I first read these ideas in 2013. I took a Standord Startup Engineering course on Coursera taught by Balaji Srinivasan. That course was described as the successor to Peter Thiel’s CS183. I read Blake Master’s notes during that time. I first read this book in November 2014. These notes are the combination of my kindle notes from then, and additional notes I created while reading the book for a second time just this month (June 2018).
The clips below are taken directly from my highlights as I read this book with minimal formatting. Reference below to ‘I’ is referring to the author. I will mark any comments I add as my own thoughts in bold beginning with Note:.
The Zero to One Hypothesis: The most successful businesses are the result of creating something entirely new, not copying what has been done before. 0 to 1, not 1 to n.
This book details the patterns that Peter Thiel has observed in creating PayPal and Palantir, and as investor in hundreds of startups including Facebook and SpaceX.
1 The Challenge of the Future
2 Party Like It’s 1999
3 All Happy Companies Are Different
4 The Ideology of Competition
5 Last Mover Advantage
6 You Are Not a Lottery Ticket
7 Follow the Money
10 The Mechanics of Mafia
11 If You Build It, Will They Come?
12 Man and Machine
13 Seeing Green
14 The Founder’s Paradox
Conclusion: Stagnation or Singularity?
1 THE CHALLENGE OF THE FUTURE
What important truth do very few people agree with you on?”
Brilliant thinking is rare, but courage is in even shorter supply than genius.
A good answer takes the following form: “Most people believe in x, but the truth is the opposite of x.”
What does this contrarian question have to do with the future?
No one can predict the future exactly, but we know two things: it’s going to be different, and it must be rooted in today’s world.
ZERO TO ONE: THE FUTURE OF PROGRESS
Horizontal or extensive progress means copying things that work—going from 1 to n.
Vertical or intensive progress means doing new things—going from 0 to 1.
At the macro level, the single word for horizontal progress is globalization—taking things that work somewhere and making them work everywhere.
The single word for vertical, 0 to 1 progress is technology.
Properly understood, any new and better way of doing things is technology.
My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more.
In a world of scarce resources, globalization without new technology is unsustainable.
Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can. Positively defined, a startup is the largest group of people you can convince of a plan to build a different future.
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
preliminary: what does everybody agree on?
Madness is rare in individuals—but in groups, parties, nations, and ages it is the rule,” Nietzsche wrote (before he went mad).
If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
The first step to thinking clearly is to question what we think we know about the past.
A QUICK HISTORY OF THE ’90’S
The’90’s started with a burst of euphoria when the Berlin Wall came down in November ’89.
1992 through the end of 1994 was a time of general malaise.
The internet changed all this. The Mosaic browser was officially released in November 1993, giving regular people a way to get online.
In December ’96—more than three years before the bubble actually burst—Fed chairman Alan Greenspan warned that “irrational exuberance” might have “unduly escalated asset values.”
The East Asian financial crises hit in July 1997.
The ruble crisis followed in August ’98 when Russia, hamstrung by chronic fiscal deficits, devalued its currency and defaulted on its debt.
LTCM managed to lose $4.6 billion in the latter half of 1998, and still had over $100 billion in liabilities when the Fed intervened with a massive bailout
The euro launched in January 1999 to great skepticism and apathy.
In mid-2000, G7 central bankers had to prop it up with a multibillion-dollar intervention.
MANIA: SEPTEMBER 1998–MARCH 2000
Dot-com mania was intense but short—18 months of insanity from September 1998 to March 2000.
We gave new customers $10 for joining, and we gave them $10 more every time they referred a friend. This got us hundreds of thousands of new customers and an exponential growth rate. Of course, this customer acquisition strategy was unsustainable on its own—when you pay people to be your customers, exponential growth means an exponentially growing cost structure.
That March 2000 financing round bought us the time we needed to make PayPal a success. Just as we closed the deal, the bubble popped.
’Cause they say 2,000 zero zero party over, oops! Out of time! So tonight I’m gonna party like it’s 1999! -Prince
The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:
- Make incremental advances
- Stay lean and flexible
- Improve on the competition
- Focus on product, not sales
These lessons have become dogma in the startup world; those who would ignore them are presumed to invite the justified doom visited upon technology in the great crash of 2000. And yet the opposite principles are probably more correct:
- 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.
