In Zero to One, PayPal co-founder and venture capitalist Peter Thiel contends that creating new things is the best way to profit economically, as well as the only path for human progress.
However, technology has stagnated today. Much of what we do repeats or builds on what’s been done before. It’s easier to copy something than to create something new. This moves the world from 1 to n, refining something that already exists. However, creating something entirely new moves us from 0 to 1.
Unless companies create new things, they’ll eventually fail regardless of how profitable they are today. There’s a limit to what we can gain by refining things, a point at which best practices won’t get us any further. We need to break new ground.
Progress can be either horizontal or vertical. Horizontal or expansive progress results from duplicating success—going from 1 to n. This kind of progress is easy to envision because it looks a lot like the present. Vertical or intensive (focused) progress requires doing something entirely new—going from 0 to 1. It’s more difficult to envision because we’ve never seen it before.
For example, starting with one typewriter and building 100 of them would be horizontal progress (duplicating something). Starting with a typewriter and building a word processor would be vertical progress (creating something new).
Globalization is horizontal progress—it entails taking something that works in a particular place and replicating it everywhere. For instance, China’s 20-year plan is to be like the West is today.
Technology, going from 0 to 1, is vertical progress—it encompasses anything new and better, including but not limited to computers.
Continued globalization isn’t feasible without technological progress because the industrialization of more countries will lead to more environmental problems and competition for limited resources. For instance, if China doubles its industrial production without technology improvements, it will double its air pollution. Spreading the practices of developed countries globally will bring devastation rather than wealth. The key to a better future is both imagining and creating the technologies to get us there.
Startups consisting of a few people with a common mission are the source of most new technology. But many tech startups today are hobbled by four erroneous lessons drawn from the 1990s dot-com bubble and crash:
Tech startups treat these lessons as sacrosanct, but they actually undermine success, especially big innovations. The opposite of each lesson is more accurate:
Monopolies are good for society. While it may seem counterintuitive, they can be more ethical, treat workers with greater consideration, and create more value than companies locked in competition do.
Competitors are caught up in a daily struggle for survival. For instance, with their low margins, restaurants have to do everything possible to minimize expenses—which can include paying minimum wage to employees and putting family members to work for nothing. In survival mode, money is everything.
In contrast, in a monopoly where profits are assured, there’s room to consider other things besides money. For instance, lacking intense competition, Google can give consideration to its workers, its products, and its impact on society.
Monopolies’ bad reputation comes from sometimes earning outsized profits at the expense of society. Certain monopolies corner the market on something that’s needed and jack up the price; customers have no choice but to pay it. This works for the owners in a world where nothing changes, like in the game of Monopoly, where you control as much real estate as you can, but you can’t create new real estate.
In contrast, creative monopolies do good and drive social progress because they operate in a different environment, a dynamic one. Instead of controlling all the options like Monopoly real estate, they create new options. They expand consumers’ choices by creating new categories of things. By adding value, creative monopolies make society better.
Monopoly businesses with strong future cash flows share several characteristics:
There are five additional considerations in building a monopoly:
When starting a company, it’s important to choose leaders who have the right technical knowledge and whose skills are complementary. Equally important, however, is how well the founders know each other and work together. You also need a structure and clearly defined roles so everyone is aligned to move the organization forward.
For effective alignment, you must make three decisions:
A CEO of a venture-funded startup shouldn’t be paid more than $150,000 a year. High pay (more than $300,000) encourages him to protect his salary by defending the status quo and minimizing problems rather than exposing and fixing them.
Other advantages of low CEO pay are that it:
By the same token, over-paying employees encourages them to focus on what the company is doing in the present instead of thinking about how to increase the company’s value in the future. Cash bonuses also encourage short-term thinking. Offering equity or part ownership of the company shifts the focus to the future.
The first few employees in a startup might be attracted by exciting roles or equity. But beyond your first round of hires, you must be able to articulate to the 20th candidate why she should want to join your company.
Your answers need to be specific to your company. They should address:
1) Your mission: Explain what makes your mission unique and compelling—what’s the important thing you’re doing that no one else is doing?
2) Your team: Show potential employees that the people on your team are the kind of people they want to work with. Show recruits how your company is a unique match for them.
Don’t cite your perks—you don’t want people working for you who can be convinced to do so by things like laundry pickup because that’s an indication of superficiality. Your unique mission is what should count.
Many Silicon Valley entrepreneurs underestimate the importance of distribution, or the process of selling the product (advertising, sales, marketing, and distribution channels). They often believe their product is so superior it should sell itself: if they build it, customers will come. But understanding distribution and having a plan for it is critical to a company’s success; it should be part of designing your product.
There are two considerations for planning a sales strategy for your product: customer lifetime value and customer acquisition cost.
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Some animals have a drive to build things like dams but only humans have the ability to invent entirely new things. In Zero to One, PayPal co-founder and venture capitalist Peter Thiel contends that creating new things is the best way to profit economically, as well as the only path of human progress.
This book, written with Blake Masters, is about launching companies that create new things. It stems from a course Thiel taught at Stanford in 2012 on startups. Masters was a student in the class and his notes, which were widely shared online, evolved with Thiel’s collaboration into this book.
The ideas are drawn from Thiel’s experience as a tech entrepreneur and investor, but they don’t comprise a formula for success—no one can tell you how to be innovative, because every innovation is by definition new and unique. However, the key to success is to look for value where no one else is looking.
Technology has stagnated today. Much of what we do repeats or builds on what’s been done before. It’s easier to copy something than to create something new. This moves the world from 1 to n, refining something we already have or know how to do. However, creating something new moves us from 0 to 1.
In business, each jump from 0 to 1 happens only once. The next Bill Gates won’t invent an operating system; the next Mark Zuckerberg won’t build a social network. The next innovator of the same caliber will build something unimagined to this point. Successful people don’t look for formulas or choose from existing options, they “rewrite the plan of the world.”
Unless companies create new things, they’ll eventually fail regardless of how profitable they are today. There’s a limit to what we can gain by refining things, a point at which best...
Thiel likes to ask job candidates what he calls a contrarian question: “What important truth do few people agree with you on?” The best answers point to the future.
Thiel’s answer is that most people think globalization will dictate or determine the world’s future, but he believes it’s technology that will.
The future will be rooted in today’s world, but different. It may be farther away or closer than we think, depending on the degree of progress we make. If things aren’t likely to change much over the next century, then the future is a century away; If they’re destined to change rapidly in the next decade, then the future is a decade away.
Answering the contrarian question is the closest we can come to predicting what will be.
Progress can be either horizontal or vertical. Horizontal or expansive progress results from duplicating success—going from 1 to n. We can easily envision this kind of progress because it’s much like the present. Vertical or intensive (focused) progress requires doing something new—going from 0 to 1. It’s more difficult to envision because we’ve never seen it before.
For example, starting with one typewriter and building 100 would be horizontal progress (duplicating something). In contrast, starting with a typewriter and building a word processor would be vertical progress (creating something new).
Globalization is horizontal progress—it entails taking something that works in a particular place and replicating it everywhere. For instance, China’s 20-year plan is to be like the West is today.
Technology, going from 0 to 1, is vertical progress—it encompasses anything new and better, including but not limited to computers.
