DotNetSurfers

Latish Sehgal's Blog

Book Notes: Zero to One

Read On: Dec 2015
Reading Time: 10 hours
Rating: 9/10

Summary

The great secret of our time is that there are still uncharted frontiers to explore and new inventions to create. In Zero to One, legendary entrepreneur and investor Peter Thiel shows how we can find singular ways to create those new things.

Notes

  • This is a book about to build companies that create new things, not just making more of something familiar.
  • Progress can be in 2 forms:
    • Horizontal: copying things that already work, going from 1 to n. For e.g. Globalization (taking things that work somewhere & making them work everywhere).
    • Vertical: Doing new things. Going from 0 to 1.
  • In a world of scarce resources, Globalizaton without new technology is unsustainable.
  • A startup is the largest group of people you can convince of a plan to build a different future.
  • 4 lessons from the Dot Com Crash.
    • Make incremental advances. Small incremental advances are the only safe path forward.
    • Stay lean And Flexible. Try things out, iterate and treat entrepreneurship as agnostic experimentation.
    • Improve on the competition. Build your company by improving on recognizable products already offered by successful competitors.
    • Focus on product, not sales. If your product requires advertising or salespeople to sell it, it’s not good enough. The only sustainable growth is viral growth.
  • If you want to create and capture lasting value, don’t build an undifferentiated commodity business.
  • 2 simple economic models of companies:
    • Perfect competition: Every firm in that market sells the same homogenous products.Since no firm has any market power, they must all sell at whatever the 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. In the long run, no company makes an economic profit.
    • Monopoly: Opposite of perfect competition. Monopoly owns its market, so it sets its own price. Google Search is a good example.
  • Both monopolies and competitors are incentivized to bend the truth:
    • Monopoly lies: They want their monopoly lies to continue unmolested, so they tend to do whatever they can to conceal the monopoly - usually by exaggerating the power of their (non-existent) competition. For e.g. Google changes the frame of reference from being evaluated as a search company to being just another tech company (producing consumer technology and other technology).
    • Competitive lies: Non-monopolists tell the opposite lies. They describe the market so narrowly that they dominate it by definition. They exaggerate their distinction by defining their market as the intersection of various smaller markets. Monopolists by contrast, disguise their monopoly by defining their market as the union of several large markets.
  • In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money.
  • Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of. Monopoly is the condition of every successful business.
  • Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival.
  • The value of a business today is the sum of all the money it will make in the future.
  • Most of the value of a low-growth business is in the near term. Technology companies follow the opposite trajectory. They often lose money for the first few years as they are building something valuable.
  • Growth is easy to measure, but durability isn’t. For a company to be valuable, it must both grow and endure.
  • Every monopoly is unique, but they usually share some combination of the following characteristics:
    • Properietary Technology: Makes your product difficult/impossible to replicate. Must be at least 10x better than its closest substitute in some important dimension to lead a real monopolistic advantage. Anything less than that will be hard to sell, especially in an already crowded market.
    • Network effect: Make a product more useful as more people use it.
    • Economies of scale: A monopoly business gets stronger as it gets bigger. The fixed cost of creating a product can be spread out over even greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
    • Branding: Creating a strong brand is a powerful way to claim a monopoly.
  • Building a Monopoly
    • Start small and monopolize: Always err on the side of starting too small. It’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and big market already served by competing companies is even worse.
    • Scaling up: Once you create and dominate a niche market, then you should gradually expand into related and slightly broader market. Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression to first dominate a specific niche and then scale to adjacent markets a part of their founding narrative.
  • Don’t Disrupt. Don’t obsess about disruption.
  • You can expect the future to take a definite form or you can treat it as hazily uncertain.
    • Indefinite attitudes to the future explain what’s most dysfunctional in our world today. When people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options. This explains Americans today. We hoard extracurricular activities and are ready for anything, or nothing in particular, by the time we get to college.
    • A definite view, by contrast, favors firm convictions. A definite person determines the one best thing to do and then does it. This is not what young people do today.
  • Optimists welcome the future, pessimists fear it. Combining these possibilities yields four views:
    • Indefinite Pessimism: An indefininite pessimist looks out onto a bleak future, but he has no idea what to do about it. This describes Europe today, which just reacts to changes and hopes things don’t get worse.
    • Definite Pessimism: A definite Pessimist believes the future to be known, but since it will be bleak, he must prepare for it. China is the most definitely pessimistic place in the world today.
    • Definite Optimism: To a definite optimist, the future will be better than the present if he plans and works to make it better. This describes USA in the 1950s-1960s.
    • Indefinite Optimism: To an indefinite optimist, the but he doesn’t know how exactly, so he won’t make any specific plans. Instead of working for years to build a new product, they rearrange already arranged ones.
  • In an indefinite world, money is more valuable than anything you could possibly do with it. Only in a definite world is money a means to an end, not the end itself.
  • 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.
  • Every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share you secret, the recipient becomes a fellow conspirator.
  • Bad decisions made early on (wrong partner or hire) are very hard to correct after they are made.
  • Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.
  • The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight.
  • In a startup, paying with equity is a powerful tool because anyone who prefers owning a part of you company to being paid in cash reveals a preference for the long term and a commitment to increase your company’s value in the future.
  • Recruiting is a core competency for any company. It should never be outsoured. You should try to hire talented people not by offering stock, perks etc. but because they find your mission compelling and the team is a good match for him.
  • 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.
  • Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.
  • The Customer Lifetime Value must exceed the amount you spend on average to acquire a new customer.
  • Politics matter in big sales just as much as technical ingenuity.
  • Good enterprise sales strategy starts small. Once you have a pool of reference customers who are successfully using your product, then you can begin working towards even bigger deals,
  • A product’s viral if its core functionally encourages users to invite their friends to become users too. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth.
  • Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market. Paypal did this right by getting the ebay PowerSellers on board.
  • Most businesses get zero distributor channels to work. Poor sales rather than bad product is the most common cause of failure. If you get just one distributor channel to work, you have a great business.
  • You must also sell your company to employees and investors. Selling your company to the media is a necessary part of selling it to everybody else. The press can help attract investors and employees.
  • People are less good at making sense of enormous amounts of data. Computers are exactly the opposite: they excel at efficient data processing, but they struggle to make basic judgements that would be simple for any human.
  • As computers become more and more powerful, they won’t be substitutes for humans, they’ll be complements.
  • A lot of CleanTech companies crashed in 2012 because they neglected to answer the 7 questions that every business must answer:
    • Can you create breakthrough technology instead of incremental improvements? (The Engineering Question)
    • Is now the right time to start your particular business? (The Timing Question)
    • Are you starting with a big share of a small market? (The Monopoly Question)
    • Do you have the right team? (The People Question)
    • Do you have a way to not just create but deliver your product? (The Distribution Question).
    • Will your market position be defensible 10 and 20 years in the future? (The Durability Question).
    • Have you identified a unique opportunity that others don’t see? (The Secret Question)
  • Tesla is one of the few CleanTech companies that got all these questions right.
  • Founders are important not because they are the only one whose work has value, but rather because a great founder can bring out the best work from everybody at his company.

Thoughts

I have been learning about startups for the last few years and also work in one, yet I this book reminded me once again about how less I know. It gives you a great mental framework to analyze and think about different startups.

P.S More Book Notes here.

Comments