Notes on Zero to One - Part 1

What valuable company nobody is building?

If you are copying the existing companies then you are not learning from the great companies. Copying existing models is easy but it only takes the world from 1 to n while creating something new it takes the world from 0 to 1. No matter how successful current companies are, they will fail if they do not create new things. Zero to one is about how to build companies that create new things.

The Challenge of the Future

Brilliant thinking is rare, but courage is in even shorter supply than genius. Future means that the world we see today will not be the same, whenever that happens we can call it future. Two things about future is certain - It’s going to be different and it must be rooted in today’s world.

Future can be imagined only two ways:

1. Horizontal or extensive progress - where we go from 1 to n. We already know how it looks like. Example: Globalization - One thing happens in one country, it gets copied in other countries

2. Vertical or intensive progress - where we go from 0 to 1. This is hard to imagine, since no one has imagined this ever. Example: New technology

Only vertical progress can provide a better future. If all the countries start living the way people live in USA, then the natural resources will get exhausted in no time and the world will not survive such exploitation. The only way we can have a better future if we have a better technology to preserve or replace the scarce sources.

The big misconception around us is that we have advanced a lot in last few decades. Although the reality is we haven’t progressed much apart from the advances in computers and communication.

Startup Thinking - A startup is the largest group of people you can convince of a plan to build a different future.

New technology comes from smaller ventures(Startups), as it is difficult to develop new things in big organizations and even harder to do it yourself. Only small group of people with a sense of mission will be able to execute things fast (A Startup)

The most important strength of a startup is new thinking - they need to question received ideas and rethink business from scratch

Party like it’s 1999

In late 1990’s the conventional wisdom was that the page views were more important than the profits. No loss was big enough. These beliefs appeared wrong only in retrospect and we now call it a bubble.

Dot com boom happened when there was unemployment all around and old service economy wasn’t good enough to provide for all. Internet gave a platform for all to come online and reach places where they couldn’t before. This attracted a lot of money between 1998 to 2000. Only internet looked like the new future. Startups were over funded, suddenly the number of paper millionaires in silicon valley increased. People left their jobs to open companies. Everyone thought they could succeed in this dot com madness. Nothing was impossible. People believed they could get an IPO before even opening the company. It might look odd today but it was the norm back in the day.

When the dot com bubble crashed only those companies survived which had clear objectives & used their resources wisely. Investors became vary of investing in the companies who promised unimaginable things.

They went back to where they felt their investment was safe - Brick and Mortar (Real estate). This created another bubble - Real estate bubble too crashed in 2007.

Lessons learnt

The entrepreneurs learnt few lessons from both the crashes which guides today's business thinking;

1. Make incremental advance - Making grand goals results in bubbles, hence look for small advancements in order to be safe
2. Stay lean & flexible - Iteration is the only way to survive, do not be dogmatic about your plans
3. Improve on the competition - Don’t enter in unknown markets, do only what others are doing and build over it.
4. Focus on product not sales - If your product is good enough, it will sell itself.

The author argues that the principles opposite to these lessons are more correct;

1. It is better to risk boldness than triviality
2. A bad plan is better than no plan
3. Competitive markets destroy profits
4. Sales matter just as much as product

In 90’s people dreamt of going from 0 to 1 and the crash discouraged people to dream so big. The author urges the readers to learn from the past mistakes and still be bold and courageous as the world still needs world changing technologies which 90’s provided.

“The most contrarian thing of all is not to oppose the crowd but to think for yourself”

All companies are different

For a business creating a value is not enough, a business should be able to capture the value which it creates.

Airlines vs Google.

Airlines create so much value but still makes so little profit whereas Google creates way too much profit in much smaller value. The airlines compete with each other while Google stands alone.

Two types of markets

1. Perfect competition - Companies sell undifferentiated products, the price is completely determined by the market. Under perfect competition, in the long run no company makes an economic profit
2. Monopoly - Unlike perfect competition, Monopoly owns the market. Makes the production and price combination in such a way that maximizes its profit.

Google is the best example of 0 to 1 and also a monopoly. If you want to capture lasting value, don't build an undifferentiated commodity business.

Lies people tell

There is a perception that most of the firms are similar and there aren't many competitive or monopolistic companies. The truth can’t far from this.

Monopoly lies - Monopolists lie to protect themselves from scrutiny

Competitive lies - Non-monopolists try to show that they are in the league of their own and they themselves underestimate the scale of competition.