These modes of progress can occur simultaneously or one at a time. For instance, the period from World War I through Nixon’s visit to China in 1971 featured technological development but not much globalization. However, since 1971, we’ve seen rapid globalization without much technological development beyond information technology.
Globalization is a path to homogenization. The way we talk about it implies a belief that technological progress has a peak: we refer to the developed and developing worlds as though Western nations have reached a fixed level of achievement to which poorer nations must catch up.
But continued globalization isn’t feasible without technological progress, because the industrialization of more countries will lead to more problems. For instance, if China doubles its industrial production without technology improvements, it will double its air pollution. Spreading the practices of developed countries globally will bring ruin rather than wealth.
New technology has never been a given. From the primitive agrarian societies thousands of years ago up until the advent of the steam engine in the 1760s, there was little technological progress. From that point, technological advances continued through 1970. In the late 1960s, however, people looked forward to a future of tech advances that didn’t happen—for instance, cheap energy and vacations on the moon. Although they expected great advances to be automatic, only computers and communications advanced dramatically. The key to a better future is both imagining and creating the technologies to get us there.
For several reasons, startups consisting of a few people with a mission are the source of most new technology.
Big organizations don’t often produce new technology because they tend to avoid risk. People working alone seldom produce new technology either. A brilliant loner might produce great art, but she wouldn’t have the means to create a new industry.
Startups work because it takes multiple people to create new...
Remember the question, “What important truth do few people agree with you on?” To get an answer that points to the future, start with another question: “What does everyone agree on?”
The real truth is often the opposite of what everyone agrees is true. When you’re blinded by the latest conventional wisdom, you can’t create anything new.
Conventional wisdom helped create the dot-com bubble. The basic principle that companies need to make money was replaced in the late 1990s by a delusion that became the new conventional wisdom: companies racking up enormous, unending losses are actually succeeding because the losses are investments in future success. In the “New Economy,” where no loss was too big to tolerate, page views became a more relevant metric than profits.
We understand how wrong these accepted beliefs were only in retrospect. When they fall apart, we refer to the delusional beliefs as a bubble. But bubbles continue to influence our thinking long after they collapse because we draw the wrong lessons from them.
The tech bubble of the 1990s was the biggest bubble since the one ending in the Wall Street crash of 1929—the “lessons” of the dot-com dictate the way we think about tech today.
Thinking clearly about the future requires questioning what everyone “knows” about what happened in the past. To understand the real lessons of the tech bubble for startups today, it's useful to review the 1990s.
We remember the 1990s mostly positively for the rise of the internet, but the 18-month dot-com bubble at the end occurred against a backdrop of growing financial problems in the U.S. and globally.
The decade started euphorically with the fall of the Berlin Wall in 1989. But in the early 1990s, the U.S. was slowly and painfully recovering from a recession. Unemployment climbed as the economy began a long shift from manufacturing to a service emphasis. From 1992 through 1994, the mood was anxious as jobs migrated to Mexico and concerns grew about globalization and competitiveness. The economic anxiety sank George H.W. Bush’s reelection chances and fueled billionaire H. Ross Perot’s third-party bid.
Silicon Valley was sleep-walking, and Japan seemed to be winning the trade war over the export of semiconductors. A tech turning point came in late 1993 with the first release of a user-friendly internet browser, Mosaic, which became Netscape Navigator. Now that everyone (not just academics and government employees) had a way to get online, the internet took off with the rise of Netscape, Yahoo, Amazon, and other companies.
By spring 1998, due to the tech excitement, each company’s stock had quadrupled even though they weren’t making profits. In December 1996, a prescient Fed chairman Alan Greenspan warned of “irrational exuberance” or overvaluing companies. This was three years before the tech bubble burst.
Problems were brewing in an increasingly connected global economy. Massive foreign debt and crony capitalism (scheming between business and government) created an Asian financial crisis in July 1997. Russia followed with a financial crisis year later when it devalued the ruble and defaulted on debt. Russia’s instability scared American investors, and the Dow plunged.
The ruble crisis started a domino fall leading to the collapse of the U.S. hedge fund Long-Term Capital Management in the second half of 1998. The Fed stepped in with a bailout and cut interest rates to prevent system-wide disaster. Europe was in trouble too—the euro launched in January 1999 but had to be propped up by mid-2000.
So global financial problems were the backdrop for the dot-com mania that started in September 1998. The reasoning went that the Old Economy couldn’t handle global challenges—the only answer was the New Economy of the internet.
For 18 months, from September 1998 to March 2000, Silicon Valley was awash in money, which attracted throngs of exuberant, sometimes disreputable people. New startups threw extravagant launch parties. “Paper millionaires” racked up entertainment bills and tried to pay them with shares of startup stock, sometimes succeeding. People left lucrative jobs to found or join startups.
The fact that the “anti-business model” (losing money to grow) was unsustainable should have been obvious. But there was a certain logic to enjoying the irrational while it lasted.
In this insane environment, Thiel recalled feeling “scared out of my wits” while running PayPal in late 1999. People readily believed any grandiose idea; acting rationally seemed crazy.
Thiel and his co-founders nonetheless had a big vision for PayPal. They followed the thinking of the time—trade short-term profit for growth—but they did it in a calculated way and managed to pull off a miracle before the bubble burst.
The original idea was to create an internet currency to replace the dollar. The first version of PayPal allowed people to send money from one PalmPilot to another. But not enough people had PalmPilots for that to be viable. Instead, since everyone had email, the company created a way to send payments via email. It worked well, but expenses were growing faster than customers.
Striving for at least a million users, the company increased its costs by paying people $10 to sign up and $10 for each referral. To Thiel, the cost made sense because PayPal was on a path to profitability by charging users a transaction fee. But they needed to become profitable quickly.
They found eager investors after an admiring Wall Street Journal story suggested PayPal was worth $500 million; they moved quickly to secure financing, and shortly thereafter, the dot-com bubble burst.
After the NASDAQ reached a peak of 5,084 in March 2000, it fell to 3,321 by the middle of April (the dot-com bust).
By the time it hit bottom at 1,114 in October 2002, the nation had learned its lesson and reinterpreted the hope...
Anyone considering a startup should ask: “What valuable company hasn’t been built yet?”
Some companies create value without being valuable (profitable), but that isn’t enough to be successful (sustainable). A company has to accrue some of the value it creates.
Airlines in 2012 were a prime example of companies that create value without keeping much—they served millions of passengers, creating value of hundreds of billions of dollars, but made little money per passenger. While airfare averaged $178 each way, they made 37 cents per passenger trip. In contrast, Google created less value but brought in far more money—more than 100 times the airline industry’s profit margin that year. Google is worth more than three times the airline industry.
The difference is their markets: the airline industry is competitive, while Google benefits from monopoly status.
Economists have two models for markets: “perfect competition” and monopoly; perfect competition is considered to be the ideal.
Perfectly competitive markets are balanced: supply matches demand. The products are basically the same regardless of which company sells them. The price is whatever the market determines. If there’s a chance to make money, new companies enter the market, increase supply, and push prices down, thereby eliminating profits. If too many companies enter the market, some fail and prices rise again. In perfect competition, no one profits in the long run.
Monopoly is the opposite of perfect competition. While competing companies must sell their product at the market price, a monopoly owns the market and sets the price.
