This review is part of our The Elon Musk Experience article series.
Peter Thiel is the billionaire founder of PayPal and Palantir, and you would do well to take the title of his business book literally. It reads more like somebody’s detailed notes on their experiences as a startup founder and venture capitalist than a typical instructive business book. And, in fact, the genesis of the book was a course on startups that Thiel taught at Stanford.
Consequently, it’s hard to review the book. I’ve never found reviews of business books particularly enlightening anyway. So, you should read this review as more of a chapter-by-chapter summary, plus my own reactions to the contents of the book. If the summary makes you curious, the full book expands on these ideas and provides more examples. It’s also an entertaining read.
- The Challenge of the Future
Thiel likes to ask the interview question (The Contrarian Question): “What important truth do very few people agree with you on?” Which is a euphemism for “What are your crazy beliefs?” He believes this question can help find unexpectedly good predictions about the future. He offers one answer of his own – he thinks technology matters more than globalization. New technology solves problems, globalization spreads them around (as it were). “A startup is the largest group of people you can convince of a plan to build a different future.” We should mention, at this point, that Thiel has practically no interest in “normal” companies that aren’t trying to be the next Google.
- Party Like It’s 1999
Thiel discusses the economic landscape of the ‘90s. In his view, it was a decade of stagnation and confusion ending with the dot-com boom and bust. After the dot-com bust, most people took away the (erroneous) lesson that Internet was not actually going to be a big deal after all.
The bust taught everyone four business lessons that were all wrong:
- Make only incremental advances, never bold leaps.
- Stay lean and flexible, be ready to change the business plan at any moment.
- Improve on the competition, don’t try to create a new market.
- Focus on product, not sales.
Thiel goes on to say that the opposite of each of these lessons is true:
- It is better to risk boldness than triviality.
- A bad plan is better than no plan.
- Competitive markets destroy profits.
- Sales matter just as much as product.
- All Happy Companies Are Different
In this chapter, Thiel expands on his answer to the Contrarian Question: His belief that monopolies are good and you should aim to make your startup a monopoly.
“Capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.”
We view monopolists as fat-cat thieves, but in fact, monopolists can make so much money that they can afford to be ethical – observe all the billionaires who go on to be philanthropists, or invest in purely socially conscious business ventures. In a static world, a monopolist is just a rent-collector, but in a dynamic world, a monopolist is providing more choices by adding more categories of abundance to the world.
“All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”
- The Ideology of Competition
Thiel continues to lay out his case that competition is a destructive force, and not the core of Capitalism as many believe. Competition is not good, he says, but we have let it pervade everything. Even children compete in school, via grades and testing, rather than being optimally trained and prepared for success.
In our culture, we explicitly compare business to war. War is all about the destruction of value to force capitulation. “War” between businesses is always bad for all parties involved. Trying to fight Google for primacy in Search cost Microsoft a huge amount of money and earned them little; Google trying to compete with Microsoft for enterprise software wasted a lot of Google’s money in turn. Apple came along and surpassed them in value by not bothering to waste energy competing with them.
- Last Mover Advantage
Thiel invokes the concept of Net Present Value in a roundabout way by illustrating how Twitter is worth more than the New York Times, even though the Times has more cashflow, due to the fact that Twitter is expected to bring in more cash in the future.
Most of the value of a really good business may lie in the far future – the business may have net negative cashflow for the first few years. Thus, don’t fixate on short-term growth. (This Undergraduate Business-level observation may indicate the audience for which this book was intended.)
Characteristics of a company with large cashflows in the far future include proprietary technology, network effects, economies of scale, and branding, each term defined as follows:
- Proprietary technology must be at least 10X better than its closest substitute. (Examples: Google Search, the iPad, PayPal.)
- “Network Effects” means it gets more valuable the more people use it – but it must still be quite valuable to its first users. (Ex: Facebook.)
- Cost-per-unit should decrease with each subsequent unit. (Ex: Twitter.)
- Branding should be iconic and well-managed (Ex: Apple.)
Thiel thinks disruption is overrated, and that you should just make something new. Disruption attracts attention, and besides, it’s a form of competition, which he eschews.
Being the “last mover” means you’re the last one standing. It’s better to soundly finish in first place than to start the race quickly.
- You Are Not A Lottery Ticket
Several people have created multiple multimillion dollar companies. A handful have created multiple multibillion dollar companies. It can’t all be luck. (Says the billionaire.)
There must be something unique about these people, and Thiel suggest that it involves their outlook. He divides the space of possible outlooks into:
- Indefinite pessimism – “The future is bleak, and there’s nothing to be done.”
