Zero to One

Peter Thiel with Blake Masters · 2014

Thesis

Progress comes from creating new things, not copying existing ones, and the businesses that create them succeed by escaping competition to become monopolies: the founder's task is to find a valuable truth others have missed and build a company, from a small market outward, that no one else can easily replicate.

The main ideas

Going from zero to one, creating something new, is different from going from one to n, copying what works. The first is technology; the second is globalization.
Competition destroys profits. Every lasting business is a monopoly in some sense, and every failed one failed to escape competition.
Monopolies are built from proprietary technology, network effects, economies of scale and branding, starting with a small market and expanding.
A definite plan beats leaving the future to chance, and returns follow a power law: a few outcomes dwarf all the others.
Great companies are built on secrets: important truths that few people believe.
A startup's foundations, its founders, ownership and board, are almost impossible to fix later.
Distribution matters as much as product.

Zero to one

Peter Thiel, a co-founder of PayPal and Palantir and an early investor in Facebook, turned his 2012 Stanford course on startups into this book with Blake Masters, a student who had published detailed notes on the lectures. It opens with the question Thiel asks in job interviews: what important truth do very few people agree with you on. A good answer takes the form: most people believe x, but the truth is the opposite of x.

His central distinction is between two kinds of progress. Horizontal or extensive progress, going from one to n, copies things that already work and spreads them; at the scale of the world, it is globalization. Vertical or intensive progress, going from zero to one, does something new; it is technology, in the broad sense of any new and better way of doing things.

Thiel argues that the world's future depends on the second. Globalization without new technology is unsustainable, because spreading current methods to billions more people would exhaust resources. Only new technology can make that growth possible.

Implication: when evaluating a business, a career or a project, ask whether it creates something new or copies something existing. The returns, and the contribution, are concentrated in the first.

The lessons of 1999, reversed

Thiel argues that Silicon Valley drew the wrong lessons from the dot-com crash. Chastened entrepreneurs concluded that they should make incremental advances, stay lean and flexible, improve on existing competitors and focus on product rather than sales.

He proposes the opposite principles. It is better to risk boldness than triviality. A bad plan is better than no plan. Competitive markets destroy profits. Sales matters just as much as product.

The mechanism, in his account, is that the crash taught caution, and caution produces companies that make small improvements in crowded markets. The excesses of 1999 were real, but the ambition behind them was not the error.

Implication: be wary of methods that guarantee small wins. Pursue a definite, ambitious plan, and treat crowded markets and neglected distribution as warning signs.

Competition and monopoly

Thiel's most provocative argument is that competition is the enemy of profit. In a perfectly competitive market, firms sell the same thing, prices fall to cost and no one earns enough to plan for the future. A monopoly, which he defines as a company so good at what it does that no other firm can offer a close substitute, earns profits it can invest for the long term. He distinguishes this creative monopoly from illegal ones built through bullying or government favor.

He argues that both kinds of firm misdescribe their markets. A monopolist describes its market as the union of several large markets, to look small within it: Google, which held about two-thirds of search, presents itself as a minor player in advertising or technology. A firm in a competitive market describes its market as the intersection of narrow ones, to look unique: a British restaurant in Palo Alto may be the only one of its kind, but it competes with every restaurant in town.

Thiel adapts Tolstoy: all happy companies are different, each earning a monopoly by solving a unique problem; all failed companies are the same, having failed to escape competition.

Implication: define your market honestly. If it is crowded, look for one where you can be the only serious option.

Building a monopoly

Thiel names four characteristics of monopolies. Proprietary technology, ideally an order of magnitude better than its closest substitute. Network effects, which make a product more useful as more people use it. Economies of scale, which lower costs as the business grows. Branding, which is durable only when it rests on substance.

The route to monopoly starts small. A startup should dominate a small market and then expand into related ones. Amazon began with books, Facebook with students at Harvard and PayPal with a few thousand high-volume sellers on eBay.

He adds the idea of last-mover advantage. Being first matters less than being the last to make a great development in a market and so enjoy years of monopoly profits.

The mechanism is that a monopoly's value lies in its cash flows far in the future, so the question is not how much a company earns now but whether it will still be dominant in ten or twenty years.

Implication: start where you can win completely, build an advantage that compounds with scale, and judge a business by its durability.

