Notes on Zero to One - Part 2

Secrets

Peter Thiel tells a story of Ted Kaczynski (infamously known as the Unabomber). He was an American child prodigy who was enrolled in Harvard at the age of 16 and became a Mathematics professor at UC Berkeley post his phd. He was responsible for series of bombing spread across 17 years of terror campaign.

Kaczynski believed, in order to be happy an individual needs to have goals whose attainment requires effort and needs to succeed in achieving some of his goals. He divided these goals into 3 groups;

1. Goals that can be satisfied with minimal effort
2. Goals that can be satisfied with serious effort
3. Goals that cannot be satisfied, no matter how much effort one makes

He argued that the most of the modern people are depressed because all the world’s hard problems have been already solved, now the only problems that are left to solve are either too easy or impossible to solve and pursuing either of the two are deeply unsatisfying. So, he decided to break the existing structure and let people start over working on hard problems.

Although this idea of Kaczynski was crazy but the loss of faith in technology is all around the world. Majority of us do not look new problems to solve, as we believe that all the hard problems are already solved and only the easy and impossible ones are left. All fundamentalists think this way - There are easy truths which everyone knows and there are hard truths and mysteries which no one knows and cannot question. The idea of exploration is not there anymore due to increasingly connected world.

For example, Travelling - No one becomes a adventurer nowadays because National Geographic has shown all the exotic places of the earth on TV.

Peter Thiel questions the way children are raised up in the society. He points out four social trends that has forced us to not believe in secrets anymore;

1. Incrementalism - We pass school by going from one grade to another. If we learn what is expected from us then we are rewarded but if we learn something out of the order. There is no recognition for it.
2. Risk Aversion - Scared of secrets mean scared of being wrong. Being wrong is the fear which keeps us away from walking a lonely path
3. Complacency - The most elite have an option to seek new things but they only reap benefits of what others have done and lie back comfortably.
4. Flatness - Anyone who wants to look for secret questions himself - “there are so many smart people in this world, someone might have figured this out if this was possible”. This belief that the whole world is homogeneous and there are so many smart people out there, prevents people to figure something new.

The world according to convention

If we believe that there no secrets left then that means there are no big questions left to solve. If that is correct then we enjoy a perfect world with the perfect sense of justice. In early 19th century only few people believed that the slavery was evil but today it is conventional wisdom. Any injustice or inefficiency is first seen by very few people initially. Same is applicable for the business world. If we believe that we live in perfectly competitive and efficient market then there shouldn’t be financial bubbles. However we have seen this repeatedly with dot-com bubble in 1999 and real-estate housing bubble in 2005. These markets have very big inefficiencies but people believed them to be efficient. The more people believed in their efficiencies the bigger the bubble got.The future had more secrets than economists believed.

There are many more secrets left to find but they will yield only to relentless researchers. Airbnb, Uber and Facebook look so simple and elementary concepts. If so simple ideas can create such a valuable business then there are still many great companies to start.

How to find secrets?

There are two kinds of secrets;

1. Natural secrets - To find these secrets we need to study nature
2. Secrets about people - To find these secrets we need to study people

While building a business we need to see which secret we want to solve. People who study nature tend to be more authoritative in academics while secrets about people are underappreciated. Asking questions does not require any Harvard degree. Most of us generally think the way schools condition us. The best way to find secrets is to ask if there are any fields which have not been institutionalized yet, such as Nutrition. Such fields are yet to be explored and carry a lot of potential.

What to do with the secrets?

Once you have discovered a secret, the best way to change the world through it is by making a balance between telling nobody and telling everybody - that is by making a company.

Foundations

A startup messed up at its foundation can not fixed. If you chose a wrong partner or hire the wrong people then it is very hard to correct later. Technical abilities and complementary skill sets matter but how well the founders know each other and how well they work together matter just as much. Hiring employees is just as important as choosing partners. In addition to that a company needs a structure which helps to keep everyone aligned for long term. Hence there are formal roles defined to keep the structure in place. The basic concepts are;

1. Ownership - Who legally owns a company's equity. This is typically shared by founders
2. Possession - Who actually runs the company on a day-to-day basis. This is shared by managers and employees
3. Control - Who formally governs the company’s affairs. This is shared by board of directors comprising investors and founders

Most conflicts in a startup erupt between ownership and control - Between founders and investors. As their interests vary the conflict increases. Every single board member matters and even a single director can jeopardize the company. A board of three is ideal and it should never exceed more than 5 people.