- Definite pessimism – “The future is bleak, so we’d better prepare ourselves.”
- Indefinite optimism – “The future will be better, but we don’t know how, so no point in making plans.”
- Definite optimism – “The future will be better if we plan and work to make it so.”
Thiel thinks we are currently a culture of indefinite optimism, expecting everything to gradually get better regardless of our actions, and this is a bad thing, because it breeds a sort of coasting, complacent mentality. He thinks we need a cultural revolution. We need to reject the sacredness of chance in determining winners and losers and embrace planning and intention.
- Follow the Money
Returns in venture capital follow a power law, meaning a tiny fraction of investments pay off hugely, and most investments are a loss or minimally successful. The return generated by Facebook is greater than the return of every other investment made by Founders Fund combined. You can make a 1000X return on your investment, but that might not be “enough” if you only invested a dollar. You need to find those 1000X companies and then go all-in on them. Thiel argues that “life is not a portfolio”. As an entrepreneur, you should be putting all your eggs in one basket, specializing, and going all in on your venture.
Go back to the contrarian question – “What do you believe that others don’t?” – and notice that it only makes sense if the world has more secrets to give up. Our society, however, seems to think there are no secrets left. Thiel quotes Ted Kaczynski, the Unabomber, as saying that most of the world’s real problems are impossible, so people settle for solving trivial non-problems.
Social trends that cause us to underrate secrets:
- Incrementalism – everything must be done in small steps, “grade by grade”, but if you follow the path, you get an “A”.
- Risk aversion – if you believe in a secret and you’re wrong, you’ll fail, and that’s unbearable.
- Complacency – Capitalists can make plenty of income without resorting to thinking about secrets.
- Flatness – “the world is flat” – if it were possible to discover something new, somebody in Bangladesh would have done it already.
By way of example, Thiel provides a lengthy tangent on how HP gave up on innovation and stagnated.
“There are two kinds of secrets – secrets of nature and secrets about people. What secrets is nature not telling you? This is called ‘science’. What secrets are people not telling you? What are people not allowed to talk about? What is forbidden or taboo? (Example: “Competition and capitalism are opposites.”) The amount of people you want to tell about your promising secret is exactly identical to your company.”
Thiel’s Law: A startup messed up at its foundations cannot be fixed. Thiel provides guidelines for a sound foundation. Not only do you need good people, but you need them to get along amongst themselves.
Sources of misalignment between employees:
- Ownership: who legally owns the company’s equity? Equity can be a powerful motivating tool, and employees who prefer equity over cash are demonstrating a long-term preference to help build the company. However, equity must be carefully portioned out to avoid alienating latecomers.
- Possession: who actually runs the company on a day-to-day basis? Thiel seems to prefer the hands-on, autocratic CEO, and claims that a company does better the less it pays its CEO. (No more than $150,000/yr for the CEO of an early-stage venture-backed startup.) Wealth from equity should be the main motivator of the CEO.
- Control: who formally governs the company’s affairs? Limiting a company’s board to three people can help minimize conflict with the CEO and within the board.
It’s best of the same person/people contain all three – ownership, possession, and control – according to Thiel. Along these lines, he advocates consolidation of power with an essentially autocratic leadership, and alignment of employees through careful distribution of equity.
“Only at the very start do you have the opportunity to set the rules that will align people toward the creation of value in the future.”
Philosophically, Thiel suggests maintaining openness to innovation, which is characteristic of beginnings. Extend the “founding” indefinitely.
- The Mechanics of Mafia
The so-called Paypal Mafia was originally just a group of exceptional young people who eventually became serial entrepreneurs. Regarding culture, Thiel says: “No company has a culture, every company is a culture.” On this basis, Thiel strongly emphasizes that your initial team needs to be composed of the right people, carefully selected. At PayPal, Neal Stephenson’s Cryptonomicon was required reading, and it was understood that the capitalistic Star Wars was better than the socialist Star Trek. Thiel’s definition of “culture” obviously goes deeper than “providing ping pong tables in the break room”. Thiel suggests that you should think more along the lines of a cult – or a mafia.
Thiel wants you to ask yourself: “Why should the 20th employee join your company?” – rather than join, say, Google? The right answer is always specific to your company, and connects with your mission or your team specifically, rather than something generic like “making good products!”
- If You Build It, Will They Come?
Sales is underrated by “nerds”. Sales ability is crucial in every job. No product sells itself. “Superior sales and distribution can by itself create a monopoly,” says Thiel.
