Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel

Preface: Zero to One

• Actually, if American business is going to succeed, we are going to need hundreds, or even thousands, of miracles. This would be depressing but for one crucial fact: humans are distinguished from other species by our ability to work miracles. We call these miracles technology.
• One of those students, Blake Masters, took detailed class notes, which circulated far beyond the campus, and in Zero to One I have worked with him to revise the notes for a wider audience.

1. The Challenge of the Future

• Brilliant thinking is rare, but courage is in even shorter supply than genius.
• “What important truth do very few people agree with you on?”
  • Most answers to the contrarian question are different ways of seeing the present; good answers are as close as we can come to looking into the future.
• Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things—going from 0 to 1.
• Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.
• The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old: only computers and communications have improved dramatically since midcentury.
• small groups of people bound together by a sense of mission have changed the world for the better. The easiest explanation for this is negative: it’s hard to develop new things in big organizations, and it’s even harder to do it by yourself.
• This book is about the questions you must ask and answer to succeed in the business of doing new things: what follows is not a manual or a record of knowledge but an exercise in thinking. Because that is what a startup has to do: question received ideas and rethink business from scratch.

2. Party Like It’s 1999

• when you pay people to be your customers, exponential growth means an exponentially growing cost structure.
• Make incremental advances
  • Small, incremental steps are the only safe path forward.
• Stay lean and flexible All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.
• Improve on the competition Don’t try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors.
• If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution.
• It’s true that there was a bubble in technology. The late ’90s was a time of hubris: people believed in going from 0 to 1.
• Instead ask yourself: how much of what you know about business is shaped by mistaken reactions to past mistakes? The most contrarian thing of all is not to oppose the crowd but to think for yourself.

3. All Happy Companies Are Different

• Creating value is not enough—you also need to capture some of the value you create.
• Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.
• Framing itself as just another tech company allows Google to escape all sorts of unwanted attention.
• You’ll spend time trying to convince people that you are exceptional instead of seriously considering whether that’s true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all else. It’s very possible they don’t exist.
• Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.
• Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets: British food ∩ restaurant ∩ Palo Alto Rap star ∩ hackers ∩ sharks Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets: search engine ∪ mobile phones ∪ wearable computers ∪ self-driving cars
• In business, money is either an important thing or it is everything.
• Monopolists can afford to think about things other than making money; non-monopolists can’t.
• Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.
• If the tendency of monopoly businesses were to hold back progress, they would be dangerous and we’d be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents.
• Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.
• Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past.
• The hazards of imitative competition may partially explain why individuals with an Asperger’s-like social ineptitude seem to be at an advantage in Silicon Valley today. If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you.
• Winning is better than losing, but everybody loses when the war isn’t one worth fighting. When Pets.com folded after the dot-com crash, $300 million of investment capital disappeared with it.
• Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly. This advice can be hard to follow because pride and honor can get in the way.
• If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.

5. Last Mover Advantage

• If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.
• Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.
• Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.
• Google’s search algorithms, for example, return results better than anyone else’s.
• As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
  • The clearest way to make a 10x improvement is to invent something completely new.
  • Amazon made its first 10x improvement in a particularly visible way: they offered at least 10 times as many books as any other bookstore.
• For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too. Unilaterally choosing a different social network would only make you an eccentric.
• Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
• And it enjoys strong network effects from its content ecosystem: thousands of developers write software for Apple devices because that’s where hundreds of millions of users are, and those users stay on the platform because it’s where the apps are.
• Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one.
• The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse. This is why it’s always a red flag when entrepreneurs talk about getting 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%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero.
• Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books.
• The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
• Don’t Disrupt
  • Indeed, if your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.
  • Disruptive companies often pick fights they can’t win. Think of Napster.
    • Napster got sued by music producers, then ended up in Bankruptcy court.
• PayPal could be seen as disruptive, but we didn’t try to directly challenge any large competitor.