It is very important that everyone involved with the company should be involved full-time as those who don’t draw a regular salary or own a stock will eye on short term value and will not help create more value for the company.

A startup does better the less it pays to the CEO. If the pay increases then the CEO tends to defend his salary instead of working extensively to solve the ground problems. It also sets the standard for everyone else.

“ If you CEO doesn’t set an example by taking the lowest salary in the company, he can do the same thing by drawing the highest salary”

Cash incentive is more about the present than future and hence should be avoided. The compensation should always be more in terms of ownership of the company.

Equal shares is usually a mistake as everyone has different talents and responsibilities. However there is no formula to give shares of the company wisely as the people who joined company earlier will get more stocks as compared to other employees who join at the later stage irrespective of their capabilities or talents. Hence, it is imperative that the ownership distribution is kept secret from employees. The employees who take incentives in terms of equity will have more commitment compared to those who want cash.

The founding moment of the company is crucial as it sets the rule that will align people to create value in the future. The most important characteristic of the successful startup is its openness to inventions and creating new things.

The mechanics of Mafia

A startup doesn’t become successful by keeping beanbag, ping-pong tables, free massages and mascots. Unless there is no substance these kinds of perks don’t work. You can’t create anything meaningful by changing interior design or branding.

Relationships are the most important feature of the company. Stronger relationships not only make us happier at work but also successful in our careers. Hire those people who would enjoy working together. They have to be talented but also equally excited to work together. One of the most important question you should answer is why 20th employee should join your company when he can join any other company. The answer to that question lies in what you are working towards which no one else is going to get it done. Do not fight the perks war but give the opportunity which no one else can.

Startups should make their early staff as personally similar as possible. They have limited resources and small teams. They must work quickly and efficiently in order to survive and that is only possible when everyone shares same understanding of the world.

Do one thing

One the inside, every individual should be sharply distinguished by her work. Defining roles reduces conflict. A startup doesn’t fail due to competitive rivals but due to its own ecosystem which makes it vulnerable to outside threats.

Of cults and consultants

Startups are like cults which fanatically believe in something they create which those in outside world do not understand. The exact opposite of this culture is of consultants where they do not have long term connection with the company and consultancies like Accenture do not have a distinctive mission of its own.

If you build it, will they come?

Generally engineers and tech people underestimate the value of sales and distribution. They believe that the salespeople and other middlemen get in the way and distribution should magically flow from the creation of a good product. Engineers are biased towards creating cool products as compared to selling them. They believe that sales and marketing is superficial and irrational but advertising matters and it works. It works on all of us even if we don’t believe that it doesn’t work on us and everyone else.

In engineering disciplines you can evaluate someone else’s work easily but in sales it is exactly opposite. The sale campaign requires changing the appearance while keeping the reality unchanged. This might look like a dishonest or trivial to engineers but the author says that - what nerds miss is that it takes hard work to make sales look easy.

Sales is hidden work and required persuasion for people to buy. Sales is used in all the fields whether it is academic, professional or political. Everyone needs to persuade someone.

“If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business no matter how good the product.”

How to sell a product?

Superior sales and distribution by itself can create a monopoly even with no product differentiation. However the opposite is not true.

For effective distribution the two metrics which should be looked at are;

1. Customer lifetime value (CLV)
2. Customer acquisition cost (CAC)

CLV must always exceed CAC. Higher the price of the product the more it makes sense to spend on sale.

The power law of distribution

If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you are finished.

Selling to Non-Customers

A company needs to sell itself to its employees and investors in addition to its customers. Selling the company to media is very essential for business.

Everybody sells. Everybody has a product to sell irrespective of who you are.

Man and Machine

Machines will never replace humans in the coming future. Machines are complements for humans and not substitutes. People compete for jobs and resources, computers compete for neither.

According to the concept of free trade: every person has relative strength at some particular job and economy maximizes when people specialize according to their advantage and then trade with each other. But in reality the workers willing to do repetitive task for an extremely small wage is very large. They not only compete to supply labor but also for the same resources. This can cause humans to replace humans and the main driver of this competition is desire. In case of computers, while they are very good at making sense of data but they do not have inherent ability to make judgments.

When Google Trained a computer

In 2012, google trained a computer by showing 10 million YouTube videos to identify a cat with 75% accuracy. But a 4 year child has better accuracy than a supercomputer. There is no comparison between humans and machines as they both have their own strengths and they cannot be replaced by one another. Machines can only be complements.

