Zero to One: Notes on Startups, or How to Build the Future, by Peter Thiel
Didn’t go to Stanford but want a Stanford MBA? Zero to One will put you in a Stanford lecture hall with one of the world´s great entrepreneurs, Peter Thiel. Peter Thiel is the Founder of both Paypal and Palantir. Functionally, Zero to One will teach you the questions that you need to be able to answer positively to know whether you should convert an idea that you have into a business or whether a business that you are reviewing is worth investing in. The lessons of Zero to One help you to ensure that you do not waste your time or money building a business or investing in one that, statistically and practically speaking, will have little chance of success or impact. Here are the questions that Peter Thiel and Zero to One force us to consider and that we must be able to answer with a resounding “Yes” as company-builders and investors.
Zero to One – Question 1: Creation
Is what you are looking to create or the business that you are seeing truly breakthrough or just an incremental improvement on something that already exists? We are looking for products and businesses that truly change the world (a least 10x better), not tack-ons that just make the current state of things a little bit better. These kinds of revolutionary products and businesses are the ones that can attract investment capital and that can truly energize a community and following. Is what you are creating or analyzing, viewed objectively, truly revolutionary? Zero to One reminds us to ask ourselves this question and answer honestly.
Zero to One – Question 2: Timing
Is now the right time to start this particular business? Why, if it is, is the world ready for what you are about to offer or commit your investment capital to? Or has the need for what you are about to offer or invest in already passed the market by? Critical reflection and honesty are best for your own sake here. Be rigorous in your analysis before you spend time and/or money going in any one direction.
Zero to One – Question 3: Monopoly
Zero to One reminds us that “monopoly” is only a dirty word to those who are incapable of building one themselves. Let’s define this concept of monopoly-building some. What monopoly is not, is taking market share through deceit, unfair practices or mistreatment. Rather, establishing a monopoly means entering and dominating a space capable of domination. Or, in other words, entering a space where little or no competition exists and where you can get such an early advantage that any competition in the future will be futile.
Never fall into the entrepreneurial fallacy of “this is a $1 billion industry and if we can only capture 1% we will have an amazing business.” It rarely ever works that way. Less competition is better for company-builders and their investors.
Instead, focus on a niche and build or invest where there is no competition. Avoid competition – go for monopoly. Know that you can be so good at what you do that no company can offer a close substitute. This is what Paypal and Palantir did, and look where that has taken them. Big share, small market is the goal, not big market, small share.
It is worth saying again because entrepreneurs and investors often fall into this trap. Don’t build or invest in an undifferentiated commodity business. Zero to One says that the biggest mistake a startup can make is to underestimate the scope of its competition. This means making sure that the differentiating factors of your business (or a business that you are considering investing in) are not trivial. Earn a monopoly by solving a unique problem. This is “Monopoly Capitalism,” your key to building a lasting and profitable business.
Zero to One – Question 4: People & Foundation
Business owners and potential investors in those businesses should listen to this advice from Zero to One: the founders must have a great relationship, ideally formed and functioning prior to starting a business together. Founder and team compensation should be aligned with the incentive and objective to drive future value.
Those who own the company (investors), those who possess the company (officers and founders) and those who control the company (board of directors) must have aligned interests and motivations. One critical constituency among the three just mentioned should not be aiming for short-term growth while the other constituencies are focused on long-term scalability. When values differ among these constituencies, there are bound to be business headaches and problems that could put everything at risk.
Bad decisions made early on are very hard to correct. As Zero to One tells us, which certainly rings true, “you can’t build a strong company on a weak foundation.”
Zero to One – Question 5: Distribution
Does this business have a way to not just create but also deliver its product? Your goal should be to master one method of distributing your product or service and focusing your energies there with 100% intensity. How will this business go to market? Test, see what works best, then double down and commit to one strategy that is most precisely-tailored to future business growth.
Zero to One – Question 6: Durability & Relevance
Will this business still be around ten years from now? If not, is this business really worth investing time and/or capital into? Zero to One helps us answer this question, providing the criteria for businesses that are able to endure.
Importantly, enduring companies have irreplaceability, often in the form of proprietary technologies or ways of doing business that can be used to establish and protect monopolies. Remember that this proprietary solution must, however, also be the 10x improvement on prior options, not just trivial improvements to existing products or services.
Additionally, enduring companies have the ability to scale while at the same time preserving or even improving profit margins and with no inherent reason that would cause them to stop growing. Is there something that could cause this business to become much more expensive to operate or that could stymie its growth potential? For most businesses, competition is that risk. So avoid it.
Zero to One – Question 7: Secret
Have you identified a unique opportunity that others do not see?
A Zero to One quote that makes the point here: “Every great company comes from a secret of nature or a secret of people. These secrets are the things we don’t always talk about but that need a solution . . . they strike a balance between telling nobody and telling everyone . . . Secrets are often hidden in plain sight.”
What contrarian belief do you know to be true? What valuable company is nobody building? Great companies stem from solving a problem of nature or people, often reserved in secret, that needs resolving. What problems do you know that people have that they may not care to admit but that require a solution? Your business must address and resolve one, or it is not a business that can go from Zero to One.
Conclusion
All business plans must address these seven critical questions. Peter Thiel and his teams that have started and built Paypal and Palantir asked these questions from the outset. They ask them whenever they look to invest in a startup or early stage company. Why wouldn’t you ask yourself these same questions before investing your valuable time and capital as well?
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