Zero to One Notes on Startups, or How to Build the Future By Peter Thiel In business, every breakthrough innovation only happens once. There may be another Bill Gates one day, but he won’t create a world-beating operating system. Nor will the next Larry Page or Sergey Brin make an incomparable search engine. Nor will the next Mark Zuckerberg create a ubiquitous social network. Lighting never strikes the same way twice. The thing is, if you aspire to become the next Gates, Brin or Zuckerberg, it’s awfully tempting to try and copy them. After all, it’s far easier to simply copy a proven model than to go and create something new. But according to Peter Thiel - the co-founder of PayPal, successful venture capitalist, and author of Zero to One - if you’re merely copying these innovators, you aren’t learning from them. “Doing something that folks already know how to do takes the world from one to two,” explains Thiel. “You’re merely adding one more unit to something that’s already familiar. But when you create something that’s truly new, you take the world from zero to one. The act of creation is singular, and the result is something fresh, and quite possibly amazing.” Zero to One is about how to build companies that create new things. It draws on everything Thiel has learned as a co-founder of PayPal and as an investor in dozens of successful startups, including Facebook and LinkedIn. Thiel’s book asks the questions any budding entrepreneur must answer to succeed in the business of doing new things. His book isn’t intended to be a step-by-step manual, because every business is different (or at least, every business should be different). Rather, Zero to One is intended to be an exercise in thinking. It’s meant to plant a seed that may one day grow into something new, and great. The World Needs More Tech Start-Ups If you’re working in a large corporation or government organization, it’s extremely difficult to take a new innovation from zero to one. Large corporations are more interested in copying or refining products and services that have already been proven to work. Bureaucratic hierarchies tend to move slowly, and entrenched To purchase a personal subscription or corporate license, please visit us at www.TheBusinessSource.com or fill out the simple request form 1 at www.TheBusinessSource.com/contact-us. All Rights reserved. Reproduction or redistribution in whole or in part without prior written permission of The Business Source is strictly prohibited. Zero to One interests shy away from risk. In general, big corporations also tend to underinvest in new technology. This is why, in Peter Thiel’s estimation, the world needs more start-ups. Contrary to popular opinion, the biggest advantage any start-up has going for it isn’t its small size, or nimbleness. Its key competitive advantage is its willingness to embrace new technology, coupled with new ways of thinking. Build a Monopoly So what kind of tech start-up should you create? The one that nobody else is building. With any new start-up, your goal should be to turn it into a monopoly service provider. It’s not good enough to establish a billion dollar a year business if you end up having to share most of that value with other people. “Creating a lot of value is not enough,” warns Thiel. “You also need to capture most of the value you create.” As a practical matter, this means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Imagine that: only 37 cents! Now compare the airlines to Google, which creates less overall economic value than the airlines do, but captures far more of the value it creates. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits. That’s more than 100 times the airline industry’s profit margin that year. Google makes so much money that it’s now worth three times more than every U.S. airline combined. The key difference between the airlines and Google is that the airlines operate in a highly competitive marketplace, whereas Google has few, if any, competitors in many areas of its business. For the airlines, all that competition has the effect of driving prices down. This is a boon for consumers, of course. But if you happen to own one of the airlines, you might wish that you had fewer competitors so you could jack up your prices a bit more. The lesson for technology entrepreneurs in all of this is clear - if you want to create and capture lasting value, don’t build an undifferentiated commodity business. Try to build a monopoly instead. Do something that no one else is doing. Go from zero to one. And by the way, when you set out to create a monopoly in a particular market, make sure it’s a real one, not an imagined one. In Thiel’s experiences, many entrepreneurs delude themselves into thinking that they’re in a league of their own by defining their target market so narrowly so that they dominate it by definition. That can be a big mistake. 2 TheBusinessSource.com All Rights Reserved Zero to One To illustrate his point about narrowcasting, Thiel talks of how, back in 2001, he and his co-workers at PayPal would often go for lunch on Castro Street in Mountain View. Thiel and his friends had their pick of excellent restaurants, within broad categories like Indian, sushi, and burgers. Then, within those broad categories, there were more sub-options once they settled on a general type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to their local restaurant market, PayPal was at that time the only email- based payments company in the world. Thiel employed fewer people than did all the neighboring restaurants on Castro Street, but his business was much more valuable than all of those restaurants combined. That’s because running a South Indian restaurant is a really hard way to make money. You might think that your restaurant is differentiated from the others because, for example, your naan is superior because of your great-grandmother’s recipe. But great naan or not, you’re just another Indian restaurant. “If you lose sight of the actual competitive reality you’re facing and focus on trivial differentiating factors as a way to establish your market dominance, your business is unlikely to survive,” warns Thiel. And for his readers who have aspirations of doing a lot of good in the world, while they make a lot of money, Thiel points out that the problem with running a non- monopoly business goes beyond lack of profits. “Imagine you’re running one of those restaurants in Mountain View,” he writes. “You’re not that different from dozens of your competitors, so you’ve got to fight extra hard to survive. You will probably only be able to pay your employees minimum wage, and you’ll need to squeeze out every efficiency.” If that is the case, how will you be able to make the world a substantively better place than it is today? A monopoly business like Google doesn’t face the same constraints. Since Google doesn’t have to worry about competing with anyone, it has more latitude to care about its workers, including paying them well. Google also has the freedom to spend time considering its impact on the wider world. Google’s motto – “Don’t be evil” – may be, in part, a clever branding ploy. But it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence. Defining Characteristics of a Monopoly Business By definition, every monopoly is unique. But according to Thiel, they usually share some combination of the following four characteristics: proprietary technology, network effects, economies of scale, and branding: 1. Proprietary Technology “Proprietary technology is far and away the most substantive advantage a company can have because it makes your product difficult or impossible to replicate,” explains Thiel. Google’s search algorithms, for example, return results much better than 3 TheBusinessSource.com All Rights Reserved Zero to One anyone else’s. As a good rule of thumb, Thiel advises that your proprietary technology should be at least 10 times better than its closest substitute in some important dimension if you ever hope to achieve a real monopolistic advantage. Achieving modest improvements over the competing technology isn’t good enough because most customers won’t notice, or care. The clearest way to make a 10X improvement is to invent something completely new. “If you build something valuable where there was nothing before, the increase in value that your customers and prospective customers will perceive is theoretically infinite,” he says. 2. Network Effects Network effects make a product or service more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too. When you’re starting a brand new platform, it’s hard to create a network effect because, by definition, you’ll have relatively few users at that point. That’s why it’s imperative to recruit an initial group of users who are highly influential within their particular sphere of the market.