Review: “Zero to One” by Peter Thiel
Peter Thiel has a very successful career both as an entrepreneur and as an investor so it is interesting to see his point of view on startups. The book is based on a course that he taught at Stanford and its goal is to motive upcoming entreprenuers to build new things. There are a lot of ideas in the book that can spark strong debates. I will highlight the most interesting parts of the book in my opinion.
Summary
Peter Thiel provides a list of questions that every business must answer in order to become successful:
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?
Getting five or six correct might work. However, in the author’s opinion, most of the companies don’t have a good answer to any of the questions which results in a big number of failures in the startup world. The book provides the insights into the majority of the questions and how one should think about them.
Innovation and Monopoly
Zero to One is about how to build companies that create new things. Peter Thiel compares it to the “1 to n” approach where one copies the existing model and as a result produces something familiar. The pursuit for the innovation is tied to the fact that globalization without new technology is not sustainable due to the scarcity of resources in the world.
Inventing something completely new is the obvious way to create a new thing. Another option is to create a solution that is 10 times better in some important dimension than its closest substitute. Anything less than an order of magnitude better will be perceived as marginal improvement in the crowded market.
The benefit of creating a new thing is the opportunity to become a monopoly in a certain market large enough to have a sustainable business. Peter Thiel defines a “monopoly” as a kind of company that’s so good at what it does that no other firm can offer a close substitute. Building a monopoly business gives a lot of advantages such as the ability to take experiments more freely and continue to innovate. Monopolists can afford to think about things other than making money while non-monopolists can’t. For example, the motto “Don’t be evil” is in part a marketing ploy, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence.
The author concludes his pitch of striving for a monopoly with the inverse of the famous phrase from “Anna Karenina” applied to the companies: all failed companies are the same (they failed to escape competition); all happy companies are different (each one earns a monopoly by solving a unique problem).
What valuable company is nobody building?
Peter Thiel brings the idea of asking contrarian questions if one wants to build from zero to one: what important truth do very few people agree with you on? And it’s business equivalent: what valuable company is nobody building?
Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up. If there are many secrets left in the world, there are probably many world-changing companies yet to be started.
There are certain social trends that contribute to the general pessimism that there are still secrets left to discover:
- incrementalism — proceeding one very small step at a time, day by day, grade by grade. You won’t get credited for the extra knowledge beyond the test so why bother. (Extends all the way to the academics that usually chase a large number of trivial publications)
- risk aversion — the secret hasn’t been vetted by the mainstream. You are scared to be wrong. The prospect of being lonely but right is hard however the prospect of being lonely and wrong can be unbearable
- complacency — social elites have the most freedom and ability to explore new thinking but they prefer to comfortably collect rents on everything that has already been done
- flatness — globalization and the idea that the world is homogeneous and highly competitive — someone else would have found it already. The voice of doubt
Another obstacle to focus more on innovation is how one can look into the future. You can expect the future to take a definite form or you can treat it as uncertain. If you see the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you see the future as indefinite, there is no point on trying to understand it.
You can also expect the future to be either better or worse than the present. Optimists welcome the future; pessimists fear it.
The two axes — definite/indefinte and optimistic/pessimistic — creates the following quadrants:
- Indefinite pessimism — look at a bleak future, but we have no idea what to do about it.
- Definite pessimism — future can be known, but since it will be bleak, we must prepare for it
- Definite optimism — the future will be better than the present if we plan and work to make it better.
- Indefinite optimism — the future will be better, but we don’t know how exactly, so we won’t make any specific plans.
Indefinite attitudes are the biggest problem in the modern society that result in the focus on process that trumps substance. Indefinite optimism dominates the American thinking as of now according to the author. The finance eclipsed engineering as the way to approach the future. Only in a definite future is money a means to an end, not the end itself.
Team
Peter Thiel defines his own law: a startup messed up at its foundation cannot be fixed. The most ciritical ways to mess up the company is by choosing wrong partners or hiring the wrong people. Peter Thiel emphasizes that the founders should have a pre-history otherwise they are rolling the dice.
Three main concepts where the misalignment can occur in the companies:
- ownership — who legally owns a company’s equity (founders, employees, investors)
- possession — who actually runs the company on a day-to-day basis (managers and employees)
- control — who formally governs the company’s affairs (board of directors)
Ownership and possession are the usual source of misalignment in the big companies. The managers don’t have much ownership at the company so they are only driven by the short-term goals and sacrifice or neglect the long-term vision. While startups usually experience the misalignment between ownership and control where the goals of the founders and the goals of the board are not aligned (investing more in the sales versus product; aggresive growth vs sustainable growth).
Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day.
My Opinion
This book started as a course at Stanford and the main goal was to motivate and inspire students. It definitely delivers. Peter Thiel goes as far as to suggest that even if you are very talented, it is better to join the “Zero to One” company at the growth stage rather than trying to build your own. He refers to the power law to justify the choice. Peter Thiel wants to optimize the startup scene and remove the wasted efforts in order to advance the society further through innovation.
However, not everybody wants to build companies like Google, Facebook, Apple, SpaceX, Tesla, etc. There are a lot of other reasons why people want to start their own companies. For example, many serial entrepreneurs enjoy the process of bootstrapping the companies and they get bored once the company grows too big.
Furthermore, it is also very hard to create the environment that fosters innovation within the large company due to the sheer complexity of the processes and the operational cycles.
Another aspect is the motivation of the employees to create value in the future. A lot of employees look at the shares as a short-term benefit at the large corporations. They don’t really see how their work contributes to the price of the shares, they lack ownership at the company and they make enough money to defend the status quo rather than surface the problems and aggresively fix them. If the price goes up it feels more like a bonus and when the stock goes down they rather jump the ship. That is very different to the startups where a stock is effectively zero until a liquidity event and there is a very clear connection between the work and the company growth.
Verdict
Interesting motivational book but it can be skipped (entrepreneurs)
