“All happy companies are different: each earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”
The book is about the question you must ask and answer to succeed in the business of doing new things. Because that is what a startup has to do: question received ideas and rethink business from scratch.
How did companies like Google, Paypal, Amazon and Telsa become so successful, and how can we get there as a startup? In this book, Thiel – a billionaire entrepreneur and investor who co-founded PayPal and Palantir, and invested in hundreds of startups including Facebook and SpaceX – shares his insights about business and entrepreneurships. He shares how much of what we believe in may be flawed, and how we can think about and create truly valuable businesses that shape a better world.
CHANGING THE FUTURE – ZERO TO ONE
Progress can take 2 forms:
• Horizontal (extensive) progress, which comes from copying things that work, e.g. when you improve a typewriter and sell it globally. It brings us from 1 to n.
• Vertical (intensive) progress, which comes from doing new things that haven’t been done before, e.g. when you move beyond typewriters to invent a word processor. It brings us from 0 to 1.
The most successful businesses in the world – such as Apple, Facebook, Google – achieved success not by copying others, but by creating something new. They moved from 0 to 1. Globalization is at the heart of horizontal progress, while technology is at the heart of vertical progress. And the good news is, both can coexist. Each of these multi-billion-dollar companies was once a startup.
Business vs startup
When Twitter went public in 2013, it was valued at $24B — 12 times higher than Times market cap. Twitter was losing money while Times earned $133M the same year. Why do startups have such big valuations?
The answer is: cash flow. It is different between high-growth startups and low-growth businesses. Startups would usually be profitable in the future. Startup’s main metric is growth.
One big error of some entrepreneurs is that they focus only on growth while forgetting about sustainability (Zynga, Groupon). Ask yourself: Would your business be around 10 years from now?
Building a monopoly
What does a company with large cash flows far into the future look like? What makes monopolists durable? There are usually four main characteristics:
1. Proprietary technology
2. Network effects (aka virality)
3. Simple scalability
To achieve good growth, Peter got two thoughts:
a.Start small and monopolize
b. Directly challenging large competitors will totally reduce your profits
Silicon Valley nerds usually underestimate role of sales.
They know their own jobs are hard, so when they look at salespeople laughing on the phone with a customer or going to two-hour lunches, they suspect that no real work is being done
They think “if the product is good enough, it will sell itself” which is almost always incorrect.
You need to learn sales. Some core ideas:
1. All salesmen are actors: their priority is persuasion, not sincerity.
2. Obvious shady salesmen are bad salesmen. Good sales are sales hidden in plain sight.
3. Two metrics set the limits for effective product distribution:
4. The total net profit you earn on avg over the course of your relationship with a customer (Customer Lifetime Value, CLV)
5. Amount you spend on average to acquire a new customer (Customer Acquisition Cost, CAC).
6. CLV must be obviously higher than CAC
Everybody sells. Don’t underestimate sales.
7 questions every startup should answer
Many startup that were in a bubble before now are in decline. They’ve failed because they neglected the seven questions every business must answer:
1. The Engineering Question: Can you create breakthrough technology instead of incremental improvements? 20% improvement is not enough.
2. The Timing Question: Is now the right time to start your particular business?
3. The Monopoly Question: Are you starting with a big share of a small market?
4. The People Question: Do you have the right team? For Thiel’s venture capital fund (Founders Fund) the common red flag was that CEO was wearing a suit. This meant the CEO would be looking like a salesman but won’t be able to actually sale or do tech.
5. The Distribution Question: Do you have a way to not just create but deliver your product?
6. The Durability Question: Will your market position be defensible 10 and 20 years into the future?
7. The Secret Question: Have you identified a unique opportunity that others don’t see?
Innovative companies achieve best results when they can correctly give six or seven correct answers. Even five may work. Cleantech companies had zero answers most of the time.
On “lean startup” dogmas
There are some popular thoughts in startup community that were learned after dot-com crash:
1. Make incremental advances
2. Stay lean and flexible
3. Improve on the competition
4. Focus on product, not sales
Peter points out that the opposites are valid:
1. It is better to risk boldness than triviality.
2. A bad plan is better than no plan.
3. Competitive markets destroy profits go for monopoly.
4. Sales matters as much as product.