Summary of Zero To One: Notes on Startups, or How to Build the Future Part II

Posted 7 April By PlugAdminOtherNo Comments

 

Below are excerpts from the book summarized to preserve the essence of the novel, at a shorter length.

Summary of Zero To One: Notes on Startups, or How to Build the Future by Peter Thiel and Blake Masters | Part II

 

“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 start has to do: question received ideas and rethink business from scratch.”

 

 

9. Foundations

There are a few things that every business must get right at the beginning. Thiel’s law states: a startup messed up at its foundation cannot be fixed. As a founder, your very first job should be to get the right partners and employ the right people, because you cannot build a great company on a flawed foundation. Mistakes like this are very hard to correct after.

Founding Matrimony

Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce. Founders should have a prehistory. When investing in a company, Peter Thiel carefully studies the founding teams: technical abilities, complimentary skills matter just as much as how well the team works together.

Ownership, Possession, and Control

It is very hard to go from 0 to 1 without a team, so you will most likely be working with other people. And everyone in your company, not just the founders, need to work well together. You also need to keep everyone aligned and maintain structure by distinguishing between ownership, possession, and control.

Ownership is who legally owns the company’s equity, allocated among founders, employees, investors. Possession is who actually runs the company on a day-to-day basis, such as managers and employees. Control is who formally governs the company’s affairs e.g. board of directors comprised of founders and investors. In theory, this model works. In practice, this creates opportunities for misalignment. If you want to see misalignment in action, the author jokes, visit the DMV.

In a startup, most conflict is most likely to arise between ownership (founders) and control (investors on the board). A board member might want to take the company public asap to score a win for his venture firm, while the founders would prefer to stay private and grow the business. In general, if you want an effective board, keep it small. Ideally, three members. And never above five.

On the Buss of Off the Bus

As a general rule, everyone in your company should be involved full-time. Anyone who doesn’t own stock options or has a regular salary is fundamentally misaligned – they’re biased to claim short-term value and not help create more in the long-term. Your team has to work together, in the same place, every day. If you’re bringing someone onboard, they’re either on the bus or off the bus.

Cash Is Not King

Compensation is part of the commitment. A company does better the less it pays the CEO. If the CEO is receiving more than $150,000 per year in salary, he risks becoming a politician and not focusing on increasing the value of the company as a whole. CEO’s salary also sets the standard for everyone else. Workers with high cash compensation extract value from the company as it already exists, instead of investing their time in creating more and new value in the future. Bonuses, incentive pay, and any other kinds of cash encourage short-term thinking rather than focusing on the future.

Vested Interests

A single most effective way to orient people to create value in the future is by offering ownership. Equity is tricky though, it can also create conflict. That is why it must be allocated carefully. It can also be unattractive: it’s illiquid, tied to a specific company, and can be worthless. But this is also what makes it powerful and ensures alignment.

Extending the Founding

Founding moment of any company only happens once. But it also happens as long as a company is creating new things. And it ends when creation stops. The most valuable companies maintain openness to invention and keep beginning again.

10. The Mechanics of Mafia

Company culture doesn’t exist apart from the company itself. A startup is a team of people on a mission, and a good culture is just what that looks like on the inside. None of the Silicon Valley perks like free massages and bean bags have any value if there is no substance behind it.

Beyond Professionalism

The author’s first team, “PayPal Mafia,” was titled so because many of Peter Thiel’s the former colleagues went on to each start billion dollar companies after the sale of PayPal to eBay for $1.5 billion in 2002. Elon Musk has founded SapceX and co-founded Tesla Motors; Reid Hoffman co-founded LinkedIn; Steve Chen, Chard Hurley, and Jawed Karim founded YouTube; Jeremy Stoppelman and Russel Simons founded Yelp; David Sacks co-founded Yammer; and Peter Thiel himself co-founded Palantir. He attributes this success to extraordinary teamwork. Stronger relationships made his teammates happier, better at work, and eventually successful beyond PayPal.

Recruiting Conspirators

Recruiting is a core competency for any company. It should never be outsourced. You should be able to answer this question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige? Don’t try to be like Google in terms of perks (because you will lose), just cover the basics like health insurance and then promise what no others can: the opportunity to do irreplaceable work (that no one else is doing) on a unique problem (your compelling mission) alongside great people (personality fit).

What’s Under Silicon Valley’s Hoodies

Everyone at your company should look like a tribe of like-minded people fiercely devoted to the company’s mission. Startups must work quickly and efficiently in order to survive. This is easier to do when everyone shares an understanding of the world.

Do One Thing

On the inside, every individual should be sharply distinguished by his/her work. Most fights within a company happen when colleagues compete for the same responsibilities. Defining roles reduces conflict. And internal peace is what enables a startup to survive at all.

