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Book Summary: Zero to One – Notes on Startups, or How to Build The Future

Zero to One (2014) offers advice to start-up founders. It shows how to establish a monopoly by creating proprietary technology, a strong brand, scalable products, and by using network effects.

[Book Summary] Zero to One: Notes on Startups, or How to Build The Future

Content Summary

Genres
Introduction: What’s in it for me? Learn from one of the world’s most prominent venture capitalists.
Stop imitating, and start thinking outside established conventions.
Stop relying on good luck – success is the product of focus and determination.
Stop making products that can be copied and create a monopoly instead.
Here’s what you need to succeed.
You need a vision.
You need a secret.
You need persistence.
You need a strong culture.
You need an outstanding sales strategy.
Before you start, read this checklist.
Summary
Conclusion
About the author
Video and Podcast

Genres

Entrepreneurship, Management, Leadership, Finance, Economic Policy and Development, Venture Capital, Business, Self Help, Science, Technology

Introduction: Learn from one of the world’s most prominent venture capitalists.

Have you ever wondered what makes a start-up successful? There are a few answers to this question. But we’ll let you in on one of the biggest secrets to success right off the bat: your company has to achieve a monopoly. Monopolies have a bad reputation, but they can actually be good for innovation. Because to reach the state of being a monopolist, you have to create something utterly new. Something that can’t be copied. You have to go from zero to one.

This is the core of Peter Thiel’s philosophy. As you might know, Thiel is one of the world’s foremost venture capitalists. He cofounded PayPal and was the first outsider to invest in Facebook. In this summary, we’ll break down the key messages of his book Zero to One, which is based on the notes for a course Thiel himself taught at Stanford University.

In the first three chapters, you’ll learn three things you should stop doing. Then, over the course of the following five chapters, we’ll show you five things you should do if you wish to be a successful monopolist. But first, let’s start at the mysterious place where every founder should spend some time. It’s called . . . the future!

Stop imitating, and start thinking outside established conventions.

Try to imagine the world in the year 2100. What can you see?

The future you imagine is probably different from today’s world in some ways. After all, thinking about the future means thinking about some sort of progress. We’ve all internalized this idea because we share the experience that the world we lived in as children was different from today in many ways. Most importantly, there was a lot of technological progress along the way.

So, let’s get back to the exercise. If you think about the year 2100, what comes to your mind? Maybe you imagine super-fast planes. Silent and sleek self-driving cars. Computer monitors that are so thin you can barely see them from the side. You probably imagine a future that’s full of improved versions of products and services that already exist today.

This is known as horizontal progress. It’s based on expanding on existing ideas and innovations. Here, globalization is a common driver because it helps spread existing ideas to more people. But if you want to be truly innovative, making horizontal progress isn’t enough. You should aim for vertical progress, creating an utterly new technology or method.

The invention of the smartphone was the result of vertical progress: we went from a world without smartphones to a world with smartphones. Distributing them to new markets in developing countries, on the other hand, was horizontal progress – companies simply expanded on what was already there.

And this is where Thiel’s idea of “going from zero to one” comes in. Think of a coordinate system. The x-axis represents horizontal progress – improving and copying – going from 1 to 2 to 3 to 4 and so on, or, in mathematical terms, going from 1 to n. The y-axis represents vertical progress – going from nothing to something, or from 0 to 1.

Stop relying on good luck – success is the product of focus and determination.

Vertical progress is more difficult to achieve than horizontal progress because you have to think of something that doesn’t exist yet and that will meet a future need. As a start-up founder, you have to be able to predict the future, and you can only do that if you’re able to view the present critically. Thiel believes that this is such a crucial ability that, in job interviews, he asks candidates, “What important truth do very few people agree with you on?” Why? Because only a person who can think outside established conventions can see and change the future.

Imagine you have completed your thorough analysis of the potential the future holds for you. The next step is: focus.

Many people think indefinitely. They try to prepare themselves for all possible future events. This approach is futile because the future holds far too many unknowns and variables. A more effective approach is making an effort to achieve the one future that’s best for you. For example, many schoolchildren take on myriad extracurricular activities in the hope of getting into a top-notch university. But wouldn’t it make more sense to focus on mastering just one subject so they could be the best in that one thing?

It’s crucial to keep this in mind when founding a start-up. Start-ups only have one best future – and getting there demands a concerted effort. The road to success is paved with many conscious decisions: you have to find the one niche, create the one visionary product, and wait for the one moment when the conditions are just right.