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
The business version of our contrarian question is: what valuable company is nobody building?
Creating value is not enough—you also need to capture some of the value you create.
by monopoly, we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.
The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.
LIES PEOPLE TELL
How much of the world is actually monopolistic? How much is truly competitive?
The confusion comes from a universal bias for describing market conditions in self-serving ways: both monopolists and competitors are incentivized to bend the truth.
Monopoly Lies: Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked.
Competitive Lies: Non-monopolists tell the opposite lie: “we’re in a league of our own.
The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.
Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets
Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets
In business, money is either an important thing or it is everything.
Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.
Creative monopolists give customers more choices by adding entirely new categories of abundance to the world.
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.
In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot.
Monopoly is the condition of every successful business.
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.
4 THE IDEOLOGY OF COMPETITION
Creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. So why do people believe that competition is healthy?
competition is an ideology—the ideology—that pervades our society and distorts our thinking.
the more we compete, the less we gain. This is a simple truth, but we’ve all been trained to ignore it.
WAR AND PEACE
War metaphors invade our everyday business language: we use headhunters to build up a sales force that will enable us to take a captive market and make a killing. But really it’s competition, not business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive.
Why do people compete with each other?
According to Marx, people fight because they are different. To Shakespeare, by contrast, all combatants look more or less alike.
Competition can make people hallucinate opportunities where none exist.
If you can’t beat a rival, it may be better to merge. In February 2000, Elon and I were more scared about the rapidly inflating tech bubble than we were about each other: a financial crash would ruin us both before we could finish our fight. So in early March we met on neutral ground—a cafe almost exactly equidistant to our offices—and negotiated a 50-50 merger.
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.
5 LAST MOVER ADVANTAGE
Escaping competition will give you a monopoly, but even a monopoly is only a great business if it can endure in the future.
a great business is defined by its ability to generate cash flows in the future.
growth is easy to measure, but durability isn’t.
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.
CHARACTERISTICS OF MONOPOLY
What does a company with large cash flows far into the future look like?
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
- Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.
- 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.
- Network Effects
- Network effects make a product more useful as more people use it.
- Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
- Economies of Scale: A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
- Branding: A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.
BUILDING A MONOPOLY
Brand, scale, network effects, and technology in some combination define a monopoly; but to get them to work, you need to choose your market carefully and expand deliberately. Start Small and Monopolize.
Every startup is small at the start. Every monopoly dominates a large share of its market. 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.
Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.
Sequencing markets correctly is underrated, and it takes discipline to expand gradually. 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.
Originally, “disruption” was a term of art to describe how a firm can use new technology to introduce a low-end product at low prices, improve the product over time, and eventually overtake even the premium products offered by incumbent companies using older technology.
disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new.
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.
Disruption also attracts attention: disruptors are people who look for trouble and find it.
As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
THE LAST WILL BE FIRST
It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.
6 YOU ARE NOT A LOTTERY TICKET
The most contentious question in business is whether success comes from luck or skill.
luck is in the past tense. Far more important are questions about the future: is it a matter of chance or design?
CAN YOU CONTROL YOUR FUTURE?
You can expect the future to take a definite form or you can treat it as hazily uncertain. If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it.
A definite view, by contrast, favors firm convictions.
You can also expect the future to be either better or worse than the present. Optimists welcome the future; pessimists fear it. Combining these possibilities yields four views:
- Indefinite Pessimism: An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it.
- Definite Pessimism: A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.
- Definite Optimism: To a definite optimist, the future will be better than the present if he plans and works to make it better.
- Indefinite Optimism: To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans.
OUR INDEFINITELY OPTIMISTIC WORLD
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. Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.
in an indefinite world, people actually prefer unlimited optionality; money is more valuable than anything you could possibly do with it.
Only in a definite future is money a means to an end, not the end itself.
Politicians have always been officially accountable to the public at election time, but today they are attuned to what the public thinks at every moment.