6. You Are Not a Lottery Ticket

• Ralph Waldo Emerson captured this ethos when he wrote: “Shallow men believe in luck, believe in circumstances.… Strong men believe in cause and effect.”
• If you believe your life is mainly a matter of chance, why read this book? Learning about startups is worthless if you’re just reading stories about people who won the lottery.
• Indefinite attitudes to the future explain what’s most dysfunctional in our world today. Process trumps substance: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options.
• omnicompetent.
• A definite view, by contrast, favors firm convictions. Instead of pursuing many-sided mediocrity and calling it “well-roundedness,” a definite person determines the one best thing to do and then does it.
• Optimists welcome the future; pessimists fear it.
• The indefinite pessimist can’t know whether the inevitable decline will be fast or slow, catastrophic or gradual. All he can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime: hence Europe’s famous vacation mania.
• Even the Great Depression failed to impede relentless progress in the United States, which has always been home to the world’s most far-seeing definite optimists.
• Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones. Bankers make money by rearranging the capital structures of already existing companies. Lawyers resolve disputes over old things or help other people structure their affairs. And private equity investors and management consultants don’t start new businesses; they squeeze extra efficiency from old ones with incessant procedural optimizations. It’s no surprise that these fields all attract disproportionate numbers of high-achieving Ivy League optionality chasers; what could be a more appropriate reward for two decades of résumé-building than a seemingly elite, process-oriented career that promises to “keep options open”?
• While a definitely optimistic future would need engineers to design underwater cities and settlements in space, an indefinitely optimistic future calls for more bankers and lawyers.
• And once they arrive at Goldman, they find that even inside finance, everything is indefinite. It’s still optimistic—you wouldn’t play in the markets if you expected to lose—but the fundamental tenet is that the market is random; you can’t know anything specific or substantive; diversification becomes supremely important.
• Only in a definite future is money a means to an end, not the end itself.
• The government used to be able to coordinate complex solutions to problems like atomic weaponry and lunar exploration. But today, after 40 years of indefinite creep, the government mainly just provides insurance; our solutions to big problems are Medicare, Social Security, and a dizzying array of other transfer payment programs. It’s no surprise that entitlement spending has eclipsed discretionary spending every year since 1975. To increase discretionary spending we’d need definite plans to solve specific problems. But according to the indefinite logic of entitlement spending, we can make things better just by sending out more checks.
• (Remember Marx and Engels’s encomium to the technological triumphs of capitalism from this page.) These thinkers expected material advances to fundamentally change human life for the better: they were definite optimists.
• Definite optimism works when you build the future you envision. Definite pessimism works by building what can be copied without expecting anything new. Indefinite pessimism works because it’s self-fulfilling: if you’re a slacker with low expectations, they’ll probably be met. But indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it?
• Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.
• But the most important lesson to learn from Jobs has nothing to do with aesthetics. The greatest thing Jobs designed was his business. Apple imagined and executed definite multi-year plans to create new products and distribute them effectively. Forget “minimum viable products”—ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.
• A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.

7. Follow the Money

• The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments.
  • Consider what happens when you break the first rule. Andreessen Horowitz invested $250,000 in Instagram in 2010.
    • because Andreessen Horowitz has a $1.5 billion fund: if they only wrote $250,000 checks, they would need to find 19 Instagrams just to break even.
      • This is why investors typically put a lot more money into any company worth funding.
• After all, less than 1% of new businesses started each year in the U.S. receive venture funding, and total VC investment accounts for less than 0.2% of GDP. But the results of those investments disproportionately propel the entire economy. Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP. Indeed, the dozen largest tech companies were all venture-backed. Together those 12 companies are worth more than $2 trillion, more than all other tech companies combined.
• People who understand the power law will hesitate more than others when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast.
• The power law means that differences between companies will dwarf the differences in roles inside companies.
  • You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing).
• If you do start your own company, you must remember the power law to operate it well. The most important things are singular: One market will probably be better than all others, as we discussed in Chapter 5. One distribution strategy usually dominates all others, too—for that see Chapter 11. Time and decision-making themselves follow a power law, and some moments matter far more than others—see Chapter 9. However, you can’t trust a world that denies the power law to accurately frame your decisions for you, so what’s most important is rarely obvious. It might even be secret. But in a power law world, you can’t afford not to think hard about where your actions will fall on the curve.