However, monopolies aren’t all the same: market domination can be achieved in different ways, some more defensible than others—for instance, bullying, acting illegally, by government sanction, or by innovating. In this book, monopoly refers to a company that’s so good at doing something that no other company can duplicate it. For example, no other company has competed with Google in search since the 2000s, when it outdistanced Microsoft and Yahoo!
Americans equate competition with capitalism, which is seen as the opposite of socialism. But competition and capitalism are really opposites—capitalism is the accumulation of profits, but in perfect competition, profits disappear.
To succeed as an entrepreneur, you need to create something new with long-term value, rather than competing with everyone else to sell the same thing.
To protect their interests, companies tend to lie about their market status so that all businesses seem similar. However, most businesses are closer to one extreme or the other—perfect competition or monopoly—than it appears from what they say.
Monopolies lie because acknowledging their market control attracts attention (audits) and attacks. To keep monopoly profits rolling in, they downplay their status by claiming nonexistent competition. For example, Google distracts attention from its monopoly status in search, by emphasizing its competition in consumer tech products, where Google owns only a small share of the overall market.
Non-monopoly companies say the opposite, claiming to be in a class by themselves. Entrepreneurs like to downplay their competition; they define their market so narrowly that they stand out. For instance, a restaurant might try to focus on the way its food is different. It might claim to have a unique recipe or might focus on being the only Indian restaurant on the block, even though there is a wide variety of other ethnic restaurants in the neighborhood.
But when you focus on inconsequential differences or ignore the fact that you’re competing with all the different kinds of restaurants customers in your neighborhood could choose from, you’re not addressing your real challenges and are likely to fail.
Monopolies are good for society. While it may seem counterintuitive, they can be more ethical, treat workers with greater consideration, and create more value than companies locked in competitions do.
Perfect competition is static—and a state of equilibrium or stasis eventually leads to death. In competition, one undifferentiated business is simply replaced by another.
Competitors are caught up in a daily struggle for survival. For instance, with their low margins, restaurants have to do everything possible to minimize expenses—which can include paying minimum wage to employees and putting family members to work for nothing. In survival mode, they don't think about or plan for the future.
In a competitive market, money is the only consideration. In contrast, in a monopoly, because profits are assured, there’s room to consider other things besides money. For instance, lacking intense competition, Google can give consideration to its workers, its products, and even ethics, without risking profits.
Monopolies’ bad reputation comes from sometimes earning extreme profits at the expense of society. Certain monopolies corner the market on something that’s needed and jack up the price; customers have no choice but to pay it. This works for the owners in a world where nothing changes, like in the game of Monopoly, where you control as much real estate as you can, but you can’t create new real estate.
In contrast, creative monopolies do good and drive social progress because they operate in a different environment, a dynamic one. Instead of controlling all the options like Monopoly real estate, they create new options. They expand consumers’ choices by creating new categories of things. By adding value, they make society better.
This social value is why the government, in effect, creates monopolies by granting patents; patents are an incentive and a reward for creating more choices. It’s reasonable to question whether the government should award a company monopoly rights for thinking of new software....
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The myth of healthy competition persists because competition is an ideology deeply embedded in our society. Because it distorts our thinking, it’s destructive to businesses and people. We preach and believe in competition, internalizing its commandments. But we get less, rather than more, when we compete.
The obsession with competition starts in the school system. We pit students against each other with grades. We minimize differentiation among students (like we do with business commodities in a competitive market) by teaching everyone the same subjects in the same way, regardless of individual learning styles and talents.
Students with top grades advance to higher education, where competition intensifies. High school dreams die and students become conformists, competing intensely for a leg up in conventional careers like investment banking. On the job, they compete for the same trappings of success. However, by being totally focused on competition, they lose out on the chance to do or create something new.
In the workplace, war metaphors abound: we refer to headhunters, our sales force, captive markets, strategy, market penetration, and making a killing. But it’s competition, rather than business, that’s like war in that the rationale and results are often unjustifiable.
Literature offers two explanations for why people compete or fight each other:
1) According to Karl Marx, people fight because they’re different; the more they differ, the greater the conflict. The proletariat battle the bourgeoisie because they have different goals, as a result of differences in social class and wealth.
2) According to Shakespeare, opponents are often more similar than different. They fight without any reason. For example, in Romeo and Juliet, Shakespeare describes the warring houses of Montague and Capulet as “both alike in dignity.” The clans hated each other, though they couldn’t point to a reason.
Shakespeare’s explanation of senseless fighting is the more fitting metaphor for business competition. Within a company, people compete obsessively with colleagues over career advancement. And companies themselves become obsessed with competitors in the marketplace.
When businesses focus on competitors and lose sight of more important things, they end up hurting themselves. But as in Shakespeare’s tragedies, the futility of the conflict is evident only in retrospect.
For example, compare Microsoft and Google (Gates and Schmidt) to Romeo and Juliet (Montague and Capulet). There’s no objective reason for a company building operating systems to fight with one that built a search engine.
But the growing companies began obsessing over each other and creating competing products: Windows vs. Chrome, Bing vs. Google, Explorer vs. Chrome, Office vs. Docs, and Surface vs. Chrome. The obsession cost both companies their dominance—Apple surpassed them in market capitalization, exceeding the value of Microsoft and Google combined.
Besides being a money loser, war/competition spurs companies to copy what someone else is doing rather than creating new things. For instance, when the startup Square created a credit reader for the iPhone, imitators rushed to copy it by needlessly creating their own readers of different shapes.
Competition can also make companies overestimate opportunities. For instance, in the 1990s, multiple companies (pets.com, petstore.com, and petopia.com) battled fiercely for the online pet supply market. They all sold the same things and...
A monopoly by definition has avoided competition, but to be a great business, there’s more: it must last into the future.
To understand how this works, compare the New York Times Company with Twitter. Each employs thousands of people and delivers news to millions. However, in 2013, Twitter was valued at $24 billion, which was 12 times the Times’ market capitalization. Yet the Times earned $133 million in 2012, while Twitter lost money. How could the money-losing Twitter be worth more than the money-gaining Times? (Shortform note: market capitalization is the total value of a company's shares of stock.)
The reason for the dramatic difference in value is cash flow—the hallmark of a great business is its ability to generate future cash flow. Investors expected Twitter to generate monopoly profits for the next 10 years, while investors believed the New York Times lacked that ability.
A business’s current value is the sum of the profits it will earn throughout its lifetime. Low-growth businesses are those like newspapers that aren’t expected to grow dramatically in the future—most of their value is near-term. They might retain their value and keep current cash flows for a few years, but competition will erode it in the future. A successful restaurant might be profitable today, but cash flows will dwindle in a few years as new restaurants open.
The pattern is the opposite for tech companies—they often lose money initially and require time to build value. Most of a tech startup’s value will be a decade or more in coming.
For example, by March 2001, PayPal hadn’t made a profit, but revenues were growing 100% year over year. Thiel calculated that 75% of the company’s current value would come from profits generated in 2011 and thereafter. However, he underestimated. At the time of this book’s publication in 2014, it appeared most of the company’s value would come from 2020 and beyond.