We are more fascinated today by statistical predictions of what the country will be thinking in a few weeks’ time than by visionary predictions of what the country will look like 10 or 20 years from now.
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.
The philosophy of the ancient world was pessimistic: Plato, Aristotle, Epicurus, and Lucretius all accepted strict limits on human potential.
From Herbert Spencer on the right and Hegel in the center to Marx on the left, the 19th century shared a belief in progress.
These thinkers expected material advances to fundamentally change human life for the better: they were definite optimists.
In the late 20th century, indefinite philosophies came to the fore. The two dominant political thinkers, John Rawls and Robert Nozick, are usually seen as stark opposites:
Rawls and Nozick were indefinite optimists: they didn’t have any specific vision of the future.
In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future. Indefinite Life
Our ancestors sought to understand and extend the human lifespan.
the best minds of the Renaissance thought of death as something to defeat.
insurers and statisticians in the 19th century successfully revealed a secret about death that still governs our thinking today: they discovered how to reduce it to a mathematical probability, “Life tables.”
Today our society is permeated by the twin ideas that death is both inevitable and random.
IS INDEFINITE OPTIMISM EVEN POSSIBLE?
What kind of future will our indefinitely optimistic decisions bring about?
indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it?
Even in engineering-driven Silicon Valley, the buzzwords of the moment call for building a “lean startup” that can “adapt” and “evolve” to an ever-changing environment. Would-be entrepreneurs are told that nothing can be known in advance: we’re supposed to listen to what customers say they want, make nothing more than a “minimum viable product,” and iterate our way to success.
iteration without a bold plan won’t take you from 0 to 1.
Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.
THE RETURN OF DESIGN
What would it mean to prioritize design over chance?
the most important lesson to learn from Jobs has nothing to do with aesthetics. The greatest thing Jobs designed was his business.
Long-term planning is often undervalued by our indefinite short-term world.
When a big company makes an offer to acquire a successful startup, it almost always offers too much or too little: founders only sell when they have no more concrete visions for the company,
A business with a good definite plan will always be underrated in a world where people see the future as random.
6 YOU ARE NOT A LOTTERY TICKET
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
never underestimate exponential growth.
the power law—so named because exponential equations describe severely unequal distributions—is the law of the universe.
This chapter shows how the power law becomes visible when you follow the money: in venture capital, where investors try to profit from exponential growth in early-stage companies, a few companies attain exponentially greater value than all others.
we don’t live in a normal world; we live under a power law.
THE POWER LAW OF VENTURE CAPITAL
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. #1, only invest in companies that have the potential to return the value of the entire fund. #2, because rule number one is so restrictive, there can’t be any other rules.
every single company in a good venture portfolio must have the potential to succeed at vast scale
WHY PEOPLE DON’T SEE THE POWER LAW
Why would professional VCs, of all people, fail to see the power law? For one thing, it only becomes clear over time, and even technology investors too often live in the present.
Power law distributions are so big that they hide in plain sight.
WHAT TO DO WITH THE POWER LAW
even the best venture investors have a portfolio, but investors who understand the power law make as few investments as possible.
life is not a portfolio: not for a startup founder, and not for any individual. An entrepreneur cannot “diversify” herself: you cannot run dozens of companies at the same time and then hope that one of them works out well.
Everybody who passes through the American school system learns not to think in power law terms.
You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
For the startup world, this means you should not necessarily start your own company, even if you are extraordinarily talented.
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.
in a power law world, you can’t afford not to think hard about where your actions will fall on the curve. 8 SECRETS EVERY ONE OF TODAY’S most famous and familiar ideas was once unknown and unsuspected.
Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up.
is that just because it’s difficult? Or is it an impossible mystery? The difference matters. You can achieve difficult things, but you can’t achieve the impossible.
If there are many secrets left in the world, there are probably many world-changing companies yet to be started.
WHY AREN’T PEOPLE LOOKING FOR SECRETS?
Along with the natural fact that physical frontiers have receded, four social trends have conspired to root out belief in secrets.
- First is incrementalism. From an early age, we are taught that the right way to do things is to proceed one very small step at a time,
- Second is risk aversion. People are scared of secrets because they are scared of being wrong.
