How do we build things that move society forward? That is the core question addressed in Zero to One by Peter Thiel and Blake Masters. I finished the book today, and here are some key quotes (in bold) and my thoughts on 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. Thiel’s argument is that startups that are aiming to have a big impact need to focus on building the first instance of something – going from 0 to 1. But it’s not just startups. Thiel also talks about how HP was successful throughout the 1990s by consistently building important new things – and that their decline started when they stopped inventing.
- Engineers frequently … do not understand distribution. Since they don’t know what works, and haven’t thought about it, they try some sales, BD, advertising, and viral marketing—everything but the kitchen sink…. This one is from Tren Griffin’s blog, not the book, but it’s still good (I’m borrowing Griffin’s format for this post too – he writes an excellent blog, which you should check out). Griffin’s comment is: “Engineers have a tendency to believe that people will be lined up outside the door with crisp but non-sequentially numbered stacks of $100 bills waiting desperately to buy what they have designed. They love what they create and think other people will too. Selling and marketing is a much harder problem than most engineers realize.” This is another version of the mousetrap problem – it’s not enough to build something new. In fact, Thiel says that you need to answer seven questions that demonstrate that you have a clear advantage – including in distribution. The questions are:
- …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 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? The book goes into useful detail on how to address all of these questions. The advantage that startups have here is that don’t have path dependency locking them into the wrong answers to these questions, as larger firms sometimes do. Flexibility is the big advantage that you have when you’re starting out.
- Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all. This is another problem for big companies – if you’re only looking to add new $1b product lines (or even $100m), then you won’t go into these micro-segments that you need to dominate to succeed. This is another version of Clayton Christensen’s idea that disruptive innovations start in niches. Related to this, he has also said:
- Never ever hire an MBA; they will ruin your company. That’s from an article on Slate by Nathan Furr. It also included the diagram at the top of this post – which illustrates the issue. There are different sets of skills that you need when you are exploring (going from zero to one) versus when you are exploiting a known idea (going from 1 to n). Startups are usually exploring. And it’s true, we don’t do a very good job of teaching the management skills that you need to do this in our MBA programs. The challenge for larger firms is that you need to do both. More on this issue soon.
- 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. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market. The clearest way to make a 10x improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite. A drug to safely eliminate the need for sleep, or a cure for baldness, for example, would certainly support a monopoly business. When I raise this issue in talks, people often struggle with it – how we can get a 10X performance improvement? It’s not easy. But there is plenty of research (not cited by Thiel) that shows that this is true. This is why you really do need to aim high when you’re building new things.
- 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. The fact that 10X improvements are hard to come by is why Thiel focuses on contrarian thinking throughout the book. This isn’t to say that there is no value in making smaller jumps. But most systems are dominated by the outliers – the big, discontinuous jumps.
I don’t agree with everything that Thiel says – and some of his non-business views are pretty objectionable. Peter Sims has a thoughtful post on his issues with Thiel’s take on monopolies, which is worth reading. At the end of the post, Sims says:
Sorry Peter, I don’t buy your argument, but thank you as always for provoking thought.
I feel the same. The book is extremely though-provoking throughout, and worth a read. I’m still sympathetic to the little bets approach, but I also see the value in aiming high as Thiel argues. They’re important issues to be thinking about.