Blog · 50 Bits for Founders · Startup
Zero to One
Notes on Startups, or How to Build the Future — Peter Thiel with Blake Masters, 2014
The Bitcopying what works takes you from one to n; creating something new takes you from zero to one, and only the second builds extraordinary companies.
"What important truth do very few people agree with you on?"
— Peter Thiel
Peter Thiel cofounded PayPal, was Facebook's first outside investor and founded Palantir. The book was born from the class on startups he taught at Stanford, and it's the most controversial one in the entrepreneurial world: its value lies in forcing you to think differently before deciding what to build.
The question in the opening quote is a filter. Every great company is built on a secret, something true about the world that most people don't yet see. If your idea doesn't contain a secret, you're competing, and for Thiel competition destroys profits. The prize isn't in fighting over saturated markets, but in creating a monopoly: a company so good at something nobody else offers that it escapes competition and captures the value it creates.
The route to monopoly has clear rules:
- Start in a small niche. Completely dominate a small market and then grow in concentric circles toward adjacent markets. Amazon started with books, not with everything.
- Aim to be the last, not the first. The winner is whoever makes the last great development in a market and enjoys years of profits, more than whoever arrived first and was overtaken.
- Distribution matters as much as product. If you don't have a plan to sell, you don't have a business; the product that sells itself is a myth.
- Results follow a power law. A few bets are worth more than all the others combined, which is why focus decisions weigh so much.
Thiel also warns about how companies describe themselves: monopolies say they compete a lot so as not to draw regulators' attention, and competitors say they're unique to look more attractive. Knowing how to read which is which avoids diagnostic errors.
His most practical tool is seven questions for evaluating any business before building it:
- Engineering. Do you have an order-of-magnitude improvement, and not just incremental?
- Timing. Is this the right time?
- Monopoly. Are you starting with a big share of a small market?
- People. Do you have the right people?
- Distribution. Do you have a way to reach the customer?
- Durability. Will your position be defensible in ten and twenty years?
- Secret. What do you see that others don't?
Thiel closes with an idea about the founder's attitude: definite optimism. The indefinite optimist believes the future will be better, but doesn't know how, and so diversifies and waits. The definite optimist has a concrete plan for the future he wants and works to build it. For Thiel, great companies are built by the latter: founders who don't leave the future to chance, but design it.
How to apply it? Write your answers to the seven questions before committing capital. Wherever you don't have a clear answer, that's where your real risk lies.
As a founder it will help you choose what to build with long-term ambition, and to review every new line of business before launching it, so you don't build something incremental in a competitive market believing you're innovating.
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How it helped me
Crediclub was born from a truth few shared: the average Mexican needed high-quality financial services, and technology made it possible to provide them. The idea came from my years at McKinsey working with financial institutions in seven countries. The lesson was clear: the cost structure of traditional banks, with expensive branches and staff and high variable costs like mailing paper statements, couldn't serve the mass market. In fact, many projects aimed precisely at moving that market out of the branches to free them up for the affluent segment.
To me it was obvious that technology changed that equation: most of the operation and service could be done centrally and automatically. That coincided with a period of deregulation in the financial sector, and with the possibility of building Silicon Valley-style companies, with investor capital and complementing the team with a cofounder experienced in understanding the customer, operating and selling, without having to put up the capital and the experience myself ("no money, no experience... no problem").
In the hundreds of doors we knocked on to raise capital we heard it all: that the Silicon Valley model didn't work in Mexico, that it was impossible to compete against the banks, that we wouldn't find sources of liquidity and, with very good intentions, that we'd better stay in the corporate world. Each "no" helped us refine something in the model or reaffirm the conviction that the product was going to be truly innovative. The combination of conviction, the right timing and an atmosphere of disbelief allowed us to launch and grow as one of Mexico's first fintechs, with high growth and high profits.
Killer quote: "Some people want it to happen, some wish it would happen, others make it happen." — Michael Jordan