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Preface: Zero to one
Doing what we already know how to do takes the world from 1 to n
every time we create something new, we go from 0 to 1
Unless they invest in the difficult task of creating new things, American companies
will fail in the future no matter how big their profits remain today.
while I have noticed many patterns, and I relate them here, this book offers no formula for success.
the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.
THE CHALLENGE OF THE FUTURE
WHENEVER I INTERVIEW someone for a job, I like to ask this question: “What important truth do very few people agree with you on?”
I hear answers like the following
Our educational system is broken and urgently needs to be fixed
America is exceptional.
There is no God
Those are bad answers. The first and the second statements might be true, but many people already agree with them. The third statement simply takes one side in a familiar debate.
A good answer takes the following form: “Most people believe in x, but the truth is the opposite of x.
No one can predict the future exactly, but we know two things: it’s going to be different, and it must be rooted in today’s world.
ZERO TO ONE: THE FUTURE OF PROGRESS
When we think about the future, we hope for a future of progress. That progress can take one of two forms
Horizontal or extensive progress means copying things that work— going from 1 to n.
Horizontal progress is easy to imagine because we already know what it looks like.
Vertical or intensive progress means doing new things—going from 0 to 1.
Vertical progress is harder to imagine because it requires doing something nobody else has ever done.
the single word for horizontal progress is globalization
The single word for vertical, 0 to 1 progress is technology
there is no reason why technology should be limited to computers. Properly understood, any new and better way of doing things is technology.
My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more.
globalization without new technology is unsustainable
The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old
STARTUP THINKING
it’s hard to develop new things in big organizations
Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk.
In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now).
At the other extreme, a lone genius might create a classic work of art or literature, but he could never create an entire industry.
Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can.
PARTY LIKE IT’S 1999
The first step to thinking clearly is to question what we think we know about the past.
LESSONS LEARNED
The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:
Make incremental advances
Stay lean and flexible
Improve on the competition
Focus on product, not sales
the opposite principles are probably more correct:
It is better to risk boldness than triviality.
A bad plan is better than no plan.
Competitive markets destroy profits.
Sales matters just as much as product
We still need new technology, and we may even need some 1999-style hubris and exuberance to get it.
To build the next generation of companies, we must abandon the dogmas created after the crash. That doesn’t mean the opposite ideas are automatically true
ask yourself: how much of what you know about business is shaped by mistaken reactions to past mistakes?
The most contrarian thing of all is not to oppose the crowd but to think for yourself.
ALL HAPPY COMPANIES ARE DIFFERENT
THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building?
Creating value is not enough—you also need to capture some of the value you create.
even very big businesses can be bad businesses.
Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year.
Google makes so much money that it’s now worth three times more than every U.S. airline combined.
The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly.
So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines.
If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.
The opposite of perfect competition is monopoly.
a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.
by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.
Google is a good example of a company that went from 0 to 1: it hasn’t competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo!
capitalism and competition are opposites
Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.
The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.
LIES PEOPLE TELL
both monopolists and competitors are incentivized to bend the truth.
Monopoly Lies
Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked
they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.
95% of Google’s revenue comes from search advertising
Framing itself as just another tech company allows Google to escape all sorts of unwanted attention.
Competitive Lies
Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make.
Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets
Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets
RUTHLESS PEOPLE
The competitive ecosystem pushes people toward ruthlessness or death
In business, money is either an important thing or it is everything.
Monopolists can afford to think about things other than making money; non-monopolists can’t.
Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.
MONOPOLY CAPITALISM
Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.
Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.
every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.
All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.
THE IDEOLOGY OF COMPETITION
CREATIVE MONOPOLY means new products that benefit everybody and sustainable profits for the creator.
the more we compete, the less we gain.
he grinned and asked: “So, Peter, aren’t you glad you didn’t get that clerkship?”
WAR AND PEACE
really it’s competition, not business, that is like war
Amid all the human drama, people lose sight of what matters and focus on their rivals instead.
Just as war cost the Montagues and Capulets their children, it cost Microsoft and Google their dominance: Apple came along and overtook them all. In January 2013, Apple’s market capitalization was $500 billion, while Google and Microsoft combined were worth $467 billion. Just three years before, Microsoft and Google were each more valuable than Apple. War is costly business.
