Book Summary: Zero to One

post by bilalchughtai (beelal) · 2024-12-29T16:13:52.922Z · LW · GW · 1 comments

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Summary. Zero to one is a collection of notes on startups by Peter Thiel (co-founder of PayPal and Palantir) that grew from a course taught by Thiel at Stanford in 2012. Its core thesis is that iterative progress is insufficient for meaningful progress. Thiel argues that the world can only become better if it changes dramatically, which requires new technology that does not yet exist to be invented. He argues that the right way to do this is not to copy existing things, nor to iterate gradually on existing ideas, but to find fundamentally new company-shaped ideas, and leverage those to change the world. The book discusses recent historical examples of going from zero to one, comments on the fact that such instances seem to be in decline today, and challenges the reader to revive creation -- to take us from zero to one.

 

I summarise each chapter below.

The challenge of the future. Vertical progress/technology/going from zero to one is "doing new things". Horizontal progress/globalisation/going from one to n is "copying things that have already been done". We are currently in an era where horizontal progress is the norm. But the future can only be better if it is different. Horizontal progress is not sufficient.

Party like it's 1999. The 90s were a unique time in the history of entrepreneurship. The internet was just taking off. Dot-com mania was rampant. Startups were popping up like there was no tomorrow. Money was flowing. But it was not to last. The various companies were undifferentiated and overvalued. The bubble eventually popped. The dot-com crash caused people to make four updates about how to build companies: (1) Be humble, and only make incremental advances. (2) New companies should be "lean", not have a plan, and instead iterate to the whims of their customers. (3) New companies should find some existing market, not attempt to try to create a new market. (4) Focus only on the product, and the sales will come. Thiel argues the opposite to each of these, namely (1) It is better to take risks than risk triviality. (2) A bad plan is better than no plan. (3) Competitive markets destroy profits and (4) Sales do matter.

All happy companies are different. Perfect competition and monopoly are two ends of a sliding scale. Competition is baked into standard economic dogma, in part because perfect competition results in equilibrium dynamics, which are easy to model. Capitalism is often associated with competition, but this is a lie – capital cannot accrue in an environment of perfect competition as profits are unstable and margins small. Progress cannot happen without a company having a sufficient moat to be able to prioritise longer term innovative thinking, and not just short term profits.

All companies are incentivised to lie about where on the monopoly-competitive player axis they fall. Monopolies get scrutinised, audited and attacked, so they twist their brand to appear more competitive than they really are: Google is really an advertising monopoly, but masquerades as a generic and multifaceted technology company. It disguises its market by claiming to be the union of various smaller markets. Non-monopolists tell the opposite lie -- a restaurant may claim to be the "only restaurant selling British food in Palo Alto". But this is not the right market -- they have taken the intersection of various markets to result in something smaller and to appear unique.

The ideology of competition. Why does everyone think competition is healthy? It's because competition is rampant in western ideology. Our education system drives and reflects our obsession with competition -- at school, grades are what differentiates a good student from bad. This gets further exacerbated in higher education. Then, elite students compete to achieve offers from competitive graduate schemes in consulting and investment banking. The same is true in business: businesses often compete for competition's sake. But competition is negative sum. Cooperation, or better, differentiation, serves everyone better.

Last mover advantage. For a monopoly to succeed, it must grow over the long term and endure into the future. Technology companies often lose money in their first few years, but this is fine -- they should trust in exponential growth. What traits enable long term growth and characterise successful monopolies? (1) Proprietary technology, that is at least an order of magnitude better than competitors. (2) Network effects, where the utility of your product increases the more users you acquire. (3) Economies of scale, such that exponential growth is possible -- software is the prototypical example of a type of product that scales cheaply. (4) A strong brand.

How should you go about building a monopoly? Start small, monopolise a niche market, and then scale to a larger market. Both PayPal and Facebook were built like this. PayPal initially targeted only high volume Ebay auctioneers, and Facebook only Harvard students. Finally, the idea of "disrupting" some market is common but overrated, and probably indicates you have direct competitors (bad).

You are not a lottery ticket. Does success derive from luck or skill? Is success a matter of chance or design? You can treat your future as either definite, in your control to be shaped, or indefinite and random. Thiel argues against indefiniteness if your goal is success. Indefiniteness promotes well-roundedness, extracurriculars, and being good at many things but a master of none. He instead favours firm convictions. Another dimension along which people vary is optimism vs pessimism - do you expect the future to be better or worse than the present? This yields four archetypes. (1) Indefinite Pessimism ~ Europe. (2) Definite Pessimism ~ China. (3) Definite Optimism ~ Historic U.S. (4) Indefinite Optimism ~ U.S. today. Thiel argues that indefinite optimism is incoherent; that the world will not get better without bold plans to make it so.

Follow the money.  The Pareto Principle states that 80% of value is often generated by 20% of [thing]. Power laws are rampant in the world; business is no different. The most successful company some VC funds will outperform the entire rest of the fund combined. This implies the following strategy for VCs: only invest in companies with the potential to be that company. It also has implications for individuals. Every individual is an investor; they are making a bet that what they choose to work will be valuable to the world. Though importantly, an individual cannot diversify in the same way that investors can. They have to make one bet, no matter what our education system tries to tell us about "well roundedness", and "excellence" being domain agnostic. The power law also implies founding a startup is an incredibly risky endeavour: it implies that the variance over companies will be significantly greater than the variance over roles within a company. Owning 0.01% of Google far outperforms owning 100% of your own mid startup.