- Third is complacency. Social elites have the most freedom and ability to explore new thinking, but they seem to believe in secrets the least.
- Fourth is “flatness.” As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace: the world is “flat.”
THE WORLD ACCORDING TO CONVENTION
How must you see the world if you don’t believe in secrets?
In economics, disbelief in secrets leads to faith in efficient markets. But the existence of financial bubbles shows that markets can have extraordinary inefficiencies.
THE CASE FOR SECRETS
If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth. The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers.
The same is true of business. Great companies can be built on open but unsuspected secrets about how the world works.
If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
HOW TO FIND SECRETS
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?
what are people running companies not allowed to say? You would notice that monopolists downplay their monopoly status to avoid scrutiny, while competitive firms strategically exaggerate their uniqueness.
are there any fields that matter but haven’t been standardized and institutionalized?
WHAT TO DO WITH SECRETS
A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
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.
When you start something, the first and most crucial decision you make is whom to start it with. Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.
OWNERSHIP, POSSESSION, AND CONTROL
In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight.
A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
ON THE BUS OR OFF THE BUS
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.
CASH IS NOT KING
For people to be fully committed, they should be properly compensated.
In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.
Any kind of cash is more about the present than the future.
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.
Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret. Sending out a company-wide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.
EXTENDING THE FOUNDING
The founding moment of a company, however, really does happen just once: 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.
The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops.
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.
If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even
Recruiting is a core competency for any company. It should never be outsourced. You need people who are not just skilled on paper but who will work together cohesively after they’re hired.
Why should the 20th employee join your company? Talented people don’t need to work for you; they have plenty of options. Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige? there are two general kinds of good answers: answers about your mission and answers about your team. You’ll attract the employees you need if you can explain why your mission is compelling: The kind of recruit who would be most engaged as an employee will also wonder: “Are these the kind of people I want to work with?” promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.
WHAT’S UNDER SILICON VALLEY’S HOODIES
From the outside, everyone in your company should be different in the same way.
Startups have limited resources and small teams. They must work quickly and efficiently in order to survive, and that’s easier to do when everyone shares an understanding of the world. The early PayPal team worked well together because we were all the same kind of nerd.
Most important, we were all obsessed with creating a digital currency that would be controlled by individuals instead of governments.
DO ONE THING
On the inside, every individual should be sharply distinguished by her work.
The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing.
OF CULTS AND CONSULTANTS
In the most intense kind of organization, members hang out only with other members. They ignore their families and abandon the outside world.
We have a word for such organizations: cults. Cultures of total dedication look crazy from the outside,
The extreme opposite of a cult is a consulting firm like Accenture: not only does it lack a distinctive mission of its own, but individual consultants are regularly dropping in and out of companies to which they have no long-term connection whatsoever.
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?
Even though sales is everywhere, most people underrate its importance. Silicon Valley underrates it more than most.
We underestimate the importance of distribution;—a catchall term for everything it takes to sell a product.
customers will not come just because you build it. You have to make that happen, and it’s harder than it looks.
NERDS VS. SALESMEN
In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works. It works on nerds, and it works on you.
advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.
SALES IS HIDDEN
All salesmen are actors: their priority is persuasion, not sincerity.
There’s a wide range of sales ability: there are many gradations between novices, experts, and masters. There are even sales grandmasters.
Like acting, sales works best when hidden.
Whatever the career, sales ability distinguishes superstars from also-rans.
The most fundamental reason that even businesspeople underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.
It’s better to think of distribution as something essential to the design of your product.
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.
HOW TO SELL A PRODUCT
Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan.
Two metrics set the limits for effective distribution.
- Customer Lifetime Value, or CLV
- Customer Acquisition Cost, or CAC
If your average sale is seven figures or more, every detail of every deal requires close personal attention.
Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade.
average deal sizes might range between $10,000 and $100,000,
The challenge here isn’t about how to make any particular sale, but how to establish a process by which a sales team of modest size can move the product to a wide audience.
For a product priced around $1,000, there might be no good distribution channel to reach the small businesses that might buy it.