Of Cults and Consultants

On one side of the spectrum are cults, cultures of total dedication that look crazy from the outside; on the other are consulting firms that lack a distinctive mission where their employees have no long-term connection whatsoever. The best startups are slightly less extreme kinds of cults. Except cults are fanatically wrong about something important…startups are fanatically right about something those outside it have missed.

11. If You Built It, Will They come?

We tend to underestimate the importance of distribution, a catchall term for everything it takes to sell a product. Customers won’t come just because you built it. You have to make that happen and it’s harder than it looks.

Nerds vs. Salesmen

Nerds are skeptical of advertisers because they see it as superficial and irrational. But advertising matters because it works. On everyone. Nerds overestimate the relative difficulty of science and engineering because the challenges of those fields are obvious. In reality, it takes hard work to make a sale.

Sales is Hidden

All salesmen are actors and like actors, sales works best when hidden. The work of grandmasters of sales is so good that it makes you think that it doesn’t exist. When it’s in fact hidden in plain sight. The negative connotation comes from awkward, obvious and bad salesmen.

Distribution is essential to the design of the 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.

The breakdown below shows different distribution methods. Ultimately, you want your CAC (customer acquisition cost) to be less than CLV (customer lifetime value).

Viral Marketing | CAC: $1 | Target: Consumers

Marketing | CAC: $1 | Target: Consumers/Small Business

Dead Zone | CAC: 0 | Target: Small Business

Sales CAC: $10,000 | Target: Small Business

Complex Sales | CAC: $10 million | Target: Small Business/Big Business, Government

Complex Sales

Complex sales average at seven figures or more, require personal attention, and occur once in about every year or two. They’re hard but necessary for some of the most valuable products such as of Palantir, with deals ranging from $1 million to $100 million. This type of sales works best when you don’t have “salesmen” at all; Palantir (or SpaeX) clients don’t want to talk to the VP of Sales, they want to talk to the CEO himself. So Alex Karp (or Elon Musk) travels and meets with potential clients. Such businesses succeed if they achieve 50% to 100% year-over-year growth over the course of a decade.

Personal Sales

Personal Sales have average deal sizes of $10,000 and $100,00. Their challenge lies in establishing a process by which a sales team of modest size can move product to a wider audience. Box, a cloud storage space, purposefully started out with a small account in the Stanford Sleep Clinic and slowly grew to impact all of the student body and faculty. If they had gone straight to the president of the university, they would have sold nothing.

Distribution Doldrums

For a $1000 priced product, there’s no good distribution channel that reaches small businesses. That is why it’s known as the dead zone. The product needs a personal sales effort but at that price point, you simply don’t have the resources to send an actual person to talk to every prospect. In this case, the distribution is the hidden bottleneck.

Marketing and Advertising

Marketing and advertising work for companies like Procter & Gamble, low-priced products with mass appeal that lack any method of viral distribution. So it relies on commercials to reach its end user. Or in case of Warby Parker, a startup that used quirky TV ads to sell its $100 eyewear and thus expose itself to millions of eyeglass-wearing customers. The only way advertising can work for startups is if your customer acquisition cost and customer lifetime value make every other distribution channel uneconomical. As a startuper, you shouldn’t try to compete with bigger companies advertising budgets. It just won’t work for you.

Viral Marketing

A product is viral if its core functionality encourages users to invite their friends to become users too. That’s how Facebook and PayPal achieved exponential growth, every user invited another user. Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market. You need to get those enthusiastic early adopters.

The Power Law of Distribution

Distribution follows a power of law of its own, one of these methods will be far more powerful than every other. If you can get one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.

Selling to Non-Customers

You should never assume people will admire your company without a public relations strategy. Any prospective employee worth hiring will do his own diligence; what he finds or doesn’t find when he googles you will be critical to the success of your company.

Everybody Sells

Everybody has a product to sell, even if the product is just you and your computer. If you don’t see any salespeople, you’re the salesperson.

12. Man and Machine

Computers are compliments 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 don’t understand that people compete for jobs and for resources; computers compete for neither.

Globalization Means Substitution

People don’t just compete for supply labor; they also demand the same resources. And desire doesn’t stop at subsistence – people will demand even more as globalization continues. The convergence of desire is more obvious at the top: all oligarchs have the same taste in Cristal, from Petersburg to Pyongyang.

Technology Means Complementarity

Men and machines are good at fundamentally different things. Computers excel at efficient data processing while humans are good at making decisions in complicated situations and making judgment. When a cheap laptop beats the smartest mathematicians at some tasks but even a supercomputer can’t beat a child at recognizing cats in YouTube videos, you can tell humans and computers are categorically different. The differences are even deeper on the demand side, computers don’t require anything but electricity. There is no competition for resources.  Computers should be complements for humans, not rivals.