8. Secrets

• Recall the business version of our contrarian question: what valuable company is nobody building?
• four social trends have conspired to root out belief in secrets.
  • First is incrementalism. Second is risk aversion. Third is complacency. Fourth is “flatness.”
• To say that there are no secrets left today would mean that we live in a society with no hidden injustices.
• The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers.
• If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
• There are two kinds of secrets: secrets of nature and secrets about people.
• So when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?
• There’s plenty more to learn: we know more about the physics of faraway stars than we know about human nutrition.

9. Foundations

• “Thiel’s law”: a startup messed up at its foundation cannot be fixed.
• As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.
• Freud, Jung, and every other psychologist has a theory about how every individual mind is divided against itself, but in business at least, working for yourself guarantees alignment. Unfortunately, it also limits what kind of company you can build. It’s very hard to go from 0 to 1 without a team.
• You need good people who get along, but you also need a structure to help keep everyone aligned for the long term.
  • 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?
• A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control.
• Unlike corporate giants, early-stage startups are small enough that founders usually have both ownership and possession. Most conflicts in a startup erupt between ownership and control—that is, between founders and investors on the board.
• A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
• As a general rule, everyone you involve with your company should be involved full-time. Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example.
• If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus.
• A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.
  • A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
  • Low CEO pay also sets the standard for everyone else.
• Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself. Equity is the one form of compensation that can effectively orient people toward creating value in the future.
  • The graffiti artist who painted Facebook’s office walls in 2005 got stock that turned out to be worth $200 million, while a talented engineer who joined in 2010 might have made only $2 million.
  • Equity is a powerful tool precisely because of these limitations. Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future.
• The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings.

10. The Mechanics of Mafia

• “Company culture” doesn’t exist apart from the company itself: no company has a culture; every company is a culture. A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.
• We sold PayPal to eBay for $1.5 billion in 2002. Since then, Elon Musk has founded SpaceX and co-founded Tesla Motors; Reid Hoffman co-founded LinkedIn; Steve Chen, Chad Hurley, and Jawed Karim together founded YouTube; Jeremy Stoppelman and Russel Simmons founded Yelp; David Sacks co-founded Yammer; and I co-founded Palantir. Today all seven of those companies are worth more than $1 billion each.
• you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms. From the start, I wanted PayPal to be tightly knit instead of transactional. I thought stronger relationships would make us not just happier and better at work but also more successful in our careers even beyond PayPal. So we set out to hire people who would actually enjoy working together. They had to be talented, but even more than that they had to be excited about working specifically with us.
• Talented people don’t need to work for you; they have plenty of options. You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?
• You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done. That’s the only thing that can make its importance unique. At PayPal, if you were excited by the idea of creating a new digital currency to replace the U.S. dollar, we wanted to talk to you; if not, you weren’t the right fit.
• Above all, don’t fight the perk war. Anybody who would be more powerfully swayed by free laundry pickup or pet day care would be a bad addition to your team. Just cover the basics like health insurance and then promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.
• From the outside, everyone in your company should be different in the same way.
  • It’s a cliché that tech workers don’t care about what they wear, but if you look closely at those T-shirts, you’ll see the logos of the wearers’ companies—and tech workers care about those very much.
• defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities.
• The best startups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful startup are fanatically right about something those outside it have missed.