If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you
If you’re interested in making things or programming computers, you’ll be less afraid to pursue those activities single-mindedly and thereby become incredibly good at them. Then when you apply your skills, you’re a little less likely than others to give up your own convictions: this can save you from getting caught up in crowds competing for obvious prizes
Winning is better than losing, but everybody loses when the war isn’t one worth fighting
while he was busy creating billboards, Informix imploded in a massive accounting scandal and White soon found himself in federal prison for securities fraud.
If you can’t beat a rival, it may be better to merge.
Many of us at PayPal logged 100-hour workweeks. No doubt that was counterproductive, but the focus wasn’t on objective productivity; the focus was defeating X.com.
Sometimes you do have to fight. Where that’s true, you should fight and win.
either don’t throw any punches, or strike hard and end it quickly.
This advice can be hard to follow because pride and honor can get in the way.
anyone would fight for things that matter; true heroes take their personal honor so seriously they will fight for things that don’t matter. This twisted logic is part of human nature, but it’s disastrous in business.
LAST MOVER ADVANTAGE
even a monopoly is only a great business if it can endure in the future
a great business is defined by its ability to generate cash flows in the future.
To properly value a business, you also have to discount those future cash flows to their present worth, since a given amount of money today is worth more than the same amount in the future
Most of the value of low-growth businesses is in the near term.
Most of a tech company’s value will come at least 10 to 15 years in the future..
For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.
For example, rapid short-term growth at both Zynga and Groupon distracted managers and investors from long-term challenges
If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.
CHARACTERISTICS OF MONOPOLY
proprietary technology, network effects, economies of scale, and branding.
1. Proprietary Technology
Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.
Google’s search algorithms, for example, return results better than anyone else’s.
As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
You can also make a 10x improvement through superior integrated design
When Apple released the iPad, tablets went from unusable to useful
2. Network Effects
Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
Paradoxically, then, network effects businesses must start with especially small markets.
This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.
3. Economies of Scale
Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
Many businesses gain only limited advantages as they grow to large scale. Service businesses especially are difficult to make monopolies. If you own a yoga studio, for example, you’ll only be able to serve a certain number of customers.
A good startup should have the potential for great scale built into its first design.
4. Branding
A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.
Apple has a complex suite of proprietary technologies, both in hardware (like superior touchscreen materials) and software (like touchscreen interfaces purpose-designed for specific materials).
Beginning with brand rather than substance is dangerous
Ever since Marissa Mayer became CEO of Yahoo!
The people are supposed to come for the coolness: Yahoo! demonstrated design awareness by overhauling its logo
But the big question is what products Yahoo! will actually create
When Steve Jobs returned to Apple, he didn’t just make Apple a cool place to work; he slashed product lines to focus on the handful of opportunities for 10x improvements. No technology company can be built on branding alone.
BUILDING A MONOPOLY
Start Small and Monopolize
Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market.
Scaling Up
Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets
Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books.
The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
Don’t Disrupt
Disruptive companies often pick fights they can’t win.
As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
THE LAST WILL BE FIRST
moving first is a tactic, not a goal. What really matters is generating cash flows in the future
It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.
YOU ARE NOT A LOTTERY TICKET
Hundreds of people have started multiple multimillion-dollar businesses. A few, like Steve Jobs, Jack Dorsey, and Elon Musk, have created several multibillion-dollar companies. If success were mostly a matter of luck, these kinds of serial entrepreneurs probably wouldn’t exist.
Is there a way to settle this debate objectively? Unfortunately not, because companies are not experiments. To get a scientific answer about Facebook, for example, we’d have to rewind to 2004, create 1,000 copies of the world, and start Facebook in each copy to see how many times it would succeed. But that experiment is impossible. Every company starts in unique circumstances, and every company starts only once. Statistics doesn’t work when the sample size is one.
From the Renaissance and the Enlightenment, everyone agreed that you should do what you could, not focus on what you couldn’t
Ralph Waldo Emerson captured this ethos when he wrote: “Shallow men believe in luck, believe in circumstances.… Strong men believe in cause and effect.”
CAN YOU CONTROL YOUR FUTURE?
If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it.
