For anyone interested in entrepreneurship and startups, you’ll hear this book recommended over and over again. There’s a good reason for that. Zero to One contains many fantastic ideas that can change how you view business and technology.
I think you’ll find these ideas useful even if you’re a beginner or aspiring entrepreneur. I especially enjoyed his insights into choosing a target market and how to create a space in the market that allows you to avoid competition.
Who is Peter Thiel?
Peter Thiel (his official website) is an entrepreneur, investor and billionaire.
- In 1998, he co-founded PayPal with Elon Musk. Four years later, it was sold to eBay for $1.5 billion.
- In 2004, he was Facebook’s first outside investor. He bought 10.2% of the company shares for a half-million dollars. When Facebook went public in 2012, he sold most of these shares for over one billion dollars.
- And he’s made early stage investments in other leading tech startups like SpaceX, Airbnb, LinkedIn, Yelp and Spotify.
At Stanford University, Peter Thiel gave a series of lectures about entrepreneurship. Students loved the course so much that he decided to turn the lectures into this book. So now we can all benefit from Thiel’s exceptional business experience. Let’s begin!
1. Avoid Competing: Exceptional startups offer something unique
Most people see business as cut-throat competition. And you do often hear business experts talk about winning market share and outperforming their rivals. However, Peter Thiel says creating ultra-successful businesses like PayPal and Facebook is really about avoiding competition and creating natural monopolies.
A company creates a (legal) monopoly by:
- Solving a unique problem, and thereby creating a whole new category of product. For example, Airbnb allowed people to rent out extra rooms in their home for the first time.
- Do something so incredibly well that nobody can offer a close replacement. For example, Google has invested so much into their search engine that it’s almost impossible for anyone to offer a better solution.
Usually we feel the word monopoly is negative and possibly illegal. However, even the government recognizes the value in some monopolies by enforcing patents and copyrights. Monopolies often provide large profit margins, which allows the company to treat their employees very well. That’s why the benefits provided by some Silicon Valley companies are so great.
On the other hand, when a company is stuck competing with other companies who offer basically the same solution, their profit margins shrink to nothing. One of Thiel’s examples is airlines, which make less than 1% profit from each flight ticket. As a result, it’s a very difficult business to be in.
The most successful businesses of our time avoid competing. Instead, they create natural monopolies by offering a unique solution to the market, or creating a product so excellent nobody can offer a decent replacement.
2. Make the New: Great companies don’t do incremental improvement
Most business plans are based on incremental improvement. In other words, you take something that’s working and then make it a little better. Or you take something that’s working in one place and then spread it all over the country. It’s about going from 1 to 2, or 2 to 3, etc. For example, there used to be a hamburger store, then the McDonald’s brothers made a better and faster hamburger store. There used to be one McDonald’s, then Ray Kroc spread new locations all over the place.
However, Thiel says truly great businesses do something totally new. They offer something unique that has never been offered before. It’s about going from nothing to something, from 0 to 1. As examples, Thiel says Microsoft, Google and Facebook fit into this category.
From a marketing perspective, the experts Al Ries and Jack Trout teach a similar idea. They say companies usually fail when trying to directly confront a competitor that is an established market leader. The far more effective strategy is to create a brand new category for our product. They wrote, “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.”
For example, the first university in the US was… Harvard, the first safety razor was… Gillette and the first imported beer was… Heineken. These were the first brands to offer a product in each category, and that is the major reason they continue to be number one in each market.
Personally, I like this idea of “0 to 1,” but I agree with some online reviewers who say it is flawed. The critics have a good point that many of Thiel’s examples in the book are not really “0 to 1” because they were improvements on previous solutions:
- Facebook was a better social network than Myspace.
- Google was a better search engine than Google.
- Even Microsoft’s Windows was preceded by other graphical operating systems.
The greatest businesses are based on creating a totally new and unique solution that has never existed before. They don’t incrementally improve on what is already out there. However, there is valid criticism of this main idea.
3. Create Monopolies: Through technology, networks, scale or branding
According to Thiel, leading companies create monopolies in four major ways:
- Proprietary technology. Any innovation that makes it difficult for others to copy your product. Thiel says a small improvement will not cut it, you must offer something at least 10 times better than what came before to create a monopoly position. A good example is Tesla—their engineering is so good that Tesla components like batteries are used in vehicles made by other large companies.
- Network effects. This means your product becomes more valuable as more people use it. Good examples include Twitter, Facebook, Instagram, Airbnb, Uber, eBay, etc. It would be relatively easy to code a new Twitter competitor, but since everyone is already signed up to Twitter they have a strong barrier to any new competitors.
- Economies of scale. As a company gets larger, they can manufacture products more cheaply because their fixed costs are spread over a larger number of sales. It is often hard for new companies to compete with a large company that has been optimized into a well-oiled machine.
- Branding. Only your company can use your brand name, so a strong brand is a good source of monopoly.
Phil Knight is the billionaire founder of Nike. His story of entrepreneurship provides a great example of the power of branding. When he started his company, they were basically the US distributor for a Japanese shoe company named Tiger Shoes. Phil sold Tiger shoes all over America and helped make it popular.
But one day Tiger Shoes decided to end their contract and give their US distribution rights to someone else. Phil realized that he was helpless without control of the brand of the shoes he was selling. So he rushed to fix his mistake by launching his own brand, which was Nike. (Actually, Phil almost picked “Dimension Six” as his brand, but thankfully his employees convinced him that was a bad idea!)
