Zero to One by Peter Thiel Book Summary & Commentary
— Peter Thiel
Who is Peter Thiel?
Peter Thiel is an entrepreneur, investor and billionaire.
- In 1998, he co-founded PayPal with Elon Musk.
- In 2002, PayPal was sold to eBay for $1.5 billion.
- In 2004, he was Facebook’s first outside investor, buying 10.2% of the company shares for a half-million dollars.
- He also made early stage investments in other top technology startups including SpaceX, Airbnb, LinkedIn, Yelp and Spotify.
This book Zero to One is for anyone interested in startups and technology. Peter Thiel gave a series of lectures at Stanford about entrepreneurship. One of his students published their notes online and they were an immediate hit. So Thiel decided to put the lessons from his course into this book. Now we can all benefit from his incredible business experience. Let’s begin!
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1. Create a monopoly rather than competing with other businesses
Most people view successful businesses as cut-throat competitors. The truth is, the most profitable businesses avoid competition as much as they can. Instead, they build monopolies.
Generally the word monopoly is felt to be negative, but Thiel isn’t talking about monopolies that are illegal or immoral. Rather, he means companies that establish whole new categories of products that enhance our lives.
(Even the government, which prosecutes some monopolies, recognizes the value in others by granting patents and enforcing copyrights.)
You create a monopoly when you solve a unique problem, when you do something other companies don’t do, or when you do something so well nobody else can offer a reasonably close replacement.
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.
When you are in competition, your product is seen as an undifferentiated commodity—basically identical to what other businesses provide. This leads to profit margins that are razor thin. A prime example of this are airlines. Airlines make less than 40 cents profit from the average flight ticket, which costs almost $200.
A monopoly gives a company a lot more market power because they can choose what price to sell their unique product for. A great example of this is Google. They dominated the search engine market by offering incredibly accurate and fast results, a few levels above Microsoft and Yahoo. As a result, in 2012 Google earned more profit than ALL the US airlines combined, with profit margins over 20%.
Once a business establishes a monopoly, it tends to keep it. Old monopolies are not beaten, but they are eventually undermined by totally new technologies. For example, Kodak dominated film photography, but their reluctance to embrace digital cameras led to their eventual replacement by Canon. Canon itself appears to have lost most of its sales not to a new digital camera company, but smartphone makers like Apple and Samsung. (This pattern is explored in detail in the landmark business book The Innovator’s Dilemma.)
Great businesses avoid competing. Rather, they build creative monopolies which means they offer a unique solution to the market, or create a product so excellent nobody can offer a close replacement.
2. From 0 to 1: Make the new instead of copying the old
The opening sentence of this book is too good not to share:
Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
Most businesses are based on spreading something familiar, perhaps improving it a bit. This is the basic idea of globalization—taking something that’s worked in one place and applying it everywhere else. In other words, these business create progress that goes from 1 to 2, 1 to 3, 1 to 4, etc. There used to be one McDonald’s, now there are 2, 5, 100, 5000, etc.
However, truly great businesses escape competition by doing something new. This is called technology—providing a unique solution that hasn’t been offered before. In other words, going from nothing to something, from 0 to 1. Almost by definition, this kind of unique innovation cannot be taught with a set of formulas or best practices, but Thiel will share ways of thinking that can lead us there.
(Note that this idea is often criticized in online reviews of Zero to One. The critics make a good point: many of Thiel’s examples actually did improve on previous products. Facebook was a better social network than Myspace. Google was a better search engine than Yahoo. They were not totally unique products.)
The authors Al Ries and Jack Trout teach a similar idea from a marketing perspective. They say companies usually fail when trying to beat an established leader in a product category. A much more effective strategy is finding or creating a new product category that we can be the first to enter.
They write, “The basic issue in marketing is creating a category you can be first in. It’s the law of leadership: It’s better to be first than it is to be better. It’s much easier to get into the mind first than to try to convince someone you have a better product than the one that did get there first.”
In their book they ask us to name a university, razor company and imported beer. The first brands most people think of are Harvard, Gillette and Heineken. These were the market leaders in each category, and you may be surprised to find out they were also the first in each category—the first college in America, the first to sell safety razors and the first to import beer!
So if you want to learn how to “position” a business in the market for success, then read our summary of The 22 Immutable Laws of Marketing by Al Ries and Jack Trout.
Thiel says, “The next Bill Gates will not build an operating system.” Great new businesses are built not by improving or spreading familiar things, but on creating new and unique solutions.
3. The four sources of monopoly are: technology, networks, scale and brand
Peter Thiel says technology companies that create an enduring monopoly have a combination of these four characteristics:
a) Proprietary technology
This means creating a new technology that makes it very difficult for others to copy your product. A good example is Tesla. They succeeded where other electric car companies failed, partly because of their strong technology advances. Tesla engines, batteries and other components are so good they are used in vehicles made by Toyota, Mercedes-Benz, etc.