And then it’s time to strike.

Stop making products that can be copied and create a monopoly instead.

Many people believe that competition is the ideal economic stimulus since it encourages companies to improve on each other’s products. But it’s actually monopolies that drive innovation.

When people hear the word monopoly they tend to think of large, evil companies unfairly squeezing out the competition. But if you have a monopoly, it doesn’t necessarily mean the competition is being treated unfairly. It can also show that you’re doing something very well – so well, in fact, that your competition just can’t survive. If that’s the case, it’s probably due to the fact that you’ve created something new that no other company can copy.

Think of Google. The company clearly has a monopoly over the search-engine industry, having faced virtually no competition whatsoever in the twenty-first century. Long gone are the times when Yahoo or AltaVista played a significant role in the realm of web search. Is this an unfair situation? Well, it might seem unfair to other companies who’d like to compete in this very lucrative market. But that’s just a minor problem for a very narrowly defined set of companies. On the other hand, the fact that Google was able to rise up and strive to be a monopolist had clear benefits. Basically, it’s good for everyone who enjoys using Google’s powerful search engine, and that’s a lot of people.

The prospect of achieving a monopoly doesn’t kill long-term competition. For example, if a company wants to compete in the search-engine market today, it can do that right away. But it needs to invent a search engine that’s not just a Google rip-off. This new type of engine has to be different and way better than what Google offers. If it does, again, it’ll be the consumers who benefit.

Monopolistic structures have another positive effect: they prevent the rise of industries where there’s so much fierce competition that everyone loses. Take the highly competitive airline industry. In 2012, there were so many airlines that fought for passengers’ attention and money that everyone had to lower their prices. At the end of the day, a single passenger trip generated a measly $0.37 of profit. Compare that to Google, which keeps over a quarter of its revenues as profits!

And these are only the positive effects of monopolies on society. But, of course, they’re beneficial for companies, too.

First, monopolists have a technological advantage: their proprietary technology works much better than anyone else’s – usually at least ten times better. Google’s search algorithms, for example, are much faster and have better predictive power than anyone else’s, which makes it very difficult for a competitor to replace them.

Second, monopolists enjoy network effects. The more people who use their product, the more useful it is. Consider Facebook: It wouldn’t be very useful if none of your friends and family were signed up. What makes it valuable to you is the fact that many of the people in your network can be found there. This means that newcomers face an uphill battle when trying to lure customers away from monopolies with broad customer bases.

Third, monopolies benefit from economies of scale – cost savings gained by producing something on a large scale instead of a small one. Say you own a bakery and have fixed costs like rent, heating, and electricity, totaling $1,000. In this bakery, you can produce between 1 and 10,000 buns a month, while the fixed costs remain the same. The more buns you sell, the more you can spread out those fixed costs, meaning that the effective cost incurred per bun is less. Your products can be cheaper.

Finally, monopolies often have strong brands that can’t be replicated. Apple, for example, is the strongest tech brand that exists today. While many other companies have tried to emulate its sleekly designed products and stores, they just haven’t seen the same level of success because they haven’t managed to build as much buzz around their brand as Apple has.

So, if you would like to analyze a business trying to find out if they have a chance to become a monopoly, look at these four criteria: technological advantage, network effects, economies of scale, and strong brands.

Here’s what you need to succeed.

That was a lot of theory. Now, let’s take a deep breath and put the theory to work. In the next five chapters, we’ll give you five pieces of advice on how to turn your startup into a successful monopoly. You need a vision, a secret, persistence, a strong culture, and an outstanding sales strategy.

You need a vision.

What do you think makes a typical start-up founder? Sure, many founders are adventurous, they’re passionate, but there’s something else. What we’re looking for here is the special ingredient, the secret sauce. In fact, founders – especially those of successful companies – are, well, a bit strange. Consider PayPal’s founding team: almost every member was a bit of an oddball. In fact, as teenagers, four of them even had the unusual hobby of building bombs.

You need originality in your founding team. That’s important because founders do far more than just starting a company and hiring people: they provide a vision. But a vision is something that you can’t just come up with by following a step-by-step guide from a business handbook. It has to be connected to unique personalities who bring their unique ideas to life.