Indefinite attitudes to the future explain what’s most dysfunctional in our world today.
Instead of pursuing many-sided mediocrity and calling it “well-roundedness,” a definite person determines the one best thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one.
You can also expect the future to be either better or worse than the present. Optimists welcome the future; pessimists fear it. Combining these possibilities yields four views:
Indefinite Pessimism
Europeans just react to events as they happen and hope things don’t get worse.
Definite Pessimism
Every other country is afraid that China is going to take over the world; China is the only country afraid that it won’t.
with a huge population pushing resource prices higher, there’s no way Chinese living standards can ever actually catch up to those of the richest countries, and the Chinese know it.
Outsiders are fascinated by the great fortunes being made inside China, but they pay less attention to the wealthy Chinese trying hard to get their money out of the country. Poorer Chinese just save everything they can and hope it will be enough. Every class of people in China takes the future deadly seriously.
Definite Optimism
Even the Great Depression failed to impede relentless progress in the United States, which has always been home to the world’s most far-seeing definite optimists.
The Empire State Building was started in 1929 and finished in 1931. The Golden Gate Bridge was started in 1933 and completed in 1937
In the 1950s, Americans thought big plans for the future were too important to be left to experts.
Indefinite Optimism
Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones.
OUR INDEFINITELY OPTIMISTIC WORLD
Indefinite Finance
Only in a definite future is money a means to an end, not the end itself.
Indefinite Politics
Indefinite PhilosophyIndefinite Life
Eroom’s law—that’s Moore’s law backward—observes that the number of new drugs approved per billion dollars spent on R&D has halved every nine years since 1950.
Most of the people involved expect some things to work eventually, but few want to commit to a specific company with the level of intensity necessary for success.
It starts with the professors who often become part-time consultants instead of full-time employees—even for the biotech startups that begin from their own research.
IS INDEFINITE OPTIMISM EVEN POSSIBLE?
leanness is a methodology, not a goal.
Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum.
Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.
THE RETURN OF DESIGN
Forget “minimum viable products”—ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.
When Yahoo! offered to buy Facebook for $1 billion in July 2006, I thought we should at least consider it. But Mark Zuckerberg walked into the board meeting and announced: “Okay, guys, this is just a formality, it shouldn’t take more than 10 minutes. We’re obviously not going to sell here.” Mark saw where he could take the company, and Yahoo! didn’t.
YOU ARE NOT A LOTTERY TICKET
A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world.
FOLLOW THE MONEY
MONEY MAKES MONEY. “For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from
them” (Matthew 25:29)
monopoly businesses capture more value than millions of undifferentiated competitors.
everyone needs to know exactly one thing that even venture capitalists struggle to understand: we don’t live in a normal world; we live under a power law.
THE POWER LAW OF VENTURE CAPITAL
Venture funds usually have a 10-year lifespan since it takes time for successful companies to grow and “exit.”
If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies in the first place.
The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.
At Founders Fund, we focus on five to seven companies in a fund, each of which we think could become a multibillion-dollar business based on its unique fundamentals.
WHY PEOPLE DON’T SEE THE POWER LAW
WHAT TO DO WITH THE POWER LAW
The power law is not just important to investors; rather, it’s important to everybody because everybody is an investor.
An entrepreneur makes a major investment just by spending her time working on a startup.
When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now.
The most common answer to the question of future value is a diversified portfolio: “Don’t put all your eggs in one basket,”
but investors who understand the power law make as few investments as possible.
life is not a portfolio
An entrepreneur cannot “diversify” herself: you cannot run dozens of companies at the same time and then hope that one of them works out well. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.
Everybody who passes through the American school system learns not to think in power law terms.
Every university believes in “excellence,” and hundred-page course catalogs arranged alphabetically according to arbitrary departments of knowledge seem designed to reassure you that “it doesn’t matter what you do, as long as you do it well.” That is completely false
It does matter what you do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
For the startup world, this means you should not necessarily start your own company, even if you are extraordinarily talented.
People who understand the power law will hesitate more than others when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast.
You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing).
If you do start your own company, you must remember the power law to operate it well. The most important things are singular
in a power law world, you can’t afford not to think hard about where your actions will fall on the curve.