The biggest mistake a startup can make is to narrow the market so much so that you dominate the market by definition. They try to convince themselves and others that how they are different from others. It’s better to pause and re-think the scale of competition. Do not lose the sight of the competitive reality and don’t focus on trivial differentiating factors.

Monopolies such as Google try to expand their market. They started essentially as a search engine company and further moved on to become a digital advertising company to a technology company. On the contrary competitive companies try to shrink their market so much that there is nothing left to capture.

Ruthless people

Inability of profit making is not the only issue competitive companies face. Since, there is no differentiating factor in such companies it becomes impossible for them to survive. It pushes people towards ruthlessness or death. A monopoly on the other hand doesn’t have to care about survival. It has wider scope to take care of its employees and its overall impact on the world. Monopolists can afford to think about other things other than making money, non-monopolists can’t.

Monopoly capitalism

Monopoly is good for the company and the employees but not so good for the consumers as they don’t have any other choice. The profits of the company comes at the cost of society at large, but it only happens when the world is static.Today the world we live in is very dynamic and hence it is possible to invent better things. The creative monopolies give abundance and choice to the customers rather than forcing choice upon them. Monopoly of Apple was the result of such creative monopoly. It did not force the choice upon the consumers, it created abundance for them.

If monopolies try to hold down progress then the new monopolies emerge by replacing the incumbents through innovation. Innovation is the powerful incentive even for the monopolies as they help them secure their long term profits.

"All successful companies are different, each one earns a monopoly by solving a problem. All failed companies are the same, they failed to escape competition." 

The ideology of competition

Creative monopoly means higher value for the consumers and also the higher profit for the customers whereas the competition means no profit and no value. Still we are wired to believe competition is healthy. This is being fed to our minds since childhood. Irrespective of children’s individual talent and preferences they are forced to compete in the same way.This is the ideology which pervades our society. The more we compete, the less we gain.

War and peace

The culture of business has become warlike, even the terms used in businesses are taken from wars. We can easily see MBA students reading books written on war. Few examples of the terminologies are - headhunters, sales force, captive market, make a killing.

Author gives two point of views to explain why we fight;

1. Karl Marx - According to Karl Marx we fight because we are different.
2. Shakespeare - According to Shakespeare the more we are similar the more we fight with each other

In the world of business the Shakespeare version looks more apt.

In competition the focus is mostly on the rivals and not on what truly matters.

Microsoft Vs Google

Both the companies created similar products which they could have avoided.

Examples; Windows vs Chrome OS, Bing Vs Google Search Explorer vs Chrome, Office vs Docs, Surface vs Nexus. This war caused Windows and Google their dominance, Apple came and overtook both of them.

Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past. This attitude produces undifferentiated products and highly competitive markets. It is always better to rethink whether the existing market is the right space to be in, if it’s a very competitive space. Winning is always better than losing but everybody loses when the war isn’t one worth fighting

If you can’t beat a rival, it's better to merge. If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.

Last Mover Advantage

A monopoly is better than the competitive market but only if it can sustain itself in the future. A great business is defined by its ability to generate cash flows in the future. The value of a business today is the sum of all the money it will make in the future. That is why the valuation of Twitter is more than the valuation of the Times(Newspaper) even though the newspaper business is still profitable whereas Twitter is not. Any business which has too many competitors will eventually run out of cash flows once the customers move on to other alternatives.

Technology companies lose money initially but realize their values 10 to 15 years later.

Durability of a business is important than short term growth. Weekly active users, monthly revenue targets and quarterly earning reports can make many entrepreneurs overlook the durability of the business. The most important question you should be asking is : Will this business still be around a decade from now?

Shared characteristics of all the successful monopolies are;

1. Proprietary Technology - It is the most substantive power a monopoly can have. Your technology must be at least 10 times better than its closest substitute. Anything less than 10 times is just a marginal increment and will not give you monopolistic advantage.
2. Network Effects - If there are more people using a product then it makes sense for other to use it as well. The product should be useful enough to the first user so that it can easily be adopted by his/her network. It should essentially be started in a small market and then scale up.
3. Economies of scale - As the scale goes up, fixed cost reduces. A yoga studio owner can never make much margins as he can not scale up by reducing his fixed cost. The margins can never be of such magnitude which a successful software can provide. A good startup should have the potential for great scale built into its first design
4. Branding - Creating a strong brand is a powerful way to claim a monopoly. Apple is the best example of branding and monopoly.

