What valuable company is nobody building? It’s with this question that PayPal co-founder and Venture Capitalist Peter Thiel opens Zero to One, a book designed to give the rest of us a peek through the eyes of one of Silicon Valley’s more successful entrepreneurs.
Reading this book, I was curious to see what Thiel zeroes in on when building and investing in game-changing companies. Or in Thiel’s lingo, in companies that are making “vertical progress” (e.g. in a world of ever-faster type-writers, the company that’s first to develop a word processor).
The three themes that I heard most strongly in Thiel’s book were:
- Aspire to build a monopoly
- Great ideas are reserved for contrarian thinkers
- Get ahead of misalignment in your company
If you have a different philosophy towards entrepreneurship, this book certainly offers a lot to pick apart. It can be overly generous in its maxims (e.g. “every startup should start with a very small market”), and Thiel’s staunch advocacy for monopolies certainly hasn’t aged well. That said, I appreciate that Thiel is willing to openly share a strong point of view. As he writes: “Brilliant thinking is rare, but courage is in even shorter supply than genius.”
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Theme 1: Aspire To Build A Monopoly
- Contrary to popular belief, in a capitalist system competition kills the ability for businesses to thrive. “Under perfect competition, in the long run no company makes an economic profit.” Instead, entrepreneurs should aspire to build companies that compete mainly against themselves.
- Entrepreneurs build monopolies through several means. One is through doing something so well that “no other firm can offer a close substitute.” This often means a technology that provides value 10X above and beyond the existing alternatives. It can also do so through tapping network effects, economies of scale, and/or branding.
- It’s a red flag when an entrepreneur’s strategy is predicated on capturing 1% of a $100 billion market. “In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to ever reach that 1%.” Instead, launch said company with a small and focused market (“early adopter “in Lean Startup parlance). Requisite burn: “This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.” Ouch.
- It’s often better to be the last mover: “that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.”
- Service businesses are hard to make into monopolies: competition is fierce, and scaling is hard.
- The “Power Law” dictates that a certain set of employees, or market, will dominate growth and success (e.g. 20% of employees create 80% of the profits). The right strategy is to tap into those (versus hedging your bets).
Theme 2: Embrace Contrarian Thinking
- When thinking about starting a company, ask yourself two questions: “What secrets is nature not telling you? What secrets are people not telling you?” Or put differently, what are people not allowed to say? What is taboo? Simply being contrarian is not enough. “The most contrarian thing of all is not to oppose the crowd but to think for yourself.”
- This method of questioning is hard is because our society, and especially our education system, rewards conformist thinking. It is structured around competitions that have little relationship with success and failure in the real word. It’s also hard because it requires a high tolerance for risk. “By definition, a secret hasn’t been vetted by the mainstream. If your goal is to never make a mistake in your life, you shouldn’t look for secrets.”
- Our risk-averse approach to entrepreneurship is reflected more broadly on society. This wasn’t always the case. Our attitudes can be broken down into a matrix, that relates to how definitely we see the future, and what our general attitude is about it:
- When America was in its economic prime, we solicited and embraced clear visions of the future, and worked practically to build it (“definite optimism”). Today, we’re optimistic but very indefinite about what the future will bring. Instead of making plans, we are happy to rearrange existing products (incrementalism), the capital structure of existing companies (banking), resolve legal disputes (law), and maximize efficiency from existing companies (consulting).
Theme 3: Get Ahead of Misalignment
- When setting up your startup, it’s useful to have a clear perspective on three likely sources of misalignment: “Ownership: who legally owns a company’s equity? Possession: who actually runs the company on a day-to-day basis? Control: who formally governs the company’s affairs?”
- To keep the board focused, keep it small. A board of three is ideal. A board should never exceed five people, unless the company is publicly held.
- Take company culture seriously. At PayPal, Thiel wanted a culture that was tightly knit versus transactional. They had to be excited about working specifically for PayPal and the problems it was solving, not the benefits they offered.
- Don’t underestimate sales. Often engineers look down on sales, because salespeople don’t seem to be building anything. “Like acting, sales works best when hidden.” Selling and delivering a product is at least as important as the product itself. See the failures of Cleantech.
- Don’t underestimate the media: “Selling your company to the media is a necessary part of selling it to everyone else.”
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// As published on LinkedIn.