Companies that create a lasting monopoly have some combination of these four characteristics: proprietary technology, network effects, economies of scale or branding.
4. Sell First: Promotion and distribution are critical to every business
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.” But Peter Thiel says this is the wrong mindset. From the beginning, we must be thinking about how we will get people to use our product. Every startup must focus on finding a profitable channel of gaining customers.
- For an inexpensive consumer product, this may look like a Facebook Ads campaign.
- For an expensive business-to-business service, this may involve training a sales team.
The most important thing is that you make more money from each new customer than you spent to get them. In business language, this means your Customer Lifetime Value (CLV) must be higher than your Cost Per Acquisition (CAC).
PayPal became popular very quickly because they essentially turned their whole user base into commissioned salespeople. If you recommended PayPal to your friend and they signed up with your link, then you would both receive $10 each! This strategy caused their number of users to skyrocket into the hundreds of thousands fast. While this was an expensive strategy, it gave them a crucial head start so that no other payments startup could catch up. And they knew they would be able to make money in the future from all those new users they were paying for.
A startup must quickly find a profitable way to find new customers through advertising, marketing and/or sales. PayPal grew so quickly because they had a referral strategy—they paid $20 whenever one of their users invited a friend.
5. Start Smaller: Beginning with a niche market, then expanding
Aspiring startup founders often come to Peter Thiel’s company looking for funding. And they often make the mistake of saying their new business idea is targeting some huge market. For example, they may claim that if their solar panel company can win just 1% of the global energy market, then it will be incredibly successful. But Thiel says this is the wrong approach because large markets are not full of opportunity, but profit-squeezing competition.
Instead, our business ideas should start with a small niche market. Offer a unique solution to a group of people who aren’t being served yet. That’s how we can create a monopoly, and only later should we expand our success into larger and larger markets.
Starting small is a common pattern you’ll see with the most successful companies:
- Tesla started with an electric sports car that cost six figures. Only later did they expand into luxury cars and finally average-priced cars.
- Facebook started with Harvard students. Then they expanded to other colleges, then high school, then everyone. This is how they toppled Myspace.
- PayPal started with eBay PowerSellers. In the beginning, they focused on getting only the most active eBay sellers signed on to their service. Later all the more casual eBay users followed.
One more important example: Amazon started with only selling books. Yet from the beginning, Jeff Bezos had a vision of creating an “Everything Store” that would rival Walmart. He just knew that it would be easier to start with one small category of products. After books, they expanded to similar products like music CDs and movie DVDs, then to electronics, toys and jewellery. Now, of course, they sell everything.
Trying to win 1% of a huge market usually fails. Instead, start with a very small niche market that is not being served. Offer a unique solution they love. Then progressively expand.
6. Look for Secrets: They reveal great business ideas
In Zero to One, Peter Thiel says:
Whenever I interview someone for a job, I like to ask this question: “What important truth do very few people agree with you on?”
I guess the hardest part of responding to this question is that the answer should be unpopular, which means the person being interviewed needs to show courage along with intelligence. Yet Peter Thiel says a good answer to this question will provide the best window that we can get into the future.
All innovative or disruptive ideas that we take for granted today were once scoffed at by the majority of people. For example, who would have expected Airbnb to succeed? Most people would have laughed at the ridiculous idea of letting strangers from the internet sleep in their home. Yet the founders of the startup recognized a secret that most people couldn’t see: there was a hidden market of people who owned property and would be willing to rent their extra rooms to others.
The classic success book Think and Grow Rich says that fear of criticism is one of the biggest things stopping most people from becoming wealthy. As social animals, it’s only natural that we desire to be accepted by those around us, so we tend to bury our more unconventional ideas. In fact, that book shares the story of Guglielmo Marconi, the inventor of the radio. When he told his friends that he’d discovered a way to send messages through the air without wires, his “friends” brought him to a psychiatric hospital!
Looking for ideas which are contrary to popular opinion yet true (aka “secrets”) can lead us to valuable unrealized business opportunities. Thiel often asks, “What important truth do few people agree with you on?”
7. Plan Concretely: Entrepreneurship requires definite future plans
Thiel says for many decades the dominant attitude in America was “definite optimism.” This means people made definite plans to make the future better, including bold projects like the moon landing missions or the 40,000 mile long Interstate Highway System.
But then in the 1980’s a new attitude took over which he calls “indefinite optimism.” This means people believe the future will be better, but they don’t believe we can predict how to make it better. For example, in modern finance the basic idea is that we can’t really predict anything so we should diversify our investments aka “not put all our eggs in one basket.”
In business, a definite attitude means we can envision what our future looks like, then turn that into a reality. That’s how Apple became great, they imagined new products like the iPod, iPhone and iPad and then produced them from scratch.
Yet even in the startup world, an indefinite hazy attitude is becoming the norm. In popular books like The Lean Startup, entrepreneurs are now taught to create a “minimum viable product” then try endless experiments to evolve the product until they stumble across something that customers like.
Peter Thiel says that is a good method for optimizing products that are already successful, but it won’t lead to any groundbreaking innovation. Imagine if Apple had started with a Motorola 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 bold concrete plans for the future. What is popular today is an indefinite attitude of diversification, optimization and focus groups.
Peter Thiel is a known as a contrarian, which means you may not agree with all the ideas we’ve just discussed. However, I’m sure we can all agree that he makes you think in new ways!
I especially liked his advice for starting with a small niche market and then offering a unique solution that isn’t yet available. I think most beginner (and even experienced) entrepreneurs can use this wisdom to refocus their strategy towards better growth.