Definite optimism and the power law

Thiel classifies attitudes to the future along two axes: optimistic or pessimistic, definite or indefinite. A definite optimist believes the future will be better and makes plans to build it. An indefinite optimist believes it will be better but makes no specific plans, preferring to keep options open. He argues that the United States moved from definite optimism, the era of large engineering projects, to indefinite optimism from about 1982, when a long bull market began and finance eclipsed engineering, with an emphasis on diversification and process over vision.

He attacks the idea that success is mostly luck. A founder who believes in a definite future can design toward it; one who treats life as a lottery spreads small bets and builds nothing large.

The same reasoning applies to investment returns, which follow a power law: a small number of outcomes outweigh all the others combined. Thiel says Facebook, the best investment in Founders Fund's 2005 fund, returned more than all its other investments combined. A venture investor should therefore back only companies that could return the entire fund.

Implication: concentrate effort and capital on the few things that could matter most, with a specific plan, rather than spreading them thinly.

Secrets

Every great business, Thiel argues, is built on a secret: an important truth that is unknown or unbelieved by most people. He divides questions into easy ones, which conventions answer; impossible ones, which are mysteries; and hard but achievable ones, which are secrets.

He argues that people have stopped looking for secrets because of incrementalism, risk aversion, complacency and what he calls flatness: the belief that in a crowded, competitive world someone smarter will find any secret first. That leaves many secrets in plain sight. He gives Airbnb and the ride-hailing companies as examples: each saw unused capacity, spare rooms or idle cars, that existing businesses had ignored.

Secrets come in two kinds: about nature, what the physical world allows, and about people, what they do not know about themselves or hide from others.

Implication: look for truths that seem obvious once stated but that no established business acts on, and keep them to yourself until you have built on them.

Foundations, people and distribution

Thiel states what he calls Thiel's law: a startup messed up at its foundation cannot be fixed. The choice of co-founders matters as much as any later decision. Ownership, who holds the equity, possession, who runs the company, and control, who governs it, should be aligned. A board of three is ideal; more than five is unwieldy for a private company. The chief executive of an early-stage, venture-backed startup should be paid no more than $150,000 a year in cash, so that their interest lies in the equity.

He describes the early PayPal team, later called the PayPal mafia, as a group of people who liked working together, and credits that cohesion for the many companies its members went on to found.

On distribution, he argues that poor sales rather than a bad product is the most common cause of failure. Engineers dismiss selling, but every product needs a means of reaching customers, whether personal sales, marketing or viral growth. PayPal paid new users to sign up and refer friends.

Implication: choose co-founders and early employees with care, align ownership with control, and plan distribution as seriously as the product.

The seven questions

Thiel ends his business analysis with seven questions every company must answer. Engineering: can you create breakthrough technology rather than incremental improvements. Timing: is now the right time. Monopoly: are you starting with a big share of a small market. People: do you have the right team. Distribution: can you reach customers. Durability: will your position be defensible in ten and twenty years. Secret: have you identified a unique opportunity that others do not see.

His test case is the clean-technology boom of the late 2000s. Companies such as the solar-panel maker Solyndra, which went bankrupt in 2011 despite a federal loan guarantee, and the electric-car network Better Place answered few or none of the questions well. Tesla, by contrast, answered all seven.

Implication: before committing to a venture, answer the seven questions honestly. A company that cannot answer most of them is unlikely to survive however attractive its market sounds.

Limits

Its evidence is Thiel's own success. The cases come largely from companies he founded or backed, such as PayPal, Facebook and Palantir, and the failures that followed similar principles are not examined.
Its praise of monopoly sits uneasily with economics. Economists and antitrust critics argue that dominant firms entrench themselves and raise prices; later critics have cited the book in arguments that the largest technology platforms became harmful monopolies.
Its verdict on clean technology has aged. The cost of solar power and batteries fell steeply in the decade after the book appeared, and clean energy became a large industry despite the failures it describes.

The Hard Thing About Hard Things — the experience of running a startup through crisis, from an investor of the same circle.
The Lean Startup — the incremental, experiment-driven method Thiel's call for definite plans argues against.
The Diversity Myth — Thiel's earlier, political book, written with another member of the PayPal team.