computers. Some predict that this process will accelerate and computers will continue take over more and more human functions.
People worry about computers replacing people, that a process mirroring that of globalization is taking place. Just as jobs were lost to workers in other countries, they will now be lost to computers.
People need not worry that this will happen, however. While people in one part of the world aren’t so different from people in another part of the world, computers are very different from people. They do not require the same provisions. Their capabilities are different. The kinds of things that people are good at aren’t the same as the things that computers are good at. People are able to make complex decisions. Computers are good at processing large amounts of data.Computers are tools. The big technological advances of the future will happen in computers complementing — not replacing — people. We shouldn’t be afraid that computers will replace us.People and computers combined can do tasks better than either one can by themselves. This presents business opportunities. At PayPal, they developed a system for detecting credit card fraud that involved algorithms that flagged suspicious transactions which would then be reviewed by human operators. This demonstrates how the abilities of computers and people can complement one another.
With his startup company Palantir, Thiel developed similar software for the FBI to analyze information from multiple sources. Computers alone can’t do that sort of work, nor can humans do it alone. Computers and humans combined are capable of much more. There are all sorts of examples of how Palantir helped the feds bust terrorists, child pornographers and all manner of fraudsters.
There are many ways that computers can be harnessed to crunch the data and allow people to focus on complex problem solving. There are many opportunities still to be developed that take advantage of this synchronicity.
Software engineers have been taught to think up ways that computers can do people’s jobs. But computers can’t learn everything. It isn’t just a matter of feeding them enough data. You can give computers more and more data, but this doesn’t actually make them any smarter. They can’t come close to human analysis. Artificial Intelligence is certainly interesting, and it becomes more and more developed every day, but it still isn’t close to being able to take on complex analysis. If the day ever comes when it will be able to do so, that day is far in the future.
It seemed obvious that clean technology was going to be huge. At the beginning of the 20th century, lots of money was poured into new “cleantech” firms. Unfortunately, most of these firms ended up going out of business. They failed because they ignored the basic elements necessary for success.
Thiel describes the 7 basic elements necessary for a successful startup as questions. Whatever your industry, your business plan must address every one of them. If you don’t have good answers to these questions, you’ll run into lots of “bad luck” and your business will fail.
The Engineering Question
Can you create breakthrough technology instead of incremental improvements?
To ensure success, a startup needs proprietary technology that’s significantly better than the competition. The failed cleantech companies really dropped the ball on this one. Many of them were about twice as good as the competition, some of them didn’t even hit this mark. In reality, a new product should be at least 10 times better than the closest alternative. Your product has to be clearly, obviously better than anything else in order to capture customer interest.
The Timing Question
Is it now the right time to start your particular business?
Good timing makes all the difference. Solar technology has been around for a long time, however, and its development has never been very fast. The growth of computer technology has always been fast. You have to understand whether you are dealing with a slow or fast growing technology and treat it appropriately.
The Monopoly Question
Are you starting with a big share of a small market?
There isn’t much money to be made in a competitive market. Startups emphasize their uniqueness for this reason. However, it’s better to be as realistic as possible to understand whether your product has a chance at a true monopoly. In order to do this, you have to know what market you are actually in. If you make solar panels and you capture 11% of the solar panel market, you might think you’re doing well. It’s possible, though, that the relevant market that you should pay attention to is the global solar market, or even the entire renewables market. If you don’t look at the relevant market, you won’t have the information that you need to evaluate your company’s position.
The People Question
Do you have the right team?
The people leading a startup should be experts in the product, like engineers. You need the right team for the job. The executives probably shouldn’t be salesmen.
The Distribution Question
Do you have a way to not just create but deliver your product?
Distribution is as important as the product. Find the right channel and communicate with the customer.
The Durability Question
Will your parket position be defensible 10 and 20 years into the future?
Cultivate durability. Plan to be the last mover in the market. Figure out your plan for the next 20 years or so. Anticipate changes in the market.
The Secret Question
Have you identified a unique opportunity that others don’t see?
You need to have secrets. Great companies have reasons for success that others don’t see.
Doing something good for society is a misguided goal. It’s better to do something different. You will benefit society more that way.
One of the few cleantech companies that has found success is Tesla. This is because they got all of the basic issues right. This shows that the problem was never with the idea of cleantech by itself, rather the problem was how most of the cleantech startups ran their firms.
The Founder's Paradox
The people who founded PayPal were unusual, from Thiel’s perspective. His evidence for this is that many of them came from outside of the United States. An accompanying illustration shows six young men. The most striking thing about the picture is how alike they all appear. They are all about the same age, most of them look to be approximately the same height and build, and their hair is cropped short in a similar style. While Thiel is rightly proud of his team’s accomplishments, it’s achingly clear that he is either oblivious to the issue of diversity or he simply doesn’t think it’s important enough to address.
Thiel addresses a point that founders aren’t normal people. They tend to occupy extremes of bell curves, sometimes occupying both ends at once — for example, by being cash poor but rich on paper.
Unusual traits are self-reinforcing. The cycle goes that unusual people act differently and develop extreme traits, which they exaggerate. Other people see this and exaggerate the extremeness of the person when they describe them, which causes people to act differently.
Look at Richard Branson. As someone who founded successful businesses at a young age, he was certainly exceptional, but he didn’t adopt some of his more eccentric traits until after he became successful. Several others in this mode are discussed, including Sean Parker and Lady Gaga.
Many examples are given of unique people who were founders. It can be marvelous to not only think outside the box but to live outside of it as well, but that isn’t without its problems. A tremendous problem with standing out is that you can become a scapegoat when something goes wrong. Celebrities provide us with many examples of how the mighty can crash and burn.
Businesses need founders, even if they’re a little eccentric. They can be magnets for hostility, however. Bill Gates is a prime example of this.
The most important thing to bear in mind is that founders shouldn’t take the power and the glory too seriously.
Conclusion: Stagnation or Singularity
Predicting anything beyond the next 20 or 30 years is perilous.
In the past, the world cycled between good times and bad. This pattern might be the inescapable norm, and the cycle could continue indefinitely. The conventional wisdom, though, is that through modern improvements, the world is reaching a plateau where things won’t suck as bad anymore; the cycle will be broken. However, you don’t have to be a huge pessimist to see the possibility that we, as a species, are marching ourselves toward extinction. We’ll have wars and problems, and poof, that’s it for us. The optimistic take is that we’re going to take off into a vastly improved future. Hopefully, it’ll be this last option. Hopefully, we’ll go from zero to one.