Think about Apple. In its early days in the 1970s, Apple used to be a small but playful and highly innovative company. But as its products gained popularity, people at Apple felt the need to hire more managers. At some point in 1985, Apple kicked out its ingenious founder Steve Jobs. What was left was a company that had refined management strategies – but it lacked a soul.

In 1997, when Apple was just a few months away from bankruptcy, Steve Jobs returned. Driven by his vision of personal computing, he made a couple of radical decisions. In 2001, he introduced the iPod, which analysts brushed off as nothing but a cool gadget for Mac users.

Today we know that the iPod was immensely successful. And so are the iPhone and the iPad. By 2010, Apple offered a family of “post-PC devices,” distinguished by their sleek looks and exclusive features. Jobs had made Apple the most valuable company in the world by following a carefully thought-out plan based on his vision.

As this success story shows, even a strong company – if it wants to perform at the highest level – needs the originality and vision of its founder.

You need a secret.

Let’s be honest: if you search for ways to make vertical progress, it’s easy to be discouraged. We live in a high-tech world that’s already filled with so many life-changing inventions. Sometimes it feels like there aren’t any new ideas to be had. But that’s not true.

In fact, the world still has plenty of secrets – things that are important but which most people don’t know about. Or, if they knew about them, they wouldn’t be interested in them. Sure, that makes them hard to discover because you’re on your own and you have to defeat a lot of skepticism. But it’s not impossible.

For tech companies, the best secret is to have better technology than their competitors, because it can make their position as market leaders unassailable. You need to find and chase these kinds of secrets. Otherwise, you’ll just be another provider of horizontal progress, offering conventional products in a competitive market.

Here’s an example. In the 1990s, Hewlett-Packard had great technology. The company used it to bring out one innovative product after the other: an affordable color printer, for example, and an all-in-one printer, copier and fax machine – a truly wild idea at the time. But at the end of the 1990s, a conflict arose within the company’s board. One group, led by the engineer Tom Perkins, believed that the board should double down its efforts on the development of new technologies. But at the end of the day, Perkins’s rival, chairwoman Patricia Dunn, had her say. Dunn argued that technical questions were outside the board’s scope of responsibility. So HP stopped chasing secrets and inventing groundbreaking products in the 2000s.

Consequently, it lost half its market value.

You need persistence.

PayPal was founded in 1998 by Max Levchin, Luke Nosek, and the author, Peter Thiel. In the early days, it didn’t make any profits. In fact, when Thiel calculated the value of the company in 2001, he found that most of it came from profits that didn’t even exist yet, profits that were expected to come in more than ten years! And, as we know now, the company did make a lot of profit later.

The key message here is that it can take years for a start-up to become profitable. But even if the company doesn’t initially make profits, it can still have value, because value is determined by the profits it will make over its entire lifespan. If you’ve founded a start-up, you can’t expect to be top dog in your business from the get-go. You need to be prepared to stick around for the long run.

And that’s why it makes sense to start small and then expand little by little.

First, understand that you don’t need to be the very best in every business, just your business. It’s important to define your market as narrowly and specifically as possible. That’ll make it easier for you to become its dominant player.

After you’ve obtained a monopoly in this niche, you can move on to the next, broader market.

Think of Amazon. From the very beginning, its founder Jeff Bezos had the ultimate goal of becoming the world’s greatest online retailer. But he started much more narrowly, selling nothing but books. Only after Amazon conquered the book market did it expand to other categories like CDs and videos, and from there to other products. Contrary to what many think, Amazon’s success hardly happened overnight.

You need a strong culture.

When you start out on the long road of building up a business, the first days are crucial. You have to create a strong culture where people support and believe in each other. For example, at PayPal, the team was so close that many of them even went on to start new companies together.

Now, typically, start-ups are so small that every single person on the team plays an important role. That’s why before making an investment in a company, it’s helpful to not only analyze the skills and vision of the people involved but also their personal connections.

Thiel has seen firsthand what weak personal ties can do to a team. Before cofounding PayPal with Luke Nosek, the author had invested in a company that Nosek had started with someone he barely knew. Eventually, their personal differences took the whole venture down, along with the author’s investment.

So, think twice about the people you’re starting your company with. And make sure that the different interests of the various company owners are balanced. Typically, the founders wish to develop their products somewhat patiently, whereas the board of directors wants to bring in profits as soon as possible. While these interests aren’t necessarily mutually exclusive, they can sometimes cause conflict. It’s crucial to define a way of resolving such conflicts early on.