To be valuable, a company has to both grow and persevere. However, many entrepreneurs overemphasize short-term growth because it’s easier to measure than long-term potential. Focusing on short-term metrics, such as user statistics and revenue targets, can keep you from noticing issues affecting future viability.
For example, initial rapid growth at Zynga and Groupon distracted managers and investors from long-term challenges. While Zynga did well with the game Farmville at first, the company lacked the ability to produce a consistent stream of entertainment content. Groupon’s online deal website also grew initially as local businesses tried the product, but the company struggled to convert them into repeat customers.
In addition to short-term growth, entrepreneurs must build the business to ensure it will last for a decade or more.
Monopoly businesses with strong future cash flows share several characteristics: proprietary technology, network effects, economies of scale, and branding. Comparing your business against these characteristics may point up opportunities for improving its long-term viability.
This may be your greatest possible asset because it makes your product difficult to copy. For example, proprietary technologies used in Google’s search algorithms for aspects such as query autocompletion make the search engine hard to replicate.
For proprietary technology to give you a monopolistic edge, it needs to be at least 10 times better in some major way than anything like it. Anything short of a dramatic difference will seem insignificant to users, which means they’ll be unlikely to switch from what they’re used to.
You can differentiate a product as 10 times better in several ways:
A network effect is the way additional users improve the value of a product or service for all users. For example, the more your friends use Instagram, the more value you get from being on it too, rather than on a different social media app your friends don’t use. To generate network effects, your product has to be immediately valuable to its earliest adopters and then grow from there. A network business has to work on a small scale before it can go big—in fact, you have to plan on starting small. Mark Zuckerburg started Facebook by getting just his Harvard classmates to sign up.
A monopoly gets stronger as it grows because the fixed costs of creating a new product (like office space and engineering or development) are spread over a greater volume of sales and the cost per unit declines.
For software startups, economies of scale are huge because it costs little to produce a copy of the software to sell. However, for businesses that provide a service, the advantages of scale are limited. For instance, even by hiring more people and opening new locations, a yoga studio can only serve a certain number of customers. By contrast, a small group of software developers can provide value to millions.
When starting a business, you should build in the capability of scaling. For example, Twitter has built-in...
How your company chooses and expands its markets is critical to its success. You should target a small niche that you can dominate, then slowly expand to related markets and eventually larger markets while maintaining monopoly control.
Think about your business or a potential future business. How would you define the market (target customer and size, other potential players)? How could you check to make sure that your intended market actually exists?
Businesspeople debate whether success comes from luck or design. Some popular writers and leaders emphasize luck and downplay the importance of design or planning in contributing to success. This makes many people think planning—trying to shape the future—is pointless.
For instance, author Malcolm Gladwell writes in Outliers that success results from “lucky breaks and arbitrary advantages.” Warren Buffett notes that he was lucky to be born with certain qualities. Jeff Bezos and Bill Gates both claim luck played a role in their success.
It’s possible luck could play a role in an individual success, but luck isn’t sufficient to explain how the same person—for instance, Elon Musk, Jack Dorsey, Steve Jobs—could achieve a series of extraordinary, multibillion-dollar successes.
When Dorsey, the founder of Twitter and Square, tweeted in 2013 that “Success is never an accident,” most of the responses were dismissive, citing white male privilege over intelligent planning as the biggest factor in success. However, while connections, wealth, and experience—and luck—can be factors, in recent years, we’ve tended to ignore or overlook the importance of planning.
In the past, people thought differently. From the Renaissance and the Enlightenment into the 20th century, people believed you made your own luck by working hard. Ralph Waldo Emmerson wrote, “Shallow men believe in luck, believe in circumstances … strong men believe in cause and effect.”
Today, whether you think of the future as determined by chance or design affects how you act in the present and whether you ultimately succeed.
You can think of the future as either: 1) definable and definite or 2) a hazy uncertainty. Your belief about the future determines what you do in the present. If you think of the future as definable and definite, you try to understand it and work to shape it. If you think of it as indefinable and random, you can’t intelligently predict or plan for it.
The prevailing belief today is that the future is unknowable or indefinite. Many dysfunctional attitudes and behaviors stem from this belief. One of the most dysfunctional and limiting is our focus on process rather than substance. Instead of having goals for the future and plans to reach them, most people follow a prescribed process of assembling options. As early as middle school, kids start collecting “extracurricular activities.” In high school, students compete to excel in everything. By the time they reach college, students have assembled a wildly diverse resume to prepare for a seemingly unknowable future; they’re ready for everything and nothing.
By contrast, a student who sees the future as definable focuses on specifics rather than on everything in general. She determines her one more important thing and then devotes time and effort to doing it. Rather than working to be well-rounded and indistinguishable from anyone else, she works to be great at something, in essence, to be a monopoly of one.
Unfortunately, because society has rejected belief in a definable or definite future, no one gets into a top university by being great at one thing, unless it’s a sport.
Our expectations of the future (whether we think it will be better or worse) and our resulting attitude (optimism/hope or pessimism/fear) define our outlook on life. When you combine these possibilities, there are four different outlooks:
|Definite||1. Definite Pessimism||3. Definite Optimism|
|Indefinite||2. Indefinite Pessimism||4. Indefinite Optimism|
A definite pessimist believes the future is certain to be bleak and therefore tries to prepare for it.
China exemplifies this outlook. Americans observing China’s rapid growth mistakenly imagine it to be a confident country—because we’re optimists and project our attitude on China. However,
China fears it can’t grow fast enough to overcome its problems. China is making big steps because it’s starting from behind. The key to its fast growth is that it’s copying what’s worked in developed nations rather than inventing something new. It’s executing definite plans to build cities, factories, and skyscrapers by burning increasing amounts of coal.
But with a huge population and increasing resources prices, China knows that no matter how hard it works, it can’t catch up to the developed world. Chinese leaders remember the famines of the past and fear that disaster is inevitable. The people share this attitude: the rich try to move their money out of the country, while the poor save every penny. For Chinese people regardless of class, the future is deadly serious.
An indefinite pessimist expects a grim future, but he doesn’t know what to do about it or have any plans to do anything. The indefinite pessimist expects decline and waits for it to occur without knowing whether it will be sudden or gradual.
Throughout history, almost all nations have been pessimistic, and many remain pessimistic today. Most cultures tell a story of a lost golden age. Many countries are not only pessimistic, but they also see the future as indefinite or uncertain: they’re indefinite pessimists.
Europe has had an indefinite pessimist outlook since the early 1970s. Today (in 2014), it’s floundering with no one in charge. The European Central Bank reacts rather than trying to shape the economy. Europeans in general react to events as they unfold and worry that there’s worse to...
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If you’re optimistic, you tend to think of the future as definable and definite, as something you can understand and shape. If you’re a pessimist, you think of it as uncertain and indefinite; since it's random, you can’t intelligently predict or plan for it.
What’s your view of the future? Are you an optimist or a pessimist?
The power law is the key to understanding how a handful of startups achieve exponential success. But it’s so interwoven into our social and natural worlds that people often don’t recognize it when it’s operating.
The power law describes a common phenomenon in which small changes can have disproportionate results.
The Pareto Principle, named after economist Vilfredo Pareto, is an example of a power law. In 1906, he determined that 20% of the people in Italy owned 80% of the land. Also, called the 80-20 rule, the principle applies everywhere in nature and society. In his garden, Pareto found that 20% of the peapods produced 80% of the peas.