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.
b) Network effects
Facebook, Instagram, Airbnb, Uber, Craigslist, eBay and PayPal. What do all these businesses have in common? Their monopoly is based on something called “the network effect.” This means the more people that use their product, the more valuable their product becomes.
For example, if nobody used eBay, there would be no point for you to visit the website. Yet the more people use eBay, the more useful it becomes. There are more listings for sale if you’re looking for something to buy, and more potential buyers browsing if you’re looking to sell. Any new auction website has an almost impossible uphill battle, because everyone already goes to eBay for that purpose.
c) Economies of scale
Big companies can gain a big advantage over smaller ones simply because they sell a lot more products. Therefore it becomes cheaper for them to make the products because they can negotiate better deals with suppliers. Their fixed costs can also be spread over a larger number of sales (fixed costs like engineering the product).
An appealing brand can become a source of monopoly because obviously only your company can use your name.
A great example of the power of branding comes from Phil Knight, the billionaire owner of Nike. When Phil started, his company was named Blue Ribbon Sports. They were basically the US distributor of Tiger shoes, a Japanese company. Phil worked tirelessly to make Tiger shoes popular in the US. But one day Tiger shoes suddenly decided to rip up their contract and give the US distribution rights to someone else.
Phil and his team panicked. They had stores all over the US and no shoes to sell! They rushed to order a new batch of shoes from an overseas factory. This time the shoes would have their own design and logo.
Phil had learned his lesson the hard way—from then on he would focus on building his own brand rather than someone else’s! He almost picked the name “Dimension Six” but thankfully all his employees told him how terrible it was. They went with “Nike” instead and the rest is history. Read more about this rollercoaster entrepreneurial story in our summary of Shoe Dog by Phil Knight.
Companies that create an enduring monopoly (a moat around their castle, so to speak) have these four characteristics: proprietary technology, network effects, economies of scale or branding.
4. Emphasize distribution/sales from the beginning, not as an afterthought
We’ve all heard sayings like “if you build it, they will come” or “build a better mousetrap and the world will beat a path to your door.” However, Peter Thiel says this is rarely the truth.
In worlds as diverse as finance, law and academia, the people who rise to the top of these fields are the ones who can make deals, bring in clients and promote themselves. (Rather than those who simply have the best technical expertise.) We also underestimate the importance of sales because companies usually hide their salespeople behind innocuous titles like “account executive.”
Sales, advertising and marketing are a core part of every successful business. Every startup needs to find a profitable channel of getting customers, whether they are running Facebook ads for low-cost products or training employees to sell high-priced products.
The magic formula is CLV > CAC. Your Customer Lifetime Value (CLV) must be greater than your Cost Per Acquisition (CAC). This simply means your customers must give you more money than you spend to get them in the door.
The way PayPal grew was essentially by turning their whole user base into commissioned salespeople. If you recommended PayPal to your friend and they signed up using your link, then you would both receive $10 each! Yes, this was an expensive strategy, but it caused their number of users to explode into the hundreds of thousands within a few months.
A startup must quickly find a profitable way to find new customers, through some combination of advertising, marketing and sales. PayPal paid $20 whenever someone referred a new user, which caused exponential growth.
5. Dominate one small market first, then expand
Startup entrepreneurs make a common mistake when they come to Peter Thiel’s venture fund looking for capital. They say their idea has huge potential because it is part of some huge trillion-dollar market. (Like a new solar panel company will argue if they can win just 1% of the global market for energy, then they will be super-successful.) But Thiel says large markets are not full of opportunity, but full of competition, which will squeeze all the profits out of the business.
Instead, he says startups should start small. Find a group of people who are not being served, then offer a unique solution to them. That’s how to create a monopoly and escape competition. Then after you’ve dominated the niche market, you can expand into progressively larger markets.
Starting small is a common pattern we see in the most successful tech companies:
- Tesla began with a sports car that cost six figures, then moved to luxury cars, and only much later cars for mainstream buyers.
- Facebook began with only Harvard students, then only college students, then other students, and eventually everyone. With this strategy, they toppled the existing giant Myspace.
- PayPal gained traction on eBay by first targeting PowerSellers. Rather than trying to get the attention of millions of eBay users, PayPal focused on converting only the few thousand highest-volume sellers. After 3 months, more than 25% of PowerSellers used PayPal. This gave PayPal a huge lead over other email payment companies.
Amazon began with only selling books. From the start, Jeff Bezos’s vision was to create an online “Everything Store” that would basically be the next Walmart or Costco. Yet in 1994 he made the intelligent decision to first dominate one product category. Why did he choose books? Because an online book store would have a natural advantage of a 10 times larger selection over big retail bookstores.
Then in 1998, they expanded to music CDs and movie DVDs. Later they expanded again to toys and electronics, then to jewellery, clothes and more. If you want to hear the story behind Jeff Bezos and Amazon, then read our summary of The Everything Store by Brad Stone.