Of course, the need to create a strong culture doesn’t stop at the C-level. Everyone in the company works more effectively when there’s mutual understanding and trust. But remember: company culture doesn’t consist merely in the perks you offer to your employees, like a pool table and a soda machine. It’s all about creating strong relationships. And that takes time and effort.

You need an outstanding sales strategy.

Innovative products are worthless unless they’re sold. Still, many founders are enthusiastic about technology. That’s a good thing, but it has a downside. Tech enthusiasts would often prefer to work on product innovation all the time – and they don’t want to spend their time on sales. But they should.

So, what does it take to improve your sales?

First, to sell your product effectively, you need good distribution. This not only includes your sales channels but also the effort and organization it takes to sell your products. To leverage your distribution, you always need to consider the potential of each client before deciding how much effort you’re willing to put into making the sale.

For example, the author cofounded the data analytics company Palantir, where a single closed sale brings in several million dollars. Here, the CEO has to do the selling personally, because clients spending such sums expect personal involvement from the seller’s executives. In another business where single sales deals only bring in a few hundred thousand dollars apiece, it wouldn’t be an efficient use of time for the highly-paid CEO. However, the CEO would still need a solid sales team to represent the company.

Another way to enhance your distribution is to use sales strategies. To be clear, this isn’t about using blunt manipulation techniques. They probably wouldn’t work, anyway. What we’d like you to do is think about selling more in terms of how you can build strong relationships with your clients. And, how you can reach your customers. For example, some products require viral marketing, where users generate more users through word-of-mouth effects, while others can be best sold using traditional advertising.

But before you pour all of your budget into a specific marketing initiative, start small. Try different approaches with a pool of reference customers. If an approach is proven to work, you can easily expand it to larger customer groups.

Before you start, read this checklist.

Here’s a story from Silicon Valley. Between 2005 and 2009, an investment bubble was at its height. The underlying industry was clean technology, or “cleantech” – products and services that promote things like the sustainable use of natural resources and the use of renewable energy sources. Sounds like a great opportunity, right? Well, thousands of companies started in this industry, financed by over $50 billion in investments. But since then, many companies have gone under. It goes without saying that they took their investors’ money with them.

So why did they fail? Because their executives were starry-eyed. They simply didn’t analyze the market opportunity well enough. Here are a few examples:

Cleantech companies didn’t understand that to prevail over established energy companies, they needed technology ten times better, not just slightly better.

Some cleantech companies believed the industry was on the cusp of a period of rapid, exponential advances in, for example, solar-panel technology, and that this would allow them to flourish. But clean technology has advanced slowly and linearly.

Cleantech companies were part of the trillion-dollar energy industry, which meant dog-eat-dog competition for even small shares of the market. A smaller market where you have a good chance of building a monopoly fast is a much better bet.

Cleantech companies were often run by non-technical executives who had no idea how to build great products.

Many cleantech companies, like electric vehicle start-up Better Place, believed their technology was so good that they didn’t need proper distribution channels. After spending $800 million of investors’ money and selling just 1,000 cars, it ended up filing for bankruptcy.

Many solar-technology companies were surprised when Chinese companies began churning out similar products at a much lower cost. This should have been foreseeable from the outset.

If you want to found a start-up, you have to avoid mistakes like these. Here are seven questions to ensure you’re set for success:

  • The engineering question. Can you create a true technological breakthrough?
  • The timing question. Is this the right time to start your business?
  • The monopoly question. Will you start off with a large share of a small market?
  • The people question. Can your team pursue this opportunity?
  • The distribution question. How will you deliver your product to customers?
  • The durability question. Can you still defend your market position in ten or 20 years?
  • The secret question. Do you see a unique opportunity others have missed?

Summary

Startups create a better future

“Positively defined, a startup is the largest group of people you can convince of a plan to build a different future…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.” – Peter Thiel

Most important strength of a startup: the ability to support a new way of thinking about the world.

7 Question to Answer Before Launching a Startup

Engineering Question – Do we have a technology that is 10x better than the competition?

“PayPal made buying and selling on eBay at least 10 times better. Instead of mailing a check that would take 7 to 10 days to arrive, PayPal let buyers pay as soon as an auction ended. Sellers received their proceeds right away, and unlike with a check, they knew the funds were good.” – Peter Thiel.

Engineer a solution that is 10x better than the competition.

