Zero to One

Notes on Startups or, How to Build the Future

Every moment in business only happens once.

 – The next Bill Gates will not build an operating system.

 – The next Larry Page or Sergey Brin won’t make a search engine.

 – The next Mark Zuckerberg won’t create a social network.

If you are copying these guys, you aren’t learning from them.

Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to N, improving something that’s already familiar. BUT every time we make something new, we go from 0 to 1. The act of creation is singular, and the result is something fresh.

Zero to One is about how to create companies that build new things.

It draws on everything Peter has learned as a cofounder of Pay Pal, and an investor in hundreds of startups including Facebook and SpaceX. Whilst there are patterns, there are no formulas for success. The paradox of teaching entrepreneurship is that such a formula cannot exist, because every innovation is unique and new, no authority can prescribe in concrete terms how to innovate.

How to Invent the Future

Whenever Peter interviews for a job, he asks the question:

“What important truth do very few people agree with you on?”

It sounds easy because it’s very straightforward, but very hard to answer. It is so difficult because the knowledge that everyone is taught in school is by definition agreed upon. Brilliant thinking is rare, but courage is even shorter than genius

There are a few common answers:

• “The American education system is broken and needs urgent fixing”
• “Now is the greatest time in history to be alive”
• “There is no God”
• “AI and technology will rule the world in the future”

These are bad answers because they’re not very unique, rather they’re picking a certain side of an ongoing debate. A good answer takes the following form:

“Most people believe in X, but the truth is the opposite of X”

What does this contrarian question have to do with the future? The future is a set of moments yet to come.

But what makes it important isn’t that it hasn’t happened yet, but rather it will be a time when the world looks different from today. No one can predict the future exactly, but we know two things. It’s going to be different, and It must be rooted in today’s world.

Most answers to the contrarian question are different ways of seeing the present. Good answers are close as we can come to looking into the future

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

The business version of the contrarian question is

“what valuable company is nobody building?”

Creating value is not enough. You need to capture the value that you create

Monopolies or Competition?

The US airline industry serves millions of passengers and creates hundred billions of dollars of value each year. But in 2012, the average airfare was just $178, the airlines made on average 37 cents per passenger trip. Compare them to google, who creates far less value but captures more. Google brought in $50 billion in 2012 (compared to $160 billion of airlines), but it kept 21% of those revenues as profits. More than 100 times teh airlines profit margins that year. Google makes so much more it’s now worth 3 times more than every US airline combined. The airlines compete with each other, but google stands alone

Economists use two simplified models to explain the difference: PERFECT COMPETITION and MONOPOLY

Perfect competition is considered the ideal and default state of economics 101. So called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products.

Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices and down and thereby eliminate profits that attracted them in the first place.

If too many firms enter the market they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.

The opposite of perfect competition is monopoly. Whereas a competitive firm sells at a market price, a monopoly owns its market, so it sets its own prices. Since it has competition, it produces at the quantity price  that maximizes its profits. By monopoly we mean the company that is so good at what it does, that no other firm can offer a close substitute. Google is a good example of a company that went from 0 to 1

A monopoly like google doesn’t have to worry about competing with anyone, it has a wider latitude to care about its workers, its products and impact on the wider world. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money

Non monopolists can’t, in perfect competition, a business is so focused on today’s margins it can’t plan for a long term future.

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

Characteristics of a monopoly

1. Proprietary technology

Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate. 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 a real monopolistic advantage

Anything less will be seen as a marginal improvement and be a hard sell – the quickest way to a 10 x improvement is to invent something new.

2. Network effects

Network effects make a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join it too. Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users, when the network is necessarily small

3. Economies of scale

A monopoly business gets stronger as it gets bigger, the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.

4. Branding

A company has a monopoly on its own brand by definition. So creating a strong brand is a powerful way to claim a monopoly.

How to Find Your Innovation

Everyone of today’s most famous and familiar ideas was once unknown an unsuspected

A conventional truth can be important, it’s essential to learn elementary mathematics for example – but it won’t give you an edge. It’s not a secret

Remember that contrarian question:

What important truth do very few people agree with you upon?

And the business version of the question:

What valuable company is nobody building?

Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable. If there are many secrets left in the world, there are probably many world changing companies yet to be started

Most people act as if there are no secrets left to find

• Conventions = easy

Goals that can be satisfied with minimal effort

• Secrets = hard

Goals that can be satisfied with serious effort

• Mysteries = impossible

Goals that cannot be satisfied, no matter how much effort one makes

Why aren’t people looking for secrets

If everything worth doing has already been done, you may as well feign an allergy to achievement and become a barista.

Along with the natural fact that physical frontiers have receded, four social trends have conspired to root our belief in secrets

First is incrementalism:

From an early age we are taught the right way to do things is to proceed one very small step at a time, day by day, grade by grade. If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange for doing exactly what’s asked of you, you’ll get an A

Second is risk aversion:

People are scared of secrets because they are scared of being wrong. By definition a secret hasn’t been vetted by mainstream. If your goal is to never make a mistake

Third is complacency:

Social elites have the most freedom and ability to explore new thinking. Why search for a new secret if you can comfortably collect rents on everything that has already been done

Fourth is flatness:

As globalisation advances, people perceive the world as one homogeneous highly competitive market place. Anyone who might have had the ambition to look for a secret will ask. If it were possible, wouldn’t have someone have already found it? Someone more creative?

The case for secrets

You can’t find secrets without looking for them. The truth is there are many more secrets left to find, but only yield to relentless searchers. There is more to do in science, medicine, engineering and technology of all kinds.

We can find new ways of generating energy, we can invent faster ways to travel the planet, or even escape it. We will never learn unless we demand to know them and force ourselves to look. If insights that look so elementary in retrospect can support important and valuable businesses, there must still remain many great companies to start

How to find secrets?

There are two kinds, secrets about nature or people:

Nature:

Exist all around us, to find them you must study and undiscovered aspect of the physical world

People:

Things about people don’t know about themselves, or things they hide because they don’t want others to know

So , what is nature not telling you, and what are people not telling you?