Compounding interest is also a power law. In fact, compounding is such a powerful concept that Albert Einstein is erroneously credited with calling it “the most powerful force in the universe” and “the eighth wonder of the world.”
This chapter shows how the power law works in the world of startups and venture capital. Venture capitalists invest in startups in the hope that in a few years, a company will “take off” and the investor will profit from the spurt in growth. However, some companies will grow more than others.
The power law says that a few companies will achieve exponentially greater value than all others.
Venture capitalists search out promising tech startups to invest in for a share of the profits. While many of them don’t fully understand it, the power law greatly influences their results.
If companies in a venture fund portfolio gain value and go public or are sold to larger companies, the venture fund makes money. However, a venture fund typically loses money at first because most of the companies in its portfolio fail soon after starting. The investors hope the fund’s value will shoot up in a few years when the most successful startups experience exponential growth and scale up.
They try to identify companies that will excel, while hedging their bets—which is a mistake. They expect portfolio returns to be normally distributed, with good companies returning two to four times value, average ones remaining flat and some failing. So they aim for a diverse portfolio, which usually fails.
This approach fails because, in reality, venture returns follow a power law: a very small number of companies far surpass all others combined. For your portfolio to succeed, you need to focus on finding those few companies that will be standout performers rather than focusing on diversification. For example, Facebook, the most successful company in Thiel’s Founders Fund, returned more than everything else in the portfolio combined. Palantir, the second-most successful investment in the fund, was set in 2005 to return more than all of the others combined excluding Facebook.
The secret in venture funding is that the top investment equals or exceeds the rest of the fund combined. This means you should invest only in startups with the potential to return the value of the whole fund—which of course eliminates most potential investments.
You still need a portfolio because there are no guarantees. But every company in your portfolio should have extraordinary potential. Find a very small number of companies likely to go from 0 to 1—and back them to the hilt.
When you stop looking for substance and focus on whether a company fits your diversification strategy, your process is akin to buying lottery tickets and you’re setting yourself up to lose.
Venture capitalists often don’t see the power law pattern because they fixate on the present, while the pattern develops over time.
For example, if you invest in ten startups (too many) with monopoly potential, their early returns will look similar. Their values will start to vary from each other over a few years but overall fund growth will still look linear. However, after about 10 years, one investment will shoot up, far exceeding everything else. Power law distributions were there all along, unnoticed.
Investors aren’t alone in not seeing the power law when it comes to startups—everyone else does too.
For example, when most people think of venture capital, they imagine small, off-beat companies like those on ABC TV’s Shark Tank. But they miss seeing the huge overall impact venture capital has on the economy. While less than 1% of the new businesses starting annually get venture funding and venture funding accounts for less than 0.2% of GDP, this funding has a disproportionate impact. Venture fund companies create 11% of private sector jobs; their combined annual revenue is equivalent to 21% of GDP.
Everyone should be aware of the power law—a minority of effort leads to a majority of results—because we’re all investors.
Creating a great business that no one else can compete with starts with discovering and building on a secret—it can be an untapped opportunity or a different way of looking at a problem. This chapter suggests ways to think about secrets and how to find them.
There’s a lot we don’t understand or haven’t thought of. Some secrets may be unfathomable, for instance string theory, the so-called Theory of Everything, which describes the universe in terms of strings. However, other secrets are challenging but still discoverable.
For example, the business version of the contrarian question—”What valuable company hasn’t been started yet?”—is challenging but answerable. As long as there are secrets to discover, there are revolutionary companies to start.
Today, most people act as if there isn’t anything left to discover; they simply accept conventional wisdom.
Unabomber Ted Kaczynski wrote a “manifesto” arguing that people are depressed because all of the world’s challenging problems have been solved. He claimed people need challenging goals to work for, but only easy and impossible problems are left and addressing those is pointless. So he sought to destroy all institutions and technology so people could start over on solving challenging problems.
Kaczynski was mentally ill, but many people have the same kind of certainty that we know everything we need to know. Society has come to believe there aren’t any challenging secrets left to discover.
Specifically, four trends have undermined our belief in secrets:
Fifty years ago, people were more open to new ideas. Today, few people espouse offbeat ideas or take such ideas seriously—and society considers not being bothered by “crazy” ideas a sign of progress. We’ve given up any sense of mystery.
Believing only in what’s accepted as true creates problems or makes it harder to recognize and solve them.
For example, in economics, because of a firm belief in market efficiency, people missed seeing the tech and housing bubbles before they burst in 1999 and 2005 (bubbles result from market inefficiencies). While Fed Chairman Alan Greenspan noticed signs of trouble in the housing market, he dismissed them, saying that “a bubble in home prices for the nation as a whole does not appear likely.” But economists couldn’t negate the secrets or unexpected developments in these markets by ignoring them.
The decline of Hewlett-Packard is an example of what can happen when a company stops believing in the value of secrets or new ideas. Throughout the 1990s, HP introduced a string of new devices: the first affordable color printer, one of the first highly portable laptops (the OmniBook), and the first device to combine printer/fax/copier capabilities. By mid-2000, as a result of the ongoing product development, HP’s value had jumped from $9 billion to $135 billion.
Then it switched focus from inventing things to providing services and support and began losing value. The company’s board split into two factions and devolved into infighting. A brief effort by one of HP’s original engineers to focus on new technology was rebuffed. By late 2012, the company was worth only $23 billion (close to what it was worth in 1990 when you adjust for inflation).
Finding secrets takes faith that they exist as well as effort—but the potential value to society, whether in the form of new knowledge or a valuable new business, is unlimited.
English mathematician Andrew Wiles demonstrated both faith and persistence, when, after nine years of work, he proved Fermat’s last theorem in 1999—a mystery that had gone unsolved for 358 years.
There’s much more to accomplish in science, medicine, technology, and engineering by pursuing the unknown. We could cure cancer, dementia, and many other diseases and address the problems of aging. We could find sustainable ways to produce energy and come up with new ways to travel.
In business, we could build highly successful companies on new ideas or newly noticed opportunities. For instance, several Silicon Valley startups discovered how to leverage unused capacity. Airbnb recognized and connected a supply of unoccupied lodging with travelers’ demand for affordable and unique accommodations. The founders of Uber and Lyft built billion-dollar businesses by connecting people who needed rides with drivers willing to provide them. Believing in secrets (untapped potential) and looking for them enabled these entrepreneurs to see an opportunity no one else noticed.
If ideas that seem so simple in hindsight can support such high-value businesses, imagine how many more great companies could be started.
**Finding secrets requires asking questions no one else is asking and...
Building a great company requires out-of-the-box thinking rather than following conventional wisdom. Often the truth is the opposite of what everyone believes.
Make a list of the most common conventional beliefs you’ve heard at your company (things that are assumed to be true) about its product(s) and market.
While all startups are different, every startup needs to get certain things right at the outset because it’s impossible to fix them later. Put another way, “Thiel’s Law” states that a startup with a flawed foundation can’t be repaired.
Whether you’re building a business, a house, or a country, what you do at the beginning determines how well your creation will hold up in the future. America’s founders spent months at the Constitutional Convention debating fundamental questions of how government should be structured—for instance, how congressional representation should be set up.