Timing Question – Is now the right time to start this business?

“Tesla CEO Elon Musk rightly saw a one-time-only opportunity. In January 2010 Tesla secured a $465 million loan from the U.S. Department of Energy. A half-billion-dollar subsidy was unthinkable in the mid-2000s. It’s unthinkable today. There was only one moment where that was possible, and Tesla played it perfectly.” – Peter Thiel

A great startup is based on an idea that wasn’t possible three years ago and won’t be possible (or special) three years from now.

Monopoly Question – Are we starting with a big share of a small market?

“Tesla started with a tiny submarket that it could dominate: the market for high-end electric sports cars. Since the first Roadster rolled off the production line in 2008, Tesla’s sold only about 3,000 of them, but at $109,000 apiece that’s not trivial. Starting small allowed Tesla to undertake the necessary R&D to build the slightly less expensive Model S, and now Tesla owns the luxury electric sedan market, too.”- Peter Thiel

Focus your initial efforts on a promising market segment to prove your business model can generate cashflow.

People Question – Do we have the right team?

“If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces. There’s the regular army, and that’s fine, but if you are working at Tesla, you’re choosing to step up your game.” – Elon Musk, Tesla CEO

You need people on your team who are as committed to the startup vision as you are. You also need the right balance of engineering and sales talent to be successful.

Distribution Question – Do we have a way to deliver our product?

“Most companies underestimate distribution, but Tesla took it so seriously that it decided to own the entire distribution chain. Other car companies are beholden to independent dealerships: Ford and Hyundai make cars, but they rely on other people to sell them. Tesla sells and services its vehicles in its own stores. The up-front costs of Tesla’s approach are much higher than traditional dealership distribution, but it affords control over the customer experience, strengthens Tesla’s brand, and saves the company money in the long run.” – Peter Thiel

The sales and distribution plan is as important as the engineering and product development plan.

Durability Question – Will our market position be defensible 10 years from now?

“Tesla has a head start and it’s moving faster than anyone else—and that combination means its lead is set to widen in the years ahead.” – Peter Thiel

Create a defensible market position for decades by either creating strong brand (ex: Tesla and Apple’s strong association with luxury goods), proprietary technology (ex: Google’s search algorithms), large network (ex: Facebook’s user size ensures people don’t leave the platform for a smaller and less valuable network), or economies of scale (ex: Amazon and Walmart sell a massive number of items, which lowers their fixed cost per item and allows them to outprice smaller competitors).

The Secret Question – Have you identified a unique opportunity that others don’t see?

“Rich people especially wanted to appear “green”…Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.” – Peter Thiel

Base your business on a behavior that people don’t want to admit or are aware they’ll be doing in the years to come.

Conclusion

If you want to become a successful entrepreneur, one strategy you can pursue is trying to build a business that obtains a monopoly. To do that, first, you have to form a vision: your goal is to go from zero to one, meaning that you create a whole new category instead of just mimicking what everybody else does. When you’ve found an unusual idea to base your start-up on, don’t go too broad too quickly. Find a small niche where you can do something way better than any of your competitors. Once you’ve established a monopoly there, you can expand to other markets later.

But remember: you have to be ready to challenge established conventions. Success is for the bold. And not for the copycats.

About the author

Peter Thiel is an entrepreneur and investor. He started PayPal in 1998, led it as CEO, and took it public in 2002, defining a new era of fast and secure online commerce. In 2004 he made the first outside investment in Facebook, where he serves as a director. The same year he launched Palantir Technologies, a software company that harnesses computers to empower human analysts in fields like national security and global finance. He has provided early funding for LinkedIn, Yelp, and dozens of successful technology startups, many run by former colleagues who have been dubbed the “PayPal Mafia.” He is a partner at Founders Fund, a Silicon Valley venture capital firm that has funded companies like SpaceX and Airbnb. He started the Thiel Fellowship, which ignited a national debate by encouraging young people to put learning before schooling, and he leads the Thiel Foundation, which works to advance technological progress and long-term thinking about the future.

Peter Thiel | Twitter @peterthiel
Peter Thiel | LinkedIn

Blake Masters was a student at Stanford Law School in 2012 when his detailed notes on Peter’s class “Computer Science 183: Startup” became an internet sensation. He is President of The Thiel Foundation and Chief Operating Officer of Thiel Capital.

Peter Thiel and Blake Masters

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