Library / Biographies | Industries

Date of review: July 2020
Book author: Peter Thiel with Blake Masters
Вook published: 2014

Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel with Blake Masters (2014)

This book is particularly important in evaluating tech companies, it helps to better understand the approaches and mindsets of their leaders. But even an investor staying outside of tech would benefit from a better understanding of how technological progress impacts other sectors and customers.

'Create new things that will make the future not just different, but better'

Thiel puts an emphasis on invention and innovation as the heart of entrepreneurship, while most businesses focus on copying. 'Create new things that will make the future not just different, but better'.

Thiel briefly discusses lessons learnt from the Dotcom crash, but calls to stay open-minded and think for yourself rather than blindly following dogmas. The four big lessons learnt in the Silicon Valley (according to Thiel) are: 1) Make incremental advances, 2) Stay lean and flexible, 3) Improve on the competition (rather than trying to create a new market prematurely), and 4) Focus on product, not on sales.

Monopolies drive progress

An important concept discussed in the book is Competition and the narrow vs broad look at the market. Thiel rightly points out that perfect competition drives economic profits to zero, so a business should seek to have a mini monopoly by having a unique product. Monopolies drive progress, according to Thiel, because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.

Thiel carries his view against conventional competition into education and shares quite interesting thoughts on it as well. 'We teach every young person the same subjects in mostly the same way, irrespective of individual talents and preferences. Students who don't learn best by sitting still at a desk are made to feel somehow inferior…Elite students climb confidently until they reach a level of competition sufficiently intense to beat their dreams out of them…Higher education is the place where people who had big plans in high school get stuck in fierce rivalries with equally smart peers over conventional careers like management consulting and investment banking…For the privilege of being turned into conformists, students (or their families) pay hundreds of thousands of dollars in skyrocketing tuition'.

In the business world, to become successful (monopoly), it has to have a few of the following characteristics: 1) Proprietary technology, 2) Network Effects, 3) Economies of scale, 4) Branding. Thiel shows where the difference in valuation comes from for a normal business (e.g. New York Times) and a tech company (e.g. Twitter, which was valued 12 x higher at IPO than New York Times despite losing money). Tech businesses tend to have longer periods of high cashflows, while many traditional businesses resemble nightclubs or restaurants which can enjoy success for just a few years.

Thiel also adds an interesting point I came across in different books about innovators who really don't try to disrupt established businesses but rather add new, more convenient services expanding the overall market, including for incumbents (e.g. PayPal and Visa).

Perhaps paradoxically, Thiel says that 'it's much better to be the last mover – that is to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do it is to dominate a small niche and scale up from there'.

Thiel also shares useful ideas on investing, especially in the VC sector

'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…Only invest in companies that have the potential to return the value of the entire fund'. This rule eliminates the vast majority of potential investments.

Thiel has a similar view on portfolio diversification as many other successful investors, pointing out that the majority of returns come from just a handful of companies, while the majority of companies return mediocre results.

The book has also a few useful ideas on how to recruit people in start-ups, how to sell products and how to manage a start-up. It is not a complete guide, but rather ideas put in between highly philosophical subjects and examples from real life.

Finally, Thiel discusses clean energy, Tesla, machine learning and how we should prepare for the future.

I should add that this sub-200 page book – a very high wisdom-per-page ratio making it a very good book to read.

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