Marketing and Advertising
Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution.
Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.
product is viral if its core functionality encourages users to invite their friends to become users too.
If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth.
The Power Law of Distribution
One of these methods is likely to be far more powerful than every other for any given business: distribution follows a power law of its own.
Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure.
Selling to Non-Customers
Your company needs to sell more than its product. You must also sell your company to employees and investors.
Look around. If you don’t see any salespeople, you’re the salesperson.
12 MAN AND MACHINE
Everyone expects computers to do more in the future—so much more that some wonder: 30 years from now, will there be anything left for people to do?
computers are complements for humans, not substitutes.
The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
SUBSTITUTION VS. COMPLEMENTARITY
Americans fear technology in the near future because they see it as a replay of the globalization of the near past. But the situations are very different: people compete for jobs and for resources; computers compete for neither.
Globalization Means Substitution
Gains from trade are greatest when there’s a big discrepancy in comparative advantage,
People don’t just compete to supply labor; they also demand the same resources.
Whether people eat shark fins in Shanghai or fish tacos in San Diego, they all need food and they all need shelter. And desire doesn’t stop at subsistence—people will demand ever more as globalization continues.
Technology Means Complementarity
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.
The stark differences between man and machine mean that gains from working with computers are much higher than gains from trade with other people. We don’t trade with computers any more than we trade with livestock or lamps. And that’s the point: computers are tools, not rivals.
Complementarity between computers and humans isn’t just a macro-scale fact. It’s also the path to building a great business.
Computers might be able to do some of these tasks, but they can’t combine them effectively. Better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more.
The Ideology of Computer Science
Watson, Deep Blue, and ever-better machine learning algorithms are cool. 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?
EVER-SMARTER COMPUTERS: FRIEND OR FOE?
once computers can answer all our questions, perhaps they’ll ask why they should remain subservient to us at all.
strong AI”: computers that eclipse humans on every important dimension.
But even if strong AI is a real possibility rather than an imponderable mystery, it won’t happen anytime soon: replacement by computers is a worry for the 22nd century. Indefinite fears about the far future shouldn’t stop us from making definite plans today.
13 SEEING GREEN
At the start of the 21st century, everyone agreed that the next big thing was clean technology.
Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer:
- The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
- The Timing Question: Is now the right time to start your particular business?
- The Monopoly Question: Are you starting with a big share of a small market?
- The People Question: Do you have the right team?
- The Distribution Question: Do you have a way to not just create but deliver your product?
- The Durability Question: Will your market position be defensible 10 and 20 years into the future?
- The Secret Question: Have you identified a unique opportunity that others don’t see?
the striking thing about the cleantech bubble was that people were starting companies with zero good answers—and that meant hoping for a miracle.
THE ENGINEERING QUESTION
A great technology company should have proprietary technology an order of magnitude better than its nearest substitute.
Companies must strive for 10x better because merely incremental improvements often end up meaning no improvement at all for the end user.
THE TIMING QUESTION
Entering a slow-moving market can be a good strategy, but only if you have a definite and realistic plan to take it over. The failed cleantech companies had none.
THE MONOPOLY QUESTION
Exaggerating your own uniqueness is an easy way to botch the monopoly question.
Cleantech entrepreneurs’ thinking about markets was hopelessly confused. They would rhetorically shrink their market in order to seem differentiated, only to turn around and ask to be valued based on huge, supposedly lucrative markets. But you can’t dominate a submarket if it’s fictional, and huge markets are highly competitive, not highly attainable.
THE PEOPLE QUESTION
Energy problems are engineering problems, so you would expect to find nerds running cleantech companies. You’d be wrong: the ones that failed were run by shockingly nontechnical teams. These salesman-executives were good at raising capital and securing government subsidies, but they were less good at building products that customers wanted to buy.
THE DISTRIBUTION QUESTION
Cleantech companies effectively courted government and investors, but they often forgot about customers. They learned the hard way that the world is not a laboratory: selling and delivering a product is at least as important as the product itself.
THE DURABILITY QUESTION
Every entrepreneur should plan to be the last mover in her particular market. That starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in? Few cleantech companies had a good answer.