Apple has the mix of the best proprietary technology, the products are sold at such a large scale that it dictates the pricing, it has one of the best content ecosystem to create network effects which develops software for the company and it has created the best brand for itself. However it should be noted that building a brand without a substance is very dangerous. No technology company can be built on branding alone

Every startup should start with a very small market. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Once you dominate the small market then you scale up to bigger markets. Few examples are - Amazon started initially with books, eBay started with Beanie Baby.

As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible. Disruption in itself encourages competition with the incumbent companies. It calls for direct competition and it is not wise to enter competition when you are starting small.

First mover advantage can be a tactic but not a goal. The only thing which matters is the amount of cash flow you can generate in future. It is better to be a last mover if you can create a large amount of cash flow by starting small and create monopoly profits.

Can you control your future?

Peter Thiel says that if you treat future as something definite, it makes sense to understand it in advance and work to shape it. If you expect it to be uncertain then you will give up on controlling it. The author argues that the uncertain future mindset is prevalent in today's world.

Students in the middle school

The students are encouraged to do as many extracurricular activities as they can. They have to compete very hard to learn as much as they can. By the time they reach college, they have a very diverse resume ready which is supposed to prepare the student for anything which comes on the way. Although it doesn’t prepare them for anything in particular.

On the contrary instead of pursuing mediocrity in many fields if a student determines one best thing and does it then she becomes a monopoly of one skill and distinguishable from others.

Four views of future;

1. Indefinite pessimism - This view considers past to be a golden age and present and future to be declining from the golden past with no clarity about the future. Cultures with such views look towards bleak future with no idea about what to do about it. They only try to enjoy as much as they can before it's all over.
2. Definite pessimism - Cultures who think their future is bleak and hence they prepare for the worse future. They are certain that future will not be as good as the present and hence they do whatever they can to prepare for the worse future.
3. Definite optimism - This view understands that the future will be better than the present and it can be planned.
4. Indefinite optimism - This view looks at the future and thinks that it will be better than today but doesn’t know or care how. They do not plan for the future. This is the worldview of people who were born in west after 1960’s. They grew up seeing development and progress which formed their opinion about future that it will always be better. Such culture do not plan for future but only tries to optimize for efficiency by rearranging existing plans.

Current world has indefinite optimistic view and there is a lot of focus on rearranging existing cultures instead of creating new things.

Examples;

Indefinite Finance - Money only gets redistributed from an entrepreneur to banks to investors to stocks but in the whole chain nobody is certain about the money they have. They just try to distribute the wealth as much as they can as they are not certain about how to make money.

Indefinite Politics -  The reduction discretionary spending as compared to 1960’s and 1970’s. The money is not spent on bigger projects and dreams like Lunar exploration project in 1970’s. Today’s politics believes in a better future without making any bigger plans and simply satisfied with incremental benefits

Indefinite Life - Our ancestors were more curious about understanding and extending the human lifespan. Today the world we live in is more interested in the probability of dying by using statistical models. The current limits seem natural and we do not dare to challenge them. Life saving drugs are not made at the rate which were made in the past.

Due to this attitude of indefinite optimism, households do not save money for future and the companies do not invest in future with their surplus cash because they do not have concrete plans for the future. This view of future makes progress very unsustainable.

Being lean or evolution in the market should not be followed as a principle.

Lean is a methodology and not a goal. Making small changes in existing things does not make any global changes. Make things which takes the world from 0 to 1. Think long term

Entrepreneurs are not a lottery ticket and they don’t have to rely on chance, they can become successful by careful planning and taking control their life.

Follow the money

Pareto’s principle (80-20 rule/Power Law)

20% people have money more than 80% of the people. The exponential equation which gives highly unequal distributions is the law of the universe.

Power law in venture capitals - Venture capitalists pool in money from different institutions and try to invest in companies they think would become valuable in the future. They diversify their profile with understanding that majority of the startups they have invested in will never make any money but few of them can give them very high returns.

However, they overlook the fact that there are high chances that there might not be any profitable company in their portfolio.

VC’s should not invest in so many companies with a blinded hope that some of them will succeed and give then 2X or 4X return. They should only invest in those companies which have the potential to go from 0 to 1. This process eliminates many companies which will remain average throughout.

If you look the investment as lottery then you are likely to lose.

An investor, an entrepreneur, a student - all of them invest their money, time or effort in what they do. It doesn’t make sense for an entrepreneur to run many companies at a time, similarly it doesn’t make sense for a student to keep multiple career options.

“It does matter what you do. You should focus relentlessly on something you are good at doing but before that you must think hard about whether it will be valuable in future?"