Since then, structural changes have been difficult and rare. Since the first 10 amendments (the Bill of Rights) were ratified 1791, the Constitution has been amended just 17 times. While the system of apportioning congressional seats is problematic today—for instance, California has the same representation as Alaska although its population is much greater—change is unlikely.
Similarly, what you do when starting a company can be difficult to change later if it turns out to be wrong—for instance, picking the wrong co-founders or directors can be hard to correct except possibly in a crisis scenario like bankruptcy. A great company requires a strong foundation.
The most critical question in starting a business is choosing partners or co-founders. As in marriage, if you choose the wrong person, breaking up can be ugly.
Of course, no one wants to think at the start of a relationship about what can go wrong—people want to be optimistic. But if the founders develop unresolvable differences, the company will be at risk.
Here’s an example. Thiel’s PayPal colleague Luke Nosek co-founded a company in which Thiel invested. The two co-founders were opposite personality types; they’d met at a networking event and without getting to know each other, decided to start a company. This would be like marrying someone you met while playing the slots in Las Vegas—the odds are against it working out. The company failed and Thiel lost his money.
When starting a company, it’s important to choose leaders who have the right technical knowledge and whose skills are complementary. Equally important, however, is how well the founders know each other and work together.
Besides the founders, everyone in a startup needs to be able to work well together.
People sometimes claim that a lack of structure liberates employees from old rules that inhibit new ideas. But you have to have structure because people don't naturally work together without it—they fight or go in different directions.
You need to hire people who can get along with each other and who have the right skills, but you also need a structure and clearly defined roles so everyone is aligned to move the organization forward.
For effective alignment, you must make three decisions:
The way it works, in theory, is: investors and employees are motivated by the financial rewards, founders and employees are motivated by the responsibility of running the company, and directors’ experience keeps the company on track.
However, people can act out of line with the company’s mission and impede its functioning. For example, the inefficiency and rudeness that characterize some government agencies like departments of motor vehicles reflect misalignment. While the governor, legislature, and department director may want to provide good service, frontline employees may not care. Good service won’t happen until everyone is on the same page.
Big corporations are better, but still prone to misalignment especially between directors and the executive handling day-to-day operations. The executive may focus on short-term results rather than creating more long-term value for shareholders by strengthening the company for the future.
In startups, most conflicts occur between founders and investors on the board (between ownership and control). For instance, a board member who’s an investor might want the company to go public as soon as possible to benefit his venture fund, while the founders want to continue building the business as a private entity.
Keeping the board small can make it easier to communicate, provide oversight, and maintain consensus. Three to five members is the ideal size. Large boards are unwieldy and ineffective. Nonprofits often have dozens of board members who are so unfocused they can’t provide any meaningful oversight. This may leave too much power in the hands of a dictatorial executive.
Because they often have limited resources, startups may be tempted to use consultants and part-time and remote employees, which cost less than full-time employees. But this works against building a cohesive team and is a recipe for misalignment.
Everyone involved in your company, except possibly lawyers and accountants, should be working on it full time. Anyone, including consultants, who isn’t getting a regular salary or stock options is misaligned. People who are only peripherally involved are predisposed toward short-term rewards rather than helping to build long-term value.
Also, misalignment can occur whenever people aren't working full time at one location. Employees can stay on the same page only by working together every day.
Paying a CEO too much can be demotivating for everyone, while paying the CEO comparatively little can have the opposite effect.
A CEO of a venture-funded startup shouldn’t be paid more than $150,000 a year. High pay (more than...
We often think of coworkers as people we need to get along with at work, but don’t have to like or befriend outside of work. This is considered being professional—but it’s not the way to run an extraordinary startup.
When you’ve discovered a new niche market, you need to move quickly to dominate it and distance your company from potential competition. To move fast with maximum productivity, you need a tight-knit and extremely dedicated team—people with more than just a transactional relationship with each other.
Many tech companies think the way to attract recruits and build a committed culture is by offering perks, such as free laundry pick-up, yoga and massages, an on-site chef, pet day care, and so on. But perks have no value unless they’re backed with substance. Further, culture is something a company is, not something it has. A company is a group of people pursuing a mission; its culture is how they do that.
The first team that Thiel built became known as the “PayPal Mafia” because so many early employees established lasting relationships and went on to help each other start great new companies. Among them were seven new companies worth more than a billion dollars each: LinkedIn, Yelp, Yammer, YouTube, Palantir, Tesla, and SpaceX.
Instead of focusing on office amenities, Thiel focused on hiring compatible employees and fostering a strong sense of community and commitment to a goal everyone was excited about. PayPal’s culture, in effect, spread into new companies.
Instead of the professional view of a workplace where employees check in and out, simply exchanging hours for a paycheck, work relationships should extend beyond work and also be long-lasting. In fact, if the considerable time you spend at work doesn’t build longer-lasting relationships, you haven’t used it well.
Stronger relationships result in better work and help people build successful careers beyond PayPal.
The first few employees in a startup might be attracted by exciting roles or equity. But beyond your first round of hires, you must be able to articulate to the 20th candidate why he should want to join your company.
Since talented people have many options, you need to take the above question even a step further: why should they choose your company over others that might offer more pay and prestige?
Most companies would say things like: we offer an opportunity to work with smart people, solve challenging problems, and receive stock options. However, to stand out, your answers need to be specific to your company. They should address two things: your company’s mission and your team.
1) Your mission: Explain what makes your mission unique and compelling—what’s the important thing you’re doing that no one else is doing? PayPal’s mission of creating a new digital currency to replace the dollar was unique and inspired job applicants and employees.
2) Your team: Show potential employees that the people on your team are the kind of people they want to work with. Show each recruit how your company is a unique match for him.
But don’t cite your perks—you don’t want people working for you who can be convinced to do so by things like laundry pickup because that’s an indication of superficiality. Your unique mission is what should count.
Startups, which are in survival mode, should make everyone on their initial team as similar as possible to enable the team to work together efficiently from the start.
Outwardly, that means providing a “uniform,” which in Silicon Valley is a branded T-shirt or hoodie that makes each employee look like his coworkers. This uniform identifies each as part of a team committed to your company’s mission. It reflects a key startup principle: every employee in your company is “different in the same way.”
Besides having a common “look,” your employees should have some common interests and a common understanding of the world. The initial PayPal team members were “the same kind of nerd.” They had certain shared interests, such as science fiction and Star Wars, and they all were “obsessed” with creating a digital currency controlled by people instead of governments. Thiel believed that for the company to succeed, every new hire had to be equally obsessed.
At work, most conflicts stem from people competing for the same responsibilities. While creating a team of like-minded people, Thiel avoided this kind of competition by making each person in the company responsible for doing one specific thing—each person’s one thing was unique. Further, each employee knew he would be evaluated only on that responsibility.
In the early stages of a typical startup, responsibilities are often fluid, which creates a risk of conflict that a startup can’t afford. Infighting weakens a company by hindering productivity and focus, making it vulnerable to outside competition.
Thiel’s “one thing” approach mitigated the risk and also made it easier for people to build the close relationships that would support the company’s success, since they weren’t competing.
Most people have a negative impression of cults, partly because they look crazy and some of the highest-profile cults in U.S. history were homicidal (Jim Jones, Charles Manson). But a culture of extreme dedication can be an asset to a startup.