SECRETS
the business version of our contrarian question: what valuable company is nobody building?
Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable
WHY AREN’T PEOPLE LOOKING FOR SECRETS?
If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange for doing exactly what’s asked of you (and for doing it just a bit better than your peers), you’ll get an A.
People are scared of secrets because they are scared of being wrong.
As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace
THE WORLD ACCORDING TO CONVENTION
What happens when a company stops believing in secrets? The sad decline of HewlettPackard provides a cautionary tale.
THE CASE FOR SECRETS
You can’t find secrets without looking for them.
If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.
The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers.
HOW TO FIND SECRETS
There are two kinds of secrets: secrets of nature and secrets about people.
Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world.
Secrets about people are different
when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?
physics PhDs are notoriously difficult to work with—because they know the most fundamental truths, they think they know all truths. But does understanding electromagnetic theory automatically make you a great marriage counselor?
The best place to look for secrets is where no one else is looking. Most people think only in terms of what they’ve been taught; schooling itself aims to impart conventional wisdom.
Physics, for example, is a real major at all major universities
Nutrition matters for everybody, but you can’t major in it at Harvard.
Most top scientists go into other fields. Most of the big studies were done 30 or 40 years ago, and most are seriously flawed.
we know more about the physics of faraway stars than we know about human nutrition.
WHAT TO DO WITH SECRETS
Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know.
every great business is built around a secret that’s hidden from the outside.
A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
FOUNDATIONS
a startup messed up at its foundation cannot be fixed.
As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.
FOUNDING MATRIMONY
When you start something, the first and most crucial decision you make is whom to start it with. Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.
when I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much.
Founders should share a prehistory before they start a company together—otherwise they’re just rolling dice.
OWNERSHIP, POSSESSION, AND CONTROL
It’s very hard to go from 0 to 1 without a team
"if men were angels, no government would be necessary."
men aren’t angels
You need good people who get along, but you also need a structure to help keep everyone aligned for the long term
To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts:
Ownership: who legally owns a company’s equity?
Possession: who actually runs the company on a day-to-day basis?
Control: who formally governs the company’s affairs?
A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control.
distributing these functions among different people makes sense, but it also multiplies opportunities for misalignment.
Most conflicts in a startup erupt between ownership and control—that is, between founders and investors on the board.
a board member might want to take a company public as soon as possible to score a win for his venture firm, while the founders would prefer to stay private and grow the business.
In the boardroom, less is more.
A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
By far the worst you can do is to make your board extra large
ON THE BUS OR OFF THE BUS
As a general rule, everyone you involve with your company should be involved full-time.
anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned.
That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day.
CASH IS NOT KING
A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups
In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.
It doesn’t matter if he got used to making much more than that at Google or if he has a large mortgage and hefty private school tuition bills.
A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
Aaron Levie, the CEO of Box, was always careful to pay himself less than everyone else in the company—four years after he started Box, he was still living two blocks away from HQ in a one-bedroom apartment with no furniture except a mattress.
Every employee noticed his obvious commitment to the company’s mission and emulated it.
high cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future.
A cash bonus is slightly better than a cash salary—at least it’s contingent on a job well done.
VESTED INTERESTS
Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself.
Giving everyone equal shares is usually a mistake: every individual has different talents and responsibilities as well as different opportunity costs, so equal amounts will seem arbitrary and unfair from the start.
Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret.
Sending out a companywide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.
Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future.
EXTENDING THE FOUNDING
a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops.
THE MECHANICS OF MAFIA
no company has a culture; every company is a culture.
A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.
BEYOND PROFESSIONALISM
Why work with a group of people who don’t even like each other?
Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together.
If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms.
we set out to hire people who would actually enjoy working together. They had to be talented, but even more than that they had to be excited about working specifically with us. That was the start of the PayPal Mafia.
RECRUITING CONSPIRATORS
Recruiting is a core competency for any company. It should never be outsourced.
Talented people don’t need to work for you; they have plenty of options. You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?
The only good answers are specific to your company, so you won’t find them in this book. But there are two general kinds of good answers: answers about your mission and answers about your team.
At PayPal, if you were excited by the idea of creating a new digital currency to replace the U.S. dollar, we wanted to talk to you; if not, you weren’t the right fit.
