Introducing Maven: a new social network where you follow interests, not influencers. Be heard without needing followers and find others who share your interests.
Categories
Books

Zero to One: Notes on Startups or How to Build the Future

Summary

If you're purely copying someone, you haven't truly learned from them. Of course, it's easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange If you'd prefer to listen to this article, use the player below. You can also find more of my articles in audio version at Listle  

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Key Takeaways

  1. Today's "best practices" lead to dead ends; the best paths are new and untried
  2. The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative. Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas
  3. Peter Thiel made the following question famous: What important truth do few people agree with you on?
    1. A good answer takes the following form: "Most people believe in x, but the truth is the opposite of x"
    2. Most answers to the contrarian question are different ways of seeing the present; good answers are as close as we can come to looking into the future
    3. His own answer to the contrarian question is that most people think the future of the world will be defined by globalization (horizontal), but the truth is that technology matters more
    4. If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth
    5. Conventional beliefs only ever come to appear arbitrary and wrong in retrospect; whenever one collapses, we call the old belief a bubble. The first step to thinking clearly is to question what we think we know about the past
  4. When we think about the future, we hope for a future of progress. That progress can take one of two forms. Horizontal or extensive progress means copying things that work - going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things - going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. The single word for vertical, 0 to 1 progress is technology
  5. Brilliant thinking is rare, but courage is in even shorter supply than genius
    1. All virtue stems from courage
  6. Startups understand you need to work with others to achieve great things but also need to stay small enough so that you actually can. A startup is the largest group of people you can convince of a plan to build a different future. A new company's most important strength is new thinking: even more important than nimbleness, small size affords space to think. This is essential as this is what startups have to do, question received ideas and rethink businesses from scratch
  7. 4 lessons learned from the dot-com crash which still guide business thinking today
    1. Make incremental advances - grand visions inflated the bubble, so they should not be indulged. Anyone who claims to be able to do something great is suspect, and anyone who wants to change the world should be more humble. Small, incremental steps are the only safe path forward
    2. Stay lean and flexible - all companies must be "lean," which is code for "unplanned." You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, "iterate," and treat entrepreneurship as agnostic experimentation
    3. Improve on the competition - don't try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors
    4. Focus on product, not sales - if your product requires advertising or salespeople to sell it, it's not good enough: technology is primarily about product development, not distribution. Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth
    5. These lessons have become dogma in the startup world 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. The most contrarian thing of all is not to oppose the crowd but to think for yourself
  8. What valuable company is nobody building? Must create and capture value
  9. Capitalism and competition are in fact opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don't build an undifferentiated commodity business
  10. Monopolists and perfect competitors both incented to lie - monopolists exaggerate the power of their competitors or reframe the situation to appear less powerful and perfect competitors under-exaggerate competition
  11. Only monopolies can transcend the brutal daily struggle for survival and put their focus where it really matters, pleasing the customer
  12. If you lose sight of the competitive reality and focus on trivial differentiating factors, you are unlikely to survive
  13. Monopolies are only bad in a static world but we have a dynamic one where companies are always innovating, competing and disrupting
  14. Competition is not healthy but it is the ideology that pervades society and distorts thinking
    1. Marx and Shakespeare provide two models for understanding almost every kind of conflict. People fight because they are different vs. fight but everyone is more or less alike. People lose sight of what really matters and become obsessed with their rivals. Rivalry causes us to overemphasize old opportunities and slavishly copy what worked in the past
  15. If you can't beat a rival, it may be better to merge. When you have to fight though, don't hold anything back
  16. For a company to be valuable it must grow and endure, but entrepreneurs tend to only focus on short-term growth. If you focus on the near-term 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.
  17. Monopolistic characteristics - proprietary technology (must be at least 10x better than its closest substitute), network effects (standalone value from the very beginning), economies of scale, branding
