Notes from Peter Thiel’s Zero to One, or how to change the future

I read Zero to One over the Christmas weekend. It made me want to dramatically increase pace of change personally and professionally. My synapses were firing constantly.

Here are some of my key takeaways and thoughts.

Good ideas that look like bad ideas

Zero to One is about building companies that change the world. The title refers to the creation of something unique and original — when 0 becomes 1. Most new enterprises are not focused on going from zero to one, but from 1 to n — in other words, not creating unique businesses that invent or redefine industries (Uber, ebay, Google, Airbnb, Tesla are all examples of this), but enter competitive markets & deliver incremental improvements.

Starting companies that revolutionize industries requires original, contrarian thinking. If this thinking wasn’t contrarian, it would already be a feature of the industry & the domain of bigger companies with greater resources. Chris Dixon refers to this phenomenon as ‘good ideas that look like bad ideas’ (its a good talk and worth watching). Thiel frames this as a question he asks founders: What important truth do very few people agree with you on? Value is created in the grey space that consensus hasn’t yet reached.

When we started onefinestay, not many people agreed that homes would provide a suitable alternative for the 5* hotel customer. This would be our important truth.

But most new companies aren’t pursuing new ideas, and most VCs are pouring money into these companies. As a result we have lots of startups not changing the world, and lots of VCs with pedestrian returns.

How did we get here?

Thiel makes a convincing argument that our current startup climate is the result of a multi-decade hangover following boom and bust of the late 90s. 20 years ago, lots of new ideas were being introduced to the market — some good, many not so good. At this time, capital started flooding the market, too.

When the bubble burst, much of the capital remained (VC fund cycles are 10 years — performance is far less liquid than the Nasdaq) but was seeking a new breed of ‘risk averse’ startups — companies that:

  • pursued smaller ideas rather than transformational ones — because transformational thinking was a feature of late 90s hubris
  • stayed lean and adapted to market conditions rather than pursued a bold plan
  • entered competitive markets instead of creating new ones (to avoid ‘market risk’)
  • focused on product instead of distribution to avoid associations with Superbowl commercials (side note: Gabriel Weinberg, the CEO of DuckDuckGo, wrote a book called Traction on this topic. The simple framework for the product vs distribution time allocation of new startups is 50/50)

However, as history has shown for the true innovators, as well as the VCs who have backed contrarian businesses over the past decade, it’s far better and more valuable to be bold (see Power-Law returns explanation by Marc Andreesen, also well covered in this book).

On not waiting

Rather than think about the future in terms of fixed number of years, Theil thinks about the future in terms of speed of progress. At the current speed of technological change, a very different ‘future’ might be 10 years away. For the best part of human existence, a different future was hundreds or thousands of years away.

For individuals on a career track, the resulting question to ask yourself is: how can you capitalize on the speed of change a fast moving environments can offer, and actualize your career ambitions much quicker? As Thiel says in Tools of Titans:

If you are planning on doing something with your life, if you have a 1o-year plan on how to get there, you should ask: why can’t you do this in 6 months?

On competition

Competition is like war — allegedly necessary, supposedly valiant, but ultimately destructive.

The trouble for companies entering a competitive market — or one where substitutes are readily available (e.g. an Indian food vs Chinese food restaurant) — is that supply and demand are efficient forces, which means profits trend to zero. Creating lasting value is predicated creating profit, which is predicated on building a meaningfully differentiated business.

Instead, Thiel suggests companies focus on micro markets, create a dominant position, and use this momentum to whip out to pursue a broader opportunity. Some examples are:

  • Paypal’s initial focus on ebay powersellers
  • ebay’s initial focus on hobbyists
  • Amazon’s focus on long-tail books, or
  • Facebook’s focus on Harvard students.

This incubation period allows the business to iron out its kinks and ripen before entering the big leagues. It’s the sequel to Kevin Kelly’s 1,000 true fans idea.

This idea applies not only to companies at formation, but as they continue to evolve (for example, the battle for the desktop and mobile environment between Microsoft and Google 10 years ago proved so distracting that Apple stepped in and ran the table).

Other applications of the competition vs monopoly paradigm

Competition breeds conformity — this starts from a young age, where getting the ‘A’ requires a certain set of behaviors, and continues often well into people’s careers. The cycle may never end. That ‘A’ leads to a top college which leads to a top grad school which leads to a career at a top law firm or bank. In order to follow this track, many people’s unique qualities are sanded down and replaced by well-roundedness. There’s nothing wrong with consciously choosing a certain career track if you’re passionate about the work, but its easy to sleepwalk your way into a career that isn’t personally fulfilling and doesn’t create impact.

Rather, people should strive to be really great at one thing, and use that to make an impact on the world. At onefinestay, a degree of well-roundedness is important but ultimately we try and hire for spikes. Its the one great thing that allows every new hire to have the future potential to transform our organization.

From an organizational design standpoint, competition can also be a destructive force. Conflict is often the result of roles within a company not being clearly defined by leadership — turf wars ensure because accountability for various tasks is not clear. Thiel gave everyone at PayPal one specific responsibility to avoid any role ambiguity — certainly the starting point is a clear job spec and an culture of continuous management so that when objectives changed these are discussed explicitly and not replicated in other areas of the organization.

The monopoly framework can also be applied to indoctrination into the company. One challenge many companies experience is what I call the ‘1st year associate / 2nd year analyst problem’ — a supposedly more experienced new hire trying enters the fray in a position of seniority, which drives the less experienced analyst with lots of context crazy.

Better to have a new management hire— regardless of level — start out in project or line roles to learn the ropes, absorb the culture, make a few mistakes, and enter a staff management position with some wins under her belt — rather than being ushered in by an enthusiastic hiring manager.

On founders, foundations & missions

Founders form the bedrock of company strategy, behaviors, and operational models — what to do, and how to do it. Once these various core elements are agreed and established, change becomes much more challenging. As Thiel mentions, our founding fathers debated the constitution for a few days in the 1790s, and we’ve amended it only 17 times since. 6 years in, onefinestay still largely cleans and prepares homes the way we initially designed it — a few days of work in 2010 has been repeated tens of thousands of times constituting 50 man-years of work. For this reason & others, choose your founders carefully.

Likewise, founders are responsible for creating a belief system that allows organizations to scale without the resources big companies have — through non-cash based value (equity, learning, culture). If the labor market didn’t place significant value on this, startups would be twice as expensive to build, which would mean even lower rates of success. As a founder, you are the chief storyteller and holder of the company mythology.

As scale continues, having a defined, written mission becomes essential. Small founding teams and early hires should know why they’re coming to work every day, & in most cases have countless hours at the grindstone in a shared space prior to hiring outsiders. Founders who know each other well from previous endeavors — a prerequisite for Thiel — have even more time together.

But with employee #10, or #100, its impossible to replicate these shared experiences. Companies can and should differentiate on learning, impact (e.g. having an empowered org structure that expects individuals to contribute), and team (the founders and previous hires all build towards the next). But the mission is the tie that binds — and is the one thing that tests whether there’s a true long term match between employer and employee. So the employer has to reveal the mission, and the employee has to want to be a part of it.

A parting thought for 2017

Christmas week is a time for reflection and resolutions. I will be taking a page out of Zero to One and making 2017 a year of impact, impatiently building the future.