Above all, don’t fight the perk war. Anybody who would be more powerfully swayed by free laundry pickup or pet day care would be a bad addition to your team.
You probably can’t be the Google of 2014 in terms of compensation or perks, but you can be like the Google of 1999 if you already have good answers about your mission and team.
WHAT’S UNDER SILICON VALLEY’S HOODIES
Max Levchin, my co-founder at PayPal, says that startups should make their early staff as personally similar as possible.
For the company to work, it didn’t matter what people looked like or which country they came from, but we needed every new hire to be equally obsessed.
DO ONE THING
The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing.
defining roles reduced conflict.
OF CULTS AND CONSULTANTS
In the most intense kind of organization, members hang out only with other members. They ignore their families and abandon the outside world.
We have a word for such organizations: cults
The extreme opposite of a cult is a consulting firm like Accenture: not only does it lack a distinctive mission of its own, but individual consultants are regularly dropping in and out of companies to which they have no long-term connection whatsoever.
The best startups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful startup are fanatically right about something those outside it have missed.
IF YOU BUILD IT, WILL THEY COME?
EVEN THOUGH SALES is everywhere, most people underrate its importance. Silicon Valley underrates it more than most.
The Field of Dreams conceit is especially popular in Silicon Valley, where engineers are biased toward building cool stuff rather than selling it. But customers will not come just because you build it. You have to make that happen, and it’s harder than it looks.
NERDS VS. SALESMEN
we entertain a false confidence in our own independence of mind. But advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.
If anything, people overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss is that it takes hard work to make sales look easy.
SALES IS HIDDEN
All salesmen are actors: their priority is persuasion, not sincerity.
Like acting, sales works best when hidden. This explains why almost everyone whose job involves distribution—whether they’re in sales, marketing, or advertising—has a job title that has nothing to do with those things.
On Wall Street, a new hire starts as an “analyst” wielding technical expertise, but his goal is to become a dealmaker.
It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.
HOW TO SELL A PRODUCT
Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true
The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC).
Complex Sales
If your average sale is seven figures or more, every detail of every deal requires close personal attention.
It might take months to develop the right relationships. You might make a sale only once every year or two.
Within just a few years of launching his rocket startup, Elon Musk persuaded NASA to sign billion-dollar contracts to replace the decommissioned space shuttle with a newly designed vessel from SpaceX.
Politics matters in big deals just as much as technological ingenuity,
a sales grandmaster like Elon Musk
Complex sales works best when you don’t have “salesmen” at all.
Alex, who is Palantir’s CEO, spends 25 days a month on the road, meeting with clients and potential clients. Our deal sizes range from $1 million to $100 million. At that price point, buyers want to talk to the CEO, not the VP of Sales.
Personal Sales
Most sales are not particularly complex: average deal sizes might range between $10,000 and $100,000, and usually the CEO won’t have to do all the selling himself.
The challenge here isn’t about how to make any particular sale, but how to establish a process by which a sales team of modest size can move the product to a wide audience.
Distribution Doldrums
In between personal sales (salespeople obviously required) and traditional advertising (no salespeople required) there is a dead zone.
This is why so many small and medium-sized businesses don’t use tools that bigger firms take for granted. It’s not that small business proprietors are unusually backward or that good tools don’t exist: distribution is the hidden bottleneck.
Marketing and Advertising
Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution.
Procter & Gamble can’t afford to pay salespeople to go door-to-door selling laundry detergent.
P&G does employ salespeople to talk to grocery chains and large retail outlets, since one detergent sale made to these buyers might mean 100,000 one-gallon bottles.
Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.
Every entrepreneur envies a recognizable ad campaign, but startups should resist the temptation to compete with bigger companies in the endless contest to put on the most memorable TV spots or the most elaborate PR stunts.
No early-stage startup can match big companies’ advertising budgets.
Viral Marketing
A product is viral if its core functionality encourages users to invite their friends to become users too.
This is how Facebook and PayPal both grew quickly: every time someone shares with a friend or makes a payment, they naturally invite more and more people into the network.