  18. Building a monopoly - start small and monopolize (small group of particular people concentrated together and served by few or no competitors), scaling up (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 gradually expand), don't disrupt (avoid competition as much as possible), the last will be first (moving first is a tactic, not a goal; aim to be the last mover)
  19. Indefinite/Definite and Optimism/Pessimism Quadrant
    1. Indefinite pessimists look out onto a bleak future, but he has no idea what to do about it
    2. A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it
    3. To a definite optimist, the future will be better than the present if he has plans and works to make it better
      1. Pretty much every successful person falls into this camp
    4. To an indefinite optimist, the future will be better but he doesn't know how exactly, so he won't make any specific plans
      1. This seems inherently unsustainable: how can the future get better if no one plans for it?
  20. Most people struggle to understand that we don't live in a normal world, we live under a power law
    1. 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. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. Even quite successful companies usually succeed on a more humble scale. This leads to rule number two: because rule number one is so restrictive, there can't be any other rules
    2. The power law means that differences between companies will dwarf differences in roles inside companies.
  21. It matters what you do and 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
  22. Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable. There are two kinds of secrets: secrets about nature and secrets about people. Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world. Secrets about people are different: they are things that people don't know about themselves or things they hide because they don't want others to know. 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
  23. The more people believe in efficiency, the bigger the bubbles get
  24. A founder's first job is to get the foundation right. You can't build a great company on a flawed foundation
    1. Find the right co-founders and early hires, figure out ownership, possession, control, have a small board, right salary structure and bonuses, all people full-time rather than part time
    2. Success of startups correlates with lower CEO pay - build value for the long-term rather than relying on paycheck
  25. Must want to spend time with the people you work with outside the office or else the culture in this type of environment will deteriorate
  26. Recruit by selling the mission and team (not prestige, equity stake, etc.)
  27. Everyone on the team should be different in the same way
  28. Just One Thing - on the inside, every individual should be sharply distinguished by her work. Make every person in the company responsible for doing just one thing. Every employee's one thing was unique, and everyone knew I [Thiel] would evaluate him only on that one thing. I had started doing this just to simplify the task of managing people. But then I noticed a deeper result: defining roles reduced conflicts. Most fights inside a company happen when colleagues compete for the same responsibilities. Startups face an especially high risk of this since job roles are fluid at the early stages. Eliminating competition makes it easier for everyone to build the kinds of long-term relationships that transcend mere professionalism. More than that, internal peace is what enables startups to survive at all. When a startup fails, we often imagine it succumbing to predatory rivals in a competitive ecosystem. But every company is also its own ecosystem, and factional strife makes it vulnerable to outside threats. Internal conflict is like an autoimmune disease: the technical cause of death may be pneumonia, but the real cause remains hidden from plain view.
  29. Sales and distribution tend to be undervalued by entrepreneurs who believe good product sells itself. It is best when one's sales skill or the persuasion to buy is hidden as nobody likes being reminded they are being sold
    1. Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost). In general, the higher the price of your product, the more you have to spend to make a sale - and the more it makes sense to spend it
    2. Poor sales rather than bad product is the most common cause of failure
  30. Most valuable businesses of the future will be those which empower people rather than those trying to replace them
  31. Thiel believes that the worries about technology today are overblown. Computers are tools, not rivals and working with them will allow people to do things never before possible
  32. 7 Questions 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 to not just create but deliver your product?
    6. The Durability Question - will your 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?
  33. Great companies have secrets - reasons for success that other people don't see
  34. 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
  35. An entrepreneur can't benefit from macro-scale insights unless his own plans begin at the micro-scale
  36. The world needs founders to push the boundaries and the trade-off is that those who tend to push the boundaries are eccentric, unusual and extreme in their views and/or behaviors

  What I got out of it

  1.  Really good in-depth view on what it takes to build startups and why they're important to the world

In the Latticework, we've distilled, curated, and interconnected the 750+book summaries from The Rabbit Hole. If you're looking to make the ideas from these books actionable in your day-to-day life and join a global tribe of lifelong learners, you'll love The Latticework. Join us today.