Zero to One: Notes on Startups, or How to Build the Future

I’ve been thinking a lot about my place in the world lately. I’m interested in doing math that makes a difference, and considering much of the breakthroughs in our society have come from various startups, I decided to investigate the startup culture. How might academia benefit from startup culture? One could easily imagine a hip research environment adorned with beanbag chairs and foosball tables, but these perks aren’t the stuff that makes a startup successful. To catch a glimpse, I turned to a book recently written by Peter Thiel (of PayPal fame):

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Thiel provides a lot of advice in 15 short chapters, and the bulk is nicely summarized in chapter 13 when performing a case study on the cleantech bubble (think the Solyndra failure) versus the success of Tesla. Here are the main ideas:

Engineering. Can you create breakthough technology instead of incremental improvements? Thiel uses “0 to 1” to describe intensive progress (making something from nothing, in particular, new technology), to be contrasted by copying things that work, which you might call “1 to n“. The goal is to change the world. Perhaps you are doing something better than the status quo. Thiel says you need to improve on the current solution by an order of magnitude (i.e., by a factor of ten in whatever metric you use) in order to have a chance to succeed in selling the product.

Timing. Is now the right time to start your particular business? It could be that your technology will change the world, but the world isn’t yet ready for it. For example, PayPal wasn’t as successful in the days of the PalmPilot. By contrast, Elon Musk found a narrow window in which Tesla could score a $465 million loan from the Department of Energy.

Monopoly. Are you starting with a big share of a small market? The underlying philosophy here is that competition is wasteful. You want to focus on your product and customers, not on your competitors. Merge if necessary. To win a monopoly, you’ll want proprietary technology (so that no one else can do what you do), network effects (so that friends of your customers will want to tag along; think Facebook or Gmail), economies of scale (you want the price per customer to shrink as the number of customers grows; this is particularly feasible for an online market), and branding (be like Apple). Start small and monopolize, scale up, but don’t disrupt (disruption is the wrong attitude; no need to develop an unhealthy view of the status quo).

People. Do you have the right team? The beginning of a company is extremely important. Many things are practically impossible to change (think the U.S. Constitution). You should have a history with your co-founder. Different people in the company will have different types of power (ownership, possession, control), and the division of power allows for misalignment. Incentives can help mitigate misalignment (CEOs ought to have low salary, equity can be a powerful tool, etc.). You want a tight-knit team to help keep everyone all in. Perhaps everyone on the team has similar interests (e.g., a certain brand of sci fi). If each person is responsible for one unique thing, it keeps them focused and removes unhealthy competition. You want your team to “almost” be a cult (a cult which is right — not wrong — about something important).

Distribution. Do you have a way to not just create but deliver your product? Salesmanship is underrated. People are the consumers, and they require interaction. The cost of salesmanship (Customer Acquisition Cost) you accept should depend on what you expect to get from each customer (Customer Lifetime Value). There are different ways to sell (personal sales, ads, viral marketing). Good salesmanship is hidden (think Tom Sawyer’s whitewashing episode). If a customer decides to buy, it should be easy for them to obtain your product. All of this is an important component to your company’s brand.

Durability. Will your market position be defensible 10 and 20 years into the future? A popular phrase is “first mover advantage,” referring to the idea that being first to enter a market allows you to gobble up a bunch of market share. But the way to really win is to be the last mover, meaning you make the last great breakthrough in your market that brings a long future of monopoly profits.

Secret. Have you identified a unique opportunity that others don’t see? Fallacy: Everything that’s interesting and doable has already been done. This is a fallacy because there are secrets to find and exploit. The best place to look for secrets is where no one else is looking. Once you find a secret, tell whoever you need to, and no one else.

Thiel makes a few additional interesting points:

Indefinite optimism is too widespread in our society. This refers to the idea that the future will be better in some unknown way, and so we should make diversified plans accordingly. If you want a successful startup, take control of the future, make it less unknown to you, and make riskier plans.

Consider using machines to complement man rather than to replace man. Thiel learned from his tenure at PayPal that it was difficult to identify fraud without a computer-man hybrid algorithm (the computer combs through the transactions to find a few instances of possible fraud, and then the human identifies the actual instances). He took this lesson to launch Palantir, a data analysis company which apparently helped the U.S. find Osama bin Laden.

Eccentric founders are charming (think Steve Jobs). Thiel makes comparisons with famous artists like Michael Jackson and Lady Gaga. Founders are important because great ones inspire the entire company to do its best.

Overall, the book was rather interesting. I liked reading his philosophies on indefinite optimism and capitalism versus competition. At times, it seems too easy for the reader to dismiss some of his claims as mere hindsight (i.e., the cleantech bubble and its advance warning signs), but he and his friends (the PayPal Mafia) have had enough success to suggest that they know what they’re talking about.

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