Funny YouTube videos or internet memes get millions of views very quickly because they have extremely short cycle times: people see the kitten, feel warm inside, and forward it to their friends in a matter of seconds. —> Hotmail example
Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
The Power Law of Distribution
distribution follows a power law of its own
Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure.
If you can get just one distribution channel to work, you have a great business.
Selling to Non-Customers
Your company needs to sell more than its product. You must also sell your company to employees and investors.
Selling your company to the media is a necessary part of selling it to everyone else. Nerds who instinctively mistrust the media often make the mistake of trying to ignore it.
you should never assume that people will admire your company without a public relations strategy.
the press can help attract investors and employees
EVERYBODY SELLS
MAN AND MACHINE
AS MATURE INDUSTRIES stagnate, information technology has advanced so rapidly that it has now become synonymous with “technology” itself.
computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
SUBSTITUTION VS. COMPLEMENTARITY
Globalization Means Substitution
in theory the economy maximizes wealth when people specialize according to their advantages and then trade with each other.
Technology Means Complementarity
People have intentionality—we form plans and make decisions in complicated situations. We’re less good at making sense of enormous amounts of data.
Computers are exactly the opposite: they excel at efficient data processing, but they struggle to make basic judgments that would be simple for any human.
To understand the scale of this variance, consider another of Google’s computer-forhuman substitution projects. In 2012, one of their supercomputers made headlines when, after scanning 10 million thumbnails of YouTube videos, it learned to identify a cat with 75% accuracy. That seems impressive—until you remember that an average four-yearold can do it flawlessly. When a cheap laptop beats the smartest mathematicians at some tasks but even a supercomputer with 16,000 CPUs can’t beat a child at others, you can tell that humans and computers are not just more or less powerful than each other—they’re categorically different.
computers are tools, not rivals.
technology is the one way for us to escape competition in a globalizing world.
COMPLEMENTARY BUSINESSES
Complementarity between computers and humans isn’t just a macro-scale fact. It’s also the path to building a great business
The Central Intelligence Agency is run by spies who privilege humans. The National Security Agency is run by generals who prioritize computers. CIA analysts have to wade through so much noise that it’s very difficult to identify the most serious threats. NSA computers can process huge quantities of data, but machines alone cannot authoritatively determine whether someone is plotting a terrorist act. Palantir aims to transcend these opposing biases: its software analyzes the data the government feeds it—phone records of radical clerics in Yemen or bank accounts linked to terror cell activity, for instance—and flags suspicious activities for a trained analyst to review.
If LinkedIn had tried to simply replace recruiters with technology, they wouldn’t have a business today.
The Ideology of Computer Science
the most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?
EVER-SMARTER COMPUTERS: FRIEND OR FOE?
But even if strong AI is a real possibility rather than an imponderable mystery, it won’t
happen anytime soon: replacement by computers is a worry for the 22nd century. Indefinite fears about the far future shouldn’t stop us from making definite plans today.
As we find new ways to use computers, they won’t just get better at the kinds of things people already do; they’ll help us to do what was previously unimaginable.
SEEING GREEN
Instead of a healthier planet, we got a massive cleantech bubble.
most cleantech companies met similarly disastrous ends—more than 40 solar manufacturers went out of business or filed for bankruptcy in 2012 alone
Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer:
1. The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
2. The Timing Question: Is now the right time to start your particular business?
3. The Monopoly Question: Are you starting with a big share of a small market?
4. The People Question: Do you have the right team?
5. The Distribution Question: Do you have a way to not just create but deliver your product?
6. The Durability Question: Will your market position be defensible 10 and 20 years into the future?
7. The Secret Question: Have you identified a unique opportunity that others don’t see?
Whatever your industry, any great business plan must address every one of them.
THE ENGINEERING QUESTION
THE TIMING QUESTION
The first silicon solar cell, by contrast, was created by Bell Labs in 1954—more than a half century before Wilson’s press release. Photovoltaic efficiency improved in the intervening decades, but slowly and linearly: Bell’s first solar cell had about 6% efficiency; neither today’s crystalline silicon cells nor modern thin-film cells have exceeded 25% efficiency in the field.
Entering a slow-moving market can be a good strategy, but only if you have a definite and realistic plan to take it over. The failed cleantech companies had none.