Complementary Business

In mid-2000, PayPal was losing upwards of $10 million per month in credit card fraud. No matter how complex the algorithms were, thieves would always outsmart the machine by adapting and changing tactics. Max Levchin then came up with a solution: a hybrid approach. Based on this machine-human symbiosis model used to track and identify credit card fraud in PayPal, the author’s own company Palantir was able to gain success and even allegedly help the government locate Osama bin Laden. In conclusion, technology won’t replace professionals like lawyers, doctors, and teachers but it will allow them to do even more.

Ever-Smarter Computer: Friend or Foe?

Commonly we hear horror stories about strong AI eclipsing humans and eventually dooming humanity. But in reality, even if true, it won’t happen anytime soon and therefore should not be a worry of the 22nd century. We should therefore focus on building machines that help us do what was previously unimaginable.

11. Seeing Green

Every business must answer these seven questions when creating their business plan. If you address these seven questions, you will succeed.

  1. The Engineering Question

Can you create breakthrough technology instead of incremental improvements?

– proprietary technology an order of magnitude better than its nearest substitute (10x improvement)

  1. The Timing Question

Is now the right time to start your particular business?

-entering a slow-moving market can be a good strategy, but only if you have a definite and realistic plan to take it over

  1. The Monopoly Question

Are you starting with a big share of a small market?

-customers won’t care about any particular technology unless it solves a particular problem in a superior way. And if you can’t monopolize a unique solution for a small market, you’ll be stuck with vicious competition

  1. The People Question

Do you have the right team?

– the best sales is hidden. There’s nothing wrong with a CEO who can sell, but if he actually looks like a salesman, he’s probably bad at sales and worse at tech. That’s why Peter Thiel’s team had only one blanket rule – pass on any company whose founders dressed up for pitch meetings

  1. The Distribution Question

Do you have a way to not just create but deliver your product?

-selling and delivering a product is at least important as the product itself

  1. The Durability Question

Will your market position be defensive 10 and 20 years into the future?

-every entrepreneur should plan to be the last mover in his/her particular market. This starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in?

  1. The Secret Question

Have you identified a unique opportunity that others don’t see?

-don’t just answer a question using broad conventions that every agrees on. Great companies have secrets: specific reasons for success that other people don’t see

The Myth of Social Entrepreneurship

The cleantech bubble was the biggest phenomenon – and the biggest flop – in the history of “social entrepreneurship.” Social entrepreneurs aim to combine the best of both worlds, that is, pursue the public interest while gaining profits. 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 even tries to solve.

Tesla: 7 for 7

Tesla is one of the few cleantech companies started in the last decade to be thriving today. They got all of the seven questions right:

Technology: Tesla was able to integrate many components of its superior product (so superior, in fact, that other companies like Mercedes-Benz and Toyota use its products) with an elegant, end-to-end design.

Timing: While it’s unthinkable today that the government would subsidize a cleantech project, especially for a half-a-billion dollars, it was the case for Tesla in 2009.

Monopoly: Tesla started with a tiny submarket that it could dominate: the market for high-end electric sports cars. This allowed the company to undertake R&D to build the slightly less expensive model while owning the luxury electric sedan market. Now Tesla is in a prime position to expand to broader markets in the future.

Team: Tesla’s CEO is the consummate engineer and salesman and his team is very good at both.

Distribution: Tesla took distribution so seriously that it decided to own the whole distribution chain. Tesla sells and services its vehicles in its own stores. This strengthens the brand and saves the company money in the long run.

Durability: Tesla has a head start and is moving faster than anyone else – that combination means its lead is set to widen in the years ahead.

Secrets: Tesla knew that fashion drove interest in cleantech. While generic cleantech companies struggled to differentiate themselves, Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.

12. The Founder’s Paradox

Which personal traits actually matter in a founder? 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. In case of PayPal, of the six people who started it, four had build bombs in high school. Yu Pan escaped from China, Luke Nosek escaped from Poland and signed up for cryonics (to be frozen upon death I hope of medical resurrection), Max Levchin escaped from Soviet Ukraine and was proud of being without a country. Russ Simmons escaped from a trailer park to the top math and science magnet school in Illinois and Ken Howery, a privileged American, left a high paying bank job to work for one-third of the salary.

The Difference Engine

Normally we assume that opposite traits are mutually exclusive: you can’t be rich and poor at the same time. But it happens all the time in founders: startup CEOs can be cash poor but millionaires on paper. They may oscillate between sullen jerkiness and appealing charisma. And when they do succeed, they attract both fame and infamy.

By taking us through various examples of bizarre stories of eccentric founders and celebrities like Bill Gates, Howard Hughes, and Steve Jobs, the author provides a lesson to all businesses: we need founders. We should be more tolerant of founders who seem strange or extreme as they are the ones who will lead companies beyond mere instrumentalism. And a lesson for founders: be careful, as 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.

Above all, don’t overestimate your own power as an individual. The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.

Conclusion

Our task today is to find singular ways to create 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.

 

Written by: Aliya Serikpayeva

 

 

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