The technology enables us to scale up the business and with conjunction with humans great results can be achieved which neither human nor machine can achieve alone.

Linkedin was never set out to replace recruiters, it has become the enabler for recruiters to find a suitable client easily and get their work done more effectively. Because of Linkedin recruiters can reach out to a lot more prospects and scrutinize profiles a lot better.

Big data and machine learning in itself is not as powerful as humans capability to interpret such data in a meaningful way. These algorithms can only assist us to solve hard problems. Between the fear that whether AI(Artificial Intelligence) can replace humans and they should there is a possibility that we can achieve unimaginable future with the help of such computers

Seeing Green

At the beginning of 21st century, the quest for renewable energy was the next big thing. With increasing pollution and depleting natural resources, it was clear that there is a need of alternative and cleaner source of energy. Thousands of startups came into picture and a lot of money was poured in by investors. None of them worked and the clean-tech bubble got burst.

These startups failed because they couldn’t answer to the following fundamental business questions;

1. The engineering question - A technology company must have its proprietary technology at least 10 times better than the closest substitute. Clean-tech companies didn’t have any
2. The timing question - There wasn’t much improvement in the field and entering such slow moving market without a plan was a recipe for failure
3. The monopoly question - The market had too much competition with none of the company having any edge over another. What clean-tech companies did not realize was they weren’t in the competition of making solar cells but in the market of renewable energy. This made them pretty small player in the global market
4. The people question - Energy problems are engineering problems but majority of clean-tech companies were run by sales people. They were able to raise money but weren’t able to create products which customers actually wanted.
5. The distribution question - Distribution is as important as the product. Most of the companies did not account for it
6. The durability question - The clean-tech companies did not account for the rise in usage of natural gas. By 2013 the gas price had fallen more than 70% which crippled the business of clean-tech companies.
7. The secret question - The clean-tech companies believed that the social need of alternative energy implied the business opportunity. This idea was agreed by all the entrepreneurs and the author suggests that great companies have secrets which others can’t see. This element was missing in these companies.

The myth of social entrepreneurship

A company cannot be ambiguous in terms of its social and financial goals. Making a goal which is similar to the goal of all other companies made each of the clean-tech companies undifferentiated.

"The best projects are likely to be overlooked, not trumpeted by the crowd; the best problems to work on are often the ones nobody even tries to solve"

Tesla: 7 for 7 - Out of all the clean-tech companies Tesla was the only one which was able to differentiate itself and answer the 7 questions correctly;

1. Technology - Tesla is rated the most sophisticated automobile by Consumer Reports.
2. Timing - Tesla was able to secure a $465 million loan form the U.S. department of energy just a year before when all the clean-tech companies were about to fail
3. Monopoly - Tesla started with the small segment of high-end electric cars and monopolized the segment in high - end luxury cars as well
4. Team - Tesla’s CEO is a great engineer and a salesman and hence he is able to create a team which is good at both technology as well as selling.
5. Distribution - Tesla owns its own distribution channel and does not depend on dealers and middlemen
6. Durability - Tesla has gained the customers trust and it has a great head-start
7. Secrets - Tesla took the angle of fashion in clean-tech. They worked on the idea that rich people wanted to be green but at the same-time look cool. While other clean-tech companies struggled to differentiate themselves Tesla understood that the clean-tech was more of a social phenomena than an environmental one.

An entrepreneur can’t benefit from macro scale insight unless his own plans begin at the micro scale. No matter how much the world needs energy, only a firm that offers superior solution for a specific energy problem can make money.

A valuable business must start by finding a niche and dominating a small market

The founder’s paradox

Bill Gates and his appearance as a nerd. Whether the appearance is natural or just an attire to suit the image? Once Microsoft was sued and charged for anti-competitive conduct and today Bill Gates is one of the leading philanthropist in the world.

Bill Gates and Steve Jobs were opposites of each other and still eccentric in their own way. Bill Gates wanted to keep the products open while Jobs wanted them to be closed. Apple is considered to be a vision of a single person and resembles the feudal monarchies and not as an organization.

Founders can be paradoxical or authoritative at times they can inspire loyalty and plan for decades ahead. The business need founders and we should be more tolerant towards the extreme founders since we need unusual individuals to lead beyond the incrementalism.

A founder is not the one whose work has value but he is the one who can bring the best work from everybody at his company.

In order to achieve singularity we need to work today. The work shouldn’t be incremental but different. We need to go from 0 to 1. We need to think with a fresh perspective like the ancients did so that we can recreate a new future.