THE MONOPOLY QUESTION
THE PEOPLE QUESTION
Energy problems are engineering problems, so you would expect to find nerds running cleantech companies. You’d be wrong: the ones that failed were run by shockingly nontechnical teams. These salesman-executives were good at raising capital and securing government subsidies, but they were less good at building products that customers wanted to buy.
At Founders Fund, we saw this coming, real technologists wear T-shirts and jeans, So we instituted a blanket rule: pass on any company whose founders dressed up for pitch meetings
THE DISTRIBUTION QUESTION
Cleantech companies effectively courted government and investors, but they often forgot about customers. They learned the hard way that the world is not a laboratory: selling and delivering a product is at least as important as the product itself.
THE DURABILITY QUESTION
Every entrepreneur should plan to be the last mover in her particular market. That starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in?
THE SECRET QUESTION
Every cleantech company justified itself with conventional truths about the need for a cleaner world
Great companies have secrets: specific reasons for success that other people don’t see.
THE MYTH OF SOCIAL ENTREPRENEURSHIP
Social entrepreneurs aim to combine the best of both worlds and “do well by doing good.” Usually they end up doing neither.
Whatever is good enough to receive applause from all audiences can only be conventional, like the general idea of green energy.
Doing something different is what’s truly good for society—and it’s also what allows a business to profit by monopolizing a new market.
the best problems to work on are often the ones nobody else even tries to solve
TESLA: 7 FOR 7
TECHNOLOGY
Tesla’s technology is so good that other car companies rely on it: Daimler uses Tesla’s battery packs; Mercedes-Benz uses a Tesla powertrain; Toyota uses a Tesla motor.
TIMING
In January 2010—about a year and a half before Solyndra imploded under the Obama administration and politicized the subsidy question—Tesla secured a $465 million loan from the U.S. Department of Energy. A half-billion-dollar subsidy was unthinkable in the mid-2000s. It’s unthinkable today. There was only one moment where that was possible, and Tesla played it perfectly.
MONOPOLY
Tesla started with a tiny submarket that it could dominate: the market for high-end electric sports cars
TEAM
Tesla’s CEO is the consummate engineer and salesman, so it’s not surprising that he’s assembled a team that’s very good at both.
DISTRIBUTION
Most companies underestimate distribution, but Tesla took it so seriously that it decided to own the entire distribution chain.
Tesla sells and services its vehicles in its own stores.
The up-front costs of Tesla’s approach are much higher than traditional dealership distribution, but it affords control over the customer experience, strengthens Tesla’s brand, and saves the company money in the long run.
DURABILITY
Tesla has a head start and it’s moving faster than anyone else
SECRETS.
Tesla knew that fashion drove interest in cleantech.
ENERGY 2.0
Tesla’s success proves that there was nothing inherently wrong with cleantech
Energy is the master resource: it’s how we feed ourselves, build shelter, and make everything we need to live comfortably.
Most of the world dreams of living as comfortably as Americans do today,
The macro need for energy solutions is still real. But a valuable business must start by finding a niche and dominating a small market.
Paradoxically, the challenge for the entrepreneurs who will create Energy 2.0 is to think small.
THE FOUNDER’S PARADOX
This chapter is about why it’s more powerful but at the same time more dangerous for a company to be led by a distinctive individual instead of an interchangeable manager.
THE DIFFERENCE ENGINE
founders aren’t really as extreme as they appear.
WHERE KINGS COME FROMAMERICAN ROYALTY
He was born wealthy, but he was always more interested in engineering than luxury.
THE RETURN OF THE KING
Steve Jobs’s return to Apple demonstrated the irreplaceable value of a company’s founder
Jobs’s return to Apple 12 years later shows how the most important task in business—the creation of new value—cannot be reduced to a formula and applied by professionals.
A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.
we need unusual individuals to lead companies beyond mere incrementalism.
Above all, don’t overestimate your own power as an individual. Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from everybody at his company.
Conclusion STAGNATION OR SINGULARITY?
We cannot take for granted that the future will be better, and that means we need to work to create it today.
Our task today is to find singular ways to create the new things that will make the future not just different, but better—to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.
Disclaimer: I don't always agree with the content of the book, the purpose of sharing my highlights is to help you decide whether to buy the book or not.