Thiel chooses to highlight two metrics which limit effective distribution:
- Total net profit earned on average over the course of your relationship with a customer (Customer Lifetime Value, CLV)
- Average cost of acquiring a customer (Customer Acquisition Cost, CAC)
Thiel sketches a number of examples indicating different places a business can occupy along the CLV-versus-CAC spectrum. SpaceX is an example of “sales”, in which Elon Musk has targeted essentially one primary customer (the US Government) and ensured that the lifetime value he obtains from this customer is more than adequate.
At the other end of the spectrum, viral marketing works if you can feasibly make it so your CAC is very low. The relationship embodied in this trade-off is a “power law of distribution”.
- Man and Machine
Thiel sidles up to the topic of automation. I admit a degree of bias on this topic, and I found myself only provisionally agreeing with him, here. He seems to belong firmly in the camp who think the future will be a smooth upward ascent, tomorrow will look like today (only a little bit better), and AI is not dangerous. Obviously, I disagree.
All that said – Thiel focuses on cases where companies were able to use software to serve as a sort of mental prosthetic. “The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.” Humans and computers are good at categorically different things, says Thiel, and a complementary approach is best. He uses his own company, Palantir, as an example of a “software prosthetic” for detecting cyber crime, complementing human intuition with machine algorithms. Likewise, he discusses LinkedIn as a prosthetic for recruiters.
Overall, I found this chapter to be the least useful, and felt that it was included by Thiel out of a compulsion to say something about automation.
- Seeing Green
This chapter was probably the most interesting in the entire book, and hit me with a few truly delightful morsels of insight. Here, Thiel takes the framework he’s developed up to this point in the book and applies it to the Cleantech bubble. He uses the failure of (most) Cleantech companies to illustrate the validity of his prior points.
“Can you create breakthrough tech instead of incremental improvements?” Almost all Cleantech companies were incremental improvements – incrementally better solar panels, marginally more efficient engines, infinitesimally better water treatment processes. The failure to achieve a real breakthrough handicapped these Cleantech outfits.
“Is now the right time to start your particular business?” Generally, no – any Cleantech company is, at this point in time, fighting an absurdly unfair uphill battle against the currently existing “cheap-and-dirty” tech that serves the same need.
“Are you starting with a big share of a small market?” If your market is electrical power, for example, the answer is certainly “no”, but this didn’t stop a number of companies from trying.
“Will your market position be defensible 10 and 20 years in the future?” Almost any attempt to “ride the wave” of an innovation trend is going to get rolled under that same wave within a short time frame.
“Have you identified a unique opportunity that others don’t see?” On the contrary, in Thiel’s view, most Cleantech entrepreneurs started companies precisely because other people were doing the same thing.
The Tesla exception: Tesla cars are a lot better than other electric cars. Tesla opened just as a huge subsidy became available. Tesla’s market was tiny and easily dominated. The “team” here was really just Musk. Tesla controlled the entire distribution chain. Tesla is positioned to remain in the lead for years to come. Tesla knew that Cleantech is a fad, so it set out to make cars that were cool and desirable regardless of how “green” they were.
- The Founder’s Paradox
Thiel argues that founders of companies are usually weirdos. They may be both an “insider and outsider” at the same time, or alternatingly a jerk and a charismatic leader. Maybe they start out just a little bit different, develop extreme traits which they exaggerate for effect, and which others then exaggerate further, which makes them even more fundamentally different, in a cycle.
In an enjoyably weird tangent, Thiel muses on the semi-religious power of celebrity, and how we “sacrificed” Britney in the same manner that human societies have been sacrificing young men and women to the gods for thousands of years. This is loosely connected to our need to “sacrifice” our leaders. “Individual prominence and adulation can never be enjoyed except on the condition that it may be exchanged for individual notoriety and demonization at any moment – so be careful.”
Overall this was a very rambling, stream-of-consciousness chapter, but not unenjoyable.
- Stagnation or Singularity?
What is the arc of history? Recurrent collapse? Plateau? Extinction? Takeoff/Singularity? It doesn’t really change what you should do. We build the future.
Zero to One is almost an economics book as much as a business book. As a business book, one could reduce the lessons to a banal statement like: “Make a great company and it will do great.” But it gives you a good sense of what a great company looks like.
I am trying to work through a conviction that Musk added this to his list as a favor to his friend Peter Thiel. I am not entirely convinced that Elon Musk actually thinks that this is one of the best books ever. But it packed more than its share of insights, and I recommend it to anyone interested in business, startups, and the future.