Secrets. Contrarian thinking results in progress. What important truth do few people agree with you on? What important company is no one building? Every successful company is built on some secret that the founders understand but the wider world does not. Secrets can be clustered into three groups: (1) Easy, (2) Hard and (3) Impossible. Society today acts as if there is nothing left in group (2). Four social trends explain this. (1) Incrementalism, (2) Risk aversion, (3) Complacency and (4) Flatness / Globalisation. In other words, it's now hard to start a cult; people are less open to new ideas. Accepting that the world holds no remaining secrets is a bold claim; it implies a solved world, without problems. The world is not solved. So secrets exist; go out and find them. Secrets can pertain either to the world, or to the people in it. The best secrets often seem obvious in retrospect.

Foundations. The initial conditions of your startup matter.

• Your cofounder better be someone you trust.
• You should keep your board small and aligned.
• There are three important properties/incentives to keep track of. (1) Ownership -- who legally owns the company's equity? (2) Possession -- Who runs the company day to day? (3) Control -- who formally governs the company's affairs? These properties are distributed among many people as the startup grows. Conflict usually arises between ownership and control.
• As a general rule, everyone involved in the company should either be "on the bus" or "off the bus". Part time (remote) contributors are bad.
• Cash salaries incentivise short term thinking. Equity is a powerful tool in getting people bought in on long term potential.

The mechanics of mafia. What is a good company culture? How do you build such a thing? What even is culture? Early PayPal must have had a good culture given the prevalence of the 'PayPal Mafia' today; the group of former early PayPal employees and founders who have gone on to found a number of other successful technology companies. 

Company culture is not having a fancy office, but is instead a term used to describe what a company is like on the inside, and how it feels to be working towards the mission. Here are some considerations relevant to culture. One aspect of good culture is that working relationships feel beyond professional -- people should actually like each other, and see a long term future building things together. Talent is not sufficient for good culture. Hiring also contributes to culture; new hires should both benefit from and give back to the company culture. From the outside, everyone should be different in the same way -- your team should share aspects of a world model that differ from the rest of the world. On the inside, everyone should be sharply distinguished by her work -- when possible, reduce internal conflict stemming from competition over responsibility. The most intense organisations might appear from the outside a cult; its members might have similar views that differ from the rest of the world and also only hang out with each other. The opposite extreme is a consultancy firm, where there is no shared identity or vision. Better to be part of a cult than a consultant. 

If you build it, will they come? A good product alone is insufficient. People also need to know about it, and be persuaded that it is good. Nerds generally have a bias against sales; they both think they are unaffected by marketing, and that marketing is not needed as long as the product is good enough. This take is wrong. Sales works if your customer lifetime value (CLV), the amount of money some customer generates for your company over their lifetime, exceeds the customer acquisition cost (CAC). Your advertising strategy depends heavily on what the CLV is, which depends on who the customer is. Thiel clusters sales into four categories along an axis, from most to least expensive:

• Complex sales, e.g. to governments, O($10M).
• Personal sales, e.g. most b2b, O($10K).
• ... a dead zone at O($1K) due to it being hard to make CAC < CLV here.
• Marketing, e.g. most b2c, O($100).
• Viral Marketing, where you rely on people telling their friends.

Man and machine. The term "technology" is now synonymous with "information technology". Computers seem important. One lesson from the past two decades has been that computers are not replacing us, as some historically worried. They are instead complementing us. All successful technology companies in the past two decades answer the following question: How can computers help humans solve hard problems? AGI may change this dynamic, but it continues to hold true, for now.

Seeing green. Earlier, we discussed that companies need to have a vision for survival into the future. At the dawn of the 21st century, climate change seemed like a big deal. This provided an opportunity: cleantech sprang onto the scene. But, almost all cleantech companies failed dramatically. This echoes the dot-com crash. Why was this? Many of these companies failed on the following 7 important questions. Tesla was the one company that didn't, hitting 7/7.

1. The engineering question - can you create breakthrough technology?
2. The timing question - is now the right time to start this 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 distribute your product?
6. The durability question - will your market position be defensible in a decade?
7. The secret question - have you identified a unique opportunity others don't see?

The founder's paradox. Founders often seem eccentric. Traits are generally normally distributed. But in the reference class of founders, they seem inversely normally distributed, peaking at the tails. Is that because founders are naturally eccentric, or because becoming a founder forces them to be? There seems to be some cycle: where people are actually different, so develop extreme traits, which both they and others exaggerate, leading to them being more different. It's hard to tell what traits are needed to be a good founder, but one thing seems certain - founders do need to be different. Difference is necessary for being sufficiently contrarian to bring about progress in a society of complacency.

Stagnation or singularity? Nick Bostrom describes four futures for humanity.  (1) Recurrent Collapse,  (2) Plateau, (3) Extinction and (4) Singularity. (1) and (2) seem unlikely. Our goal is to make it to (4), while avoiding (3). The path to (4) is unclear, but to achieve it we certainly need to make the future better than today. That requires going from zero to one.

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