In the most intensely committed organizations, members associate only with other members and ignore their families and the outside world. In return, they get a strong feeling of belonging and of being privy to some kind of secret. At the other extreme is the...
Thiel argues that startups should choose people for their initial team who are as similar as possible to enable the team to work cohesively and efficiently from the start.
In building a team for your company or a potential new business, what common qualities would you look for?
Many Silicon Valley entrepreneurs underestimate the importance of distribution, which encompasses whatever it takes to sell your product (advertising, sales, marketing, and distribution channels). But understanding distribution and having a plan for it is critical to a company’s success—it should be part of designing your product.
We often overlook the importance of distribution because society in general looks down on salespeople and advertising as dishonest and manipulative. Silicon Valley entrepreneurs take this a step further—because of a bias toward building rather than selling, they often believe their product is so superior it should sell itself: if they build it, customers will come.
But customers won’t buy your product automatically; you have to sell it, which is more challenging than many entrepreneurs and engineers realize.
Silicon Valley “nerds” should care about advertising because it works—or it wouldn’t be a $150 billion industry that employs more than 600,000 people.
But sales works differently than many people think. They think they’re not influenced by pitches because they don't run out and buy the advertised items. But advertising’s intent isn’t to get you to buy a product right away, it’s to leave an impression with you that will drive sales later.
The sales process is often subtle—selling is a hidden art that secretly drives the economy.
All salespeople are actors; like actors, their priority is persuasion, not transparency. We react negatively to inept salespeople (“used-car salesman” is a slur), but the best salespeople are masters who sell without our realizing it.
For example, Mark Twain’s character Tom Sawyer persuaded his friends to whitewash a fence for him. That took talent, but his master stroke was convincing them to pay him for the privilege of doing so. They never caught on.
Sales still works best when hidden. Sales is never mentioned in anyone’s job title—for instance, advertising salespeople are “account executives;” fundraisers trying to sell you on a cause work in “development,” and those who sell companies are “investment bankers.” Yet sales ability in each position separates superstars from average performers.
While engineers like to assert that a great product will sell itself, there’s another business maxim that the best product doesn’t always come out on top. If you've created a new product but not an effective way to sell it, you have a bad business regardless of your product’s quality.
Regardless of how great your product is, you still need an effective distribution plan. Furthermore, even if your product is no better than average, it’s possible to create a monopoly with a superb sales and distribution plan. That’s how important distribution is.
There are two considerations for planning a sales strategy for your product: customer lifetime value and customer acquisition cost.
Generally, the pricier your product is, the more you need to spend on selling it (it makes economic sense to spend the money because you’ll get a big return). In contrast, for a low-priced product like $100 eyeglasses, you’d want an economical method of advertising that wouldn’t eat up the profits from your sales.
Distribution methods can range from viral marketing (the cheapest method) to typical marketing, typical sales, and complex sales (the most costly method).
The power law applies to sales/distribution. One sales method is likely to work far better than any other. Rather than trying a little of everything (which will get you nothing), find and focus on the method that exceeds all others in its returns.
Startups fail more often because of poor distribution than because they have a bad product. Getting the right channel to work is the key to a successful business.
Some of the most valuable tech products (like Palantir’s software) require complex sales totaling seven figures or more.
(Shortform note: a complex sale is a business-to-business sale that involves multiple stakeholders in a company, takes considerable time to negotiate and finalize, is potentially high risk for the buyer, and involves a lot of money. Read more about complex versus traditional selling in the Shortform summary of The Challenger Sale.)
The CEO, rather than a vice president of sales or a sales rep, needs to personally handle the sale and negotiation if the deal is worth $1 million to $100 million. You might only make a sale like this once a year, and you need to follow up during the installation and provide ongoing service and maintenance.
Companies engaging in complex sales need to achieve 50% to 100% year-over-year growth over 10 years in order to succeed. This will seem small for entrepreneurs envisioning exponential growth for their companies. But it takes time to build the customer relationships necessary for complex sales to succeed. A new customer won’t sign a deal far exceeding your previous deals. You’ll need a track record and customer references you can build on to achieve bigger deals.
Many sales don’t reach the complex level. Those...
Some entrepreneurs develop a great product but fail to plan for its distribution, or the process for selling the product (advertising, sales, marketing, and distribution). But customers aren’t going to buy it automatically. Distribution should be part of your product design.
Think of a product you currently sell or a potential product. What are your current or planned methods for marketing/selling it?
A Forbes magazine headline once asked: “Will a machine replace you?” It’s a question people often ask as computers get more powerful and more effective at performing human tasks. At the extremes, futurists almost hope computers will replace human workers, while Luddites want society to stop creating new technology because of that fear.
But it won’t happen because computers complement human abilities—they don’t substitute for humans. In the future, the most valuable businesses will be the ones that use technology to help and empower people to do things better, not replace them.
We’ve seen that humans can replace or substitute for each other as a result of globalization—for instance, Indian, Chinese, or Mexican workers can replace American workers in manufacturing and customer service.
Americans fear technology will one day do the same thing—for instance, giant server farms will take over work people are doing. But these scenarios are different. In a global marketplace, people compete with each other for jobs and resources, but computers don’t compete with humans for either one—again, they complement people by increasing their abilities.
In 1992, third-party presidential candidate and businessman H. Ross Perot warned about the dangers of foreign competition, famously predicting a “giant sucking sound” as American jobs flowed to Mexico under the North American Free Trade Agreement.
In contrast, Presidents George H.W. Bush and Bill Clinton extolled free trade, in which governments refrain from trying to gain an advantage by placing tariffs on imports or subsidizing exports. The idea is that everyone ultimately will be richer if people specialize based on their advantages (such as resource availability) and trade with each other.
In practice, this has worked better for some workers than others. Countries usually gain the most from trade when they have the biggest advantages. But having a big unskilled labor supply can be an advantage too.
However, the challenge of the future won’t be competition for labor between countries, it will be competition for resources. And global resources are limited. Already, while Americans enjoy low-priced consumer goods from China, we pay more for gasoline because as China develops, it consumes more of the global supply of oil that we’re competing for.
People in all countries will demand more as their basic needs are met and as globalization continues.
The answer to competition for scarce resources is technology that helps people live better.
People and computers are good at different things. People excel at making plans and decisions in complicated situations; they’re not as good at analyzing huge amounts of data. In contrast, computers excel at processing data, but can’t make judgments that are easy for humans.
For instance, in 2012 one of Google’s supercomputers scanned 10 million YouTube videos and learned to identify a cat with 75% accuracy. However, a four-year-old can do it with 100% accuracy. A laptop can beat mathematicians at some tasks, but a supercomputer can't beat a child at others.
The different capabilities of humans and computers mean that we can gain more from working with computers than from trading with other people. Other people are like us and do what we do; in contrast, technology helps us do more. People substitute; technology enhances.
You can build a high-value business if you combine the complementary capabilities of humans and computers.
For example, PayPal software developers attacked credit card fraud this way. The company was losing $110 million a month to fraud, but having someone review each transaction was impossible due to the number of transactions. So the company wrote software to automatically spot and cancel fraudulent transactions. This worked until the hackers changed tactics, fooling the detection algorithms. However, the developers found that the tactics didn’t fool human analysts as often.