Trying to win 1% of a gigantic market is usually a path to failure. Instead, create a monopoly by providing a unique solution to a very small niche market. Then progressively expand your target market.
6. Knowing a secret is the cornerstone of great businesses
In Zero to One, Thiel writes:
Whenever I interview someone for a job, I like to ask this question: “What important truth do very few people agree with you on?”
Any good response to this question will be unpopular, so it will require both intellect and psychological strength. But a good answer will provide the best window we can get into the future. All modern developments we take for granted today were once ideas rejected by the majority of people. This means looking for ideas which are contrary to popular opinion yet true (aka “secrets”) can lead us to valuable unrealized business opportunities.
Thiel says great businesses are centred around secrets, often hidden in plain sight. For example, Airbnb saw what others didn’t—the hidden supply of property owners having extra rooms they were willing to rent out at a lower price than expensive hotel rooms. Back then, most people would have scoffed at the idea, saying who in their right mind would let strangers from the internet into their home.
The classic success book Think and Grow Rich says fear of criticism often stops people from getting wealthy. As social animals, it is only natural for us to desire being accepted by the people around us. So we bury our more unconventional ideas.
In fact, the inventor of the radio Guglielmo Marconi was brought to a psychiatric hospital by his friends. Because when he said he’d found a way to send messages through the air without wires, his “friends” thought he needed to have his head examined! If you want to hear more classic principles for success, then read our summary of Think and Grow Rich by Napoleon Hill.
One of Thiel’s favourite questions is, “What important truth do very few people agree with you on?” A good response to this leads us to ideas that are contrarian yet true. These are “secrets” that we can build future businesses upon.
7. Entrepreneurship requires definite future plans rather than diversification
For many decades, the dominant attitude in America was “definite optimism,” as Peter Thiel calls it. This attitude says we can make definite plans to make the future better. Symptoms of this attitude include the bold projects the US government accomplished, like the 40,000 mile long Interstate Highway System or the moon landing missions.
Then around the 1980s a new attitude of “indefinite optimism” took over. This attitude says the future will be better, but we can’t predict how. The best example of this attitude is modern finance, with its diversified portfolios which have the primary goal of “not putting all our eggs in one basket.” However, this mindset fails when it comes to entrepreneurship.
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. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.
After the dot-com bubble burst around 2000, the indefinite attitude became dominant even in the startup world. People stopped believing in big bold plans. They said that both the future and what customers want is fundamentally unpredictable. So entrepreneurs became taught to create a “minimum viable product” which adapts and evolves in response to customer feedback.
The best book to learn about this process of entrepreneurship is The Lean Startup by Eric Ries—check out our summary. Peter Thiel says while that approach can work for optimizing existing products, it will never give birth to a truly great business idea—a 0 to 1 monopoly.
Steve Jobs created definite multi-year plans directed by a clear bold vision. This approach gave birth to the iPod, iPhone and iPad. Apple transformed from a struggling company to one of the most valuable in the world. Yet if they had started with a Nokia phone and optimized it based on customer feedback, they would have never reached the iPhone.
Entrepreneurs must have the attitude of “definite optimism” which means creating clear concrete plans for the future. This is contrary to the currently popular indecisive attitude of diversification, iteration and focus groups.
8. Successful venture funds have mostly failed investments, but one extreme winner
Venture capital means investing in companies at a very early stage that have very high potential for growth. Peter Thiel runs a venture capital firm called the Founder’s Fund. They invest in technology-related companies.
The biggest surprise for him was learning how unequal the returns of their investments were. For example, in 2005 they invested in Facebook, as well as many other promising startups. 10 years later, their returns from Facebook were much larger than their returns from all those other startups—combined!
Conventional investing wisdom says we should diversify, putting our money into a variety of companies, some of which will do well and some will do poorly. But Thiel says in venture capital the only rule is to focus on finding those rare companies with the potential of growing into an extreme winner. Most startups simply don’t have that kind of potential.
This insight has big practical implications for non-investors too. A small minority of startups will become astronomically successful and the rest will either fail or be remain small. This means most people would be better off joining a rapidly growing venture than founding their own startup. It’s far more profitable to own 1% of Google than 100% of most businesses.
The financial thinker Nassim Taleb explores this idea further in his book The Black Swan. He says the world we live in is increasingly becoming dominated by extreme outliers because of trends like technology and globalization.
For example, Stephen King sells more books than 1000 average authors combined, a Picasso painting is worth more than 1000 average paintings combined, and Uber was a better investment than 1000 other startups combined. To learn more about how to thrive in this new more lopsided world, read our summary of The Black Swan by Nassim Taleb.
Tech startup investors tend to get most of their returns from just one huge winning investment. This also means you’ll probably be more successful becoming an early employee of a fast-growing startup than founding your own company.
Whether you agree or disagree with all the ideas we’ve just covered, I’m sure we can all agree Peter Thiel is one thought-provoking author! So while planning your own world-changing company, remember his advice to start small, create a monopoly and seek contrarian truths. I’ll see you in the next note!