THE SECRET QUESTION
Every cleantech company justified itself with conventional truths about the need for a cleaner world. They deluded themselves into believing that an overwhelming social need for alternative energy solutions implied an overwhelming business opportunity for cleantech companies of all kinds.
THE MYTH OF SOCIAL ENTREPRENEURSHIP
Social entrepreneurs aim to combine the best of both worlds and “do well by doing good.” Usually they end up doing neither.
Doing something different is what’s truly good for society—and it’s also what allows a business to profit by monopolizing a new market. The best projects are likely to be overlooked, not trumpeted by a crowd; the best problems to work on are often the ones nobody else even tries to solve.
TESLA: 7 FOR 7
Tesla is one of the few cleantech companies started last decade to be thriving today.
TECHNOLOGY: Tesla’s technology is so good that other car companies rely on it:
TIMING: Tesla secured a $465 million loan from the U.S. Department of Energy. There was only one moment where that was possible, and Tesla played it perfectly.
MONOPOLY: Tesla started with a tiny submarket that it could dominate: the market for high-end electric sports cars.
TEAM: Tesla’s CEO is the consummate engineer and salesman, so it’s not surprising that he’s assembled a team that’s very good at both.
DISTRIBUTION: Most companies underestimate distribution, but Tesla took it so seriously that it decided to own the entire distribution chain.
DURABILITY: Tesla has a head start and it’s moving faster than anyone else—and that combination means its lead is set to widen in the years ahead.
SECRETS: Tesla knew that fashion drove interest in cleantech. Rich people especially wanted to appear “green,”
Tesla’s success proves that there was nothing inherently wrong with cleantech. The biggest idea behind it is right: the world really will need new sources of energy. Energy is the master resource: it’s how we feed ourselves, build shelter, and make everything we need to live comfortably.
no matter how much the world needs energy, only a firm that offers a superior solution for a specific energy problem can make money.
The macro need for energy solutions is still real. But a valuable business must start by finding a niche and dominating a small market.
14 THE FOUNDER’S PARADOX
This chapter is about why it’s more powerful but at the same time more dangerous for a company to be led by a distinctive individual instead of an interchangeable manager.
THE DIFFERENCE ENGINE
Almost all successful entrepreneurs are simultaneously insiders and outsiders.
When you plot them out, founders’ traits appear to follow an inverse normal distribution:
WHERE KINGS COME FROM
Extreme founder figures are not new in human affairs. Classical mythology is full of them.
The famous and infamous have always served as vessels for public sentiment: they’re praised amid prosperity and blamed for misfortune.
whenever plagues, disasters, or violent rivalries threatened the peace, it was beneficial for the society to place the entire blame on a single person, someone everybody could agree on: a scapegoat.
Celebrities are supposedly “American royalty.”
For some fallen stars, death brings resurrection.
We alternately worship and despise technology founders just as we do celebrities.
THE RETURN OF THE KING
Jobs was an artist, Gates was a businessman, But both were insider/outsiders, and both pushed the companies they started to achievements that nobody else would have been able to match.
Apple’s value crucially depended on the singular vision of a particular person. This hints at the strange way in which the companies that create new technology often resemble feudal monarchies rather than organizations that are supposedly more “modern.”
The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.
The lesson for founders is that 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.
Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from everybody at his company.
Conclusion: STAGNATION OR SINGULARITY?
If even the most farsighted founders cannot plan beyond the next 20 to 30 years, is there anything to say about the very distant future?
Philosopher Nick Bostrom describes four possible patterns for the future of humanity.
- Recurrent Collapse: neverending alternation between prosperity and ruin.
- Plateau: a plateau of development similar to the life of the richest countries today. In this scenario, the future will look a lot like the present.
- Extinction: a collapse so devastating that we won’t survive it.
- Takeoff: accelerating takeoff toward a much better future.
But no matter how many trends can be traced, the future won’t happen on its own. What the Singularity would look like matters less than the stark choice we face today between the two most likely scenarios: nothing or something. It’s up to us. We cannot take for granted that the future will be better, and that means we need to work to create it today.
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.