11. If You Build It, Will They Come?

• What nerds miss is that it takes hard work to make sales look easy.
• This explains why almost everyone whose job involves distribution—whether they’re in sales, marketing, or advertising—has a job title that has nothing to do with those things. People who sell advertising are called “account executives.” People who sell customers work in “business development.” People who sell companies are “investment bankers.” And people who sell themselves are called “politicians.” There’s a reason for these redescriptions: none of us wants to be reminded when we’re being sold.
• The engineer’s grail is a product great enough that “it sells itself.”
• If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.
• Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.
• Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC). In general, the higher the price of your product, the more you have to spend to make a sale—and the more it makes sense to spend it.
• Complex sales works best when you don’t have “salesmen” at all. Palantir, the data analytics company I co-founded with my law school classmate Alex Karp, doesn’t employ anyone separately tasked with selling its product. Instead, Alex, who is Palantir’s CEO, spends 25 days a month on the road, meeting with clients and potential clients. Our deal sizes range from $1 million to $100 million. At that price point, buyers want to talk to the CEO, not the VP of Sales.
• product is viral if its core functionality encourages users to invite their friends to become users too.
• by directly paying people to sign up and then paying them more to refer friends, we achieved extraordinary growth. This strategy cost us $20 per customer, but it also led to 7% daily growth, which meant that our user base nearly doubled every 10 days. After four or five months, we had hundreds of thousands of users and a viable opportunity to build a great company by servicing money transfers for small fees that ended up greatly exceeding our customer acquisition cost.
• Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
• But the kitchen sink approach—employ a few salespeople, place some magazine ads, and try to add some kind of viral functionality to the product as an afterthought—doesn’t work.
• Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure.
• Even if your particular product doesn’t need media exposure to acquire customers because you have a viral distribution strategy, the press can help attract investors and employees.

12. Man and Machine

• People have intentionality—we form plans and make decisions in complicated situations. We’re less good at making sense of enormous amounts of data. Computers are exactly the opposite: they excel at efficient data processing, but they struggle to make basic judgments that would be simple for any human.
• When a cheap laptop beats the smartest mathematicians at some tasks but even a supercomputer with 16,000 CPUs can’t beat a child at others, you can tell that humans and computers are not just more or less powerful than each other—they’re categorically different.
• if humans and computers together could achieve dramatically better results than either could attain alone, what other valuable businesses could be built on this core principle?
• Computers can find patterns that elude humans, but they don’t know how to compare patterns from different sources or how to interpret complex behaviors. Actionable insights can only come from a human analyst
• But the most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?
• Technology is supposed to increase our mastery over nature and reduce the role of chance in our lives; building smarter-than-human computers could actually bring chance back with a vengeance. Strong AI is like a cosmic lottery ticket: if we win, we get utopia; if we lose, Skynet substitutes us out of existence.

13. Seeing Green

• Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer: 1. The Engineering Question Can you create breakthrough technology instead of incremental improvements? 2. The Timing Question Is now the right time to start your particular 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 not just create but deliver your product? 6. The Durability Question Will your market position be defensible 10 and 20 years into the future? 7. The Secret Question Have you identified a unique opportunity that others don’t see?
• At Founders Fund, we saw this coming. The most obvious clue was sartorial: cleantech executives were running around wearing suits and ties. This was a huge red flag, because real technologists wear T-shirts and jeans. So we instituted a blanket rule: pass on any company whose founders dressed up for pitch meetings.
• no matter how much the world needs energy, only a firm that offers a superior solution for a specific energy problem can make money. No sector will ever be so important that merely participating in it will be enough to build a great company.
• The macro need for energy solutions is still real. But a valuable business must start by finding a niche and dominating a small market. Facebook started as a service for just one university campus before it spread to other schools and then the entire world. Finding small markets for energy solutions will be tricky—you could aim to replace diesel as a power source for remote islands, or maybe build modular reactors for quick deployment at military installations in hostile territories.

14. The Founder’s Paradox

• A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.

Conclusion: Stagnation or Singularity?

• Our task today is to find singular ways to create the new things that will make the future not just different, but better—to go from 0 to 1.
• The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.
• About the Authors
• 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.