The solution was to take a hybrid approach combining the strengths of computers and humans: PayPal developers rewrote the software to flag suspect transactions for human review. The approach was so successful the FBI expressed interest—which led Thiel to create Palantir, a company using a human-plus-computer approach to analyze a wide array of information to identify terrorist networks and financial crimes.
Founded in 2004, Palantir was rumored to have helped the U.S. locate 9/11 mastermind Osama bin Laden. In the book, Thiel comments, “We have no details to share from that operation.”
In addition to searching for terrorists, analysts using Palantir software have:
But neither the software nor the professionals alone could have solved these problems. Better technology doesn’t replace analysts, financial experts, and other professionals: it enhances their capabilities.
Computer scientists tend to overlook the idea of complementarity. They break down human capabilities into specific tasks and train computers to do them.
Those who work in the field of “machine learning” believe computers can do almost anything if they’re fed the right data. Netflix and Amazon apply machine learning: they use algorithms to recommend products based on a user’s history. The more data they get on users’ viewing and purchases, the better the recommendations become.
Many companies and computer scientists have become enthralled with finding ways to analyze “big data,” or data sets too large for traditional data processing to handle. However, more data doesn’t amount to more value if it’s...
The start of the 21st century was marked by a boom in clean technology, spurred by several high-profile environmental disasters: smog in Beijing that was so bad people couldn’t see or breathe, arsenic polluting the water in Bangladesh, and blockbuster hurricanes in the U.S (Ivan and Katrina) prompting worries about future effects of global warming.
Entrepreneurs launched thousands of green technology companies and investors kicked in more than $50 billion. However, the rush to cleantech created a bubble. Most cleantech companies failed—Solyndra was one of the most notorious. When the maker of solar panels collapsed it left taxpayers on the hook for over $500 million. Over 40 solar companies folded or filed for bankruptcy in 2012.
Conservatives blamed the crash on government involvement. In reality, most cleantech companies crashed because they failed to adequately address the seven questions crucial for new companies:
As previously explained, a startup won’t succeed without a business plan that addresses each question. If your answers are weak, your company will fail—however, with a solid answer for each, you'll be on your way to having a great business.
As examples of how not to run your business, here’s a look at cleantech company responses to each question.
Cleantech entrepreneurs weren’t just seeking business success, they wanted to be “social entrepreneurs.” The idea of social entrepreneurship is to combine the best aspects of entrepreneurship with the best of nonprofits (ability to make money and serve the public interest) and “do well by doing good.”
When there’s a consensus that something is good, it’s conventional, like the idea of green energy to start with. The problem is all nonprofits pursue the same priorities (the same way for-profit companies copy each other). Cleantech produced numerous indistinguishable products under the umbrella of green energy, an overly broad goal.
A better way to do something good for society is to do something different. The best products are the ones no one else has thought of.
Tesla is one of the few cleantech companies that lasted because it had good answers for the seven entrepreneurial questions:
To succeed, a company must have solid answers to the following questions: Engineering: Is your technology a significant advance or only an incremental improvement? Timing: Is this the right time to sell this technology? Monopoly: Are you targeting a big share of a small market? People: Do you have the right people on your team? Distribution: Do you have a plan to market and sell your product? Durability: Will you dominate your market in the next 10 to 20 years? Secret: Have you identified a unique opportunity overlooked by everyone else?
Answer the above questions for your company or a potential future business.
The six people who started PayPal were eccentric: they had unconventional backgrounds and sometimes strange interests (four of them built bombs in high school). However, for the tech world, PayPal’s founders weren’t that unusual: tech entrepreneurship and eccentricity seem to go together. This can be mostly a strength if it doesn’t get out of hand.
Many founders have traits that are both extreme and paradoxical. For instance, they may be:
Sometimes founders purposely exaggerate certain traits, or their admirers exaggerate them to build a myth. Other times, founders are just “naturally” extreme—they’re unusual from the beginning and seem to get more unusual as life goes on.
Examples of eccentric founders include:
Howard Hughes, who died in 1976, was known during his era as one of the richest people in the world. He produced nine successful Hollywood films and designed and built aircraft that set multiple speed records. Later, he became known for eccentric behavior and a reclusive lifestyle, driven by obsessive-compulsive disorder.
Richard Branson, the billionaire founder of the Virgin Group, which includes more than 400 companies, started his first business at 16 and founded Virgin Records at 22. He started Virgin Atlantic Airways in the 1980s and in 2004, founded a spaceflight corporation. He won media attention and built a brand through various eccentricities—for instance, serving airline passengers drinks with ice cubes shaped like his head.
Sean Parker, who founded Napster and later was founding president of Facebook, was a hacker in high school, who came to the FBI’s attention and was arrested. He got into legal trouble again with Napster, which was shut down by the courts. He had to leave Facebook after allegations of drug use, but he garnered admiration after Justin Timberlake’s portrayal of him in the movie The Social Network.
Steve Jobs, Apple’s co-founder, was forced out in 1985, but he returned in 1997 to revive the company. Jobs could be both charismatic and crazy. Early in his career, he walked around barefoot, refused to shower, and ate only apples. But when he returned 12 years after his ouster, he turned Apple into one of the most valuable companies in the world by introducing the iPod, iPhone, and iPad.
Apple’s dependence on Jobs for its success demonstrates how tech companies can become like monarchies and how that can sometimes be a good thing. A dominant founder can make unilateral decisions, build...
There are four ways of thinking about the future, according to philosopher and Oxford professor Nick Bostrom:
1) Recurrent collapse: It will follow a historical pattern alternating between prosperity and ruin or collapse. This was the view of ancient people. Since we’re in prosperity today, humanity’s next cycle will be collapse.
2) Plateau: The future will look a lot like the present as poor countries catch up with rich countries and the world reaches a plateau of development. Many people hold this view today.
3) Extinction: The world may experience a catastrophe too big to contain and survive, given our global interconnectedness and weapons of mass destruction.
4) Takeoff: Humanity is readying for takeoff toward a better future, which will be indescribably different from the present.
The periodic collapse scenario seems unlikely because we have the knowledge to stave off any collapse that’s short of catastrophic. Annihilation or extinction are more probable.
Today, most people envision continued globalization and convergence—in other words, more of the same. The question is whether such a plateau could last. At that point competition for wealth and resources would likely be more intense than ever. Without new technology to ease competition, the status quo could dissolve into conflict. And conflict on a global scale would result in extinction.
That leaves the fourth scenario—we create new technology for a much better future. Some describe this outcome as “singularity,” the application of powerful technologies we haven’t yet imagined.
The foremost advocate of singularity, Ray Kurzweil, has plotted exponential growth trends in numerous fields, leading to a future of artificial intelligence. He believes singularity is inevitable and there’s nothing for us to do but accept it.
However, we can’t take a better future for granted—we need to work to create it. Seizing the moment to do and create new things in our daily lives is more important than whether we achieve cosmic...
A key question that Thiel poses to entrepreneurs is, What valuable company hasn’t been started yet? Answering it requires discovering a secret—for instance, seeing untapped potential or solving a problem by looking at it in a new way.
Think of a problem, inconvenience, or opportunity you encountered in the past week. What was it?