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12/11/2014

Book Review: Zero to One


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Zero-OneZero to One: Notes on Startups, or How to Build the Future is about how to build companies that create new things. It draws on everything I learned directly as a co-founder of PayPal and Palentir and then as an investor in hundreds of startups including Facebook," wrote Peter Thiel at the book's opening. Thiel, as the opening suggests, has lots of insights and lessons for those interested in business startups. The narrative is a mixture of professional and life guidance, the latter of which may not interest financial professionals.

Thiel clearly sees himself as a contrarian. This is evident at the outset where he praised monopoly business models, while being critical of competition business models. He observes " Creative monopoly means new products that benefit everyone and profits for the creator. Competition means no profits for anyone, no meaningful differentiation, and a struggle for survival ". As an example of a successful monopoly, he points to Google. Because our society praises competition, and abhors monopolies, successful monopolies go to extreme lengths to deny what they are.

In building PayPal, Thiel used clever marketing, and astute stock market timing. To get enough customers to reach critical mass, PayPal gave new customers $10 for signing up, and $10 for referring a new customer. As the Dot Com boom gathered steam, Thiel became concerned about the speculation. He pushed to get $100 million financing, which he got in March 2000, at the peak of the boom, just before the collapse.

One of the mistakes he sees in many startups is overlooking the importance of long term growth - "Many entrepreneurs focus only on short term growth ... measurement mania," instead of asking "Will the business be around a decade from now?" For example, Zynga and Groupon. He also advises startups to avoid the now trendy strategy of Disruption, and instead to "avoid competition as much as possible." So, how do you do it right? Four characteristics Thiel looks for in startups are proprietary technology; network effects (i.e., starting with a small market akin to Facebook's humble beginnings with students); economies of scale ("A good startup should have the potential for great scale built into the first design." Twitter is a good example.); and branding which must accompanied with "strong underlying substance," e.g. Apple.

One of the most practical and helpful parts of the book is Thiel's list, "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 not just to create but deliver your product
  6. The Durability Question: Will you 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?

Successful business startups are the business media "hero" stories. Great wealth and applause go with them. Few of these stories tell how difficult and risky the process is. This should make Zero to One of special interest.

–Bill Hayes

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