How Peter Thiel’s Zero To One Changed The Way I Think About Startups

I recently finished Peter Thiel’s book, Zero To One. And it is fantastic.

Few weeks ago my friend Nikhil had told me about Peter Thiel and his fellowship where he would offer a $1,00,000 fellowship to youngsters below 20 every year who would work on their own ventures instead of going to college. The very idea of a highly successful entrepreneur going out of his way to support people who dared not to goto college for starting their own startup in early part of their lives seemed amazing to me.

Naturally enough, I googled him and found out that this Peter Thiel, being a very successful founder of companies like Paypal, Palantir and Founder’s Fund; was renowned for his idiosyncrasies, and had even inspired the character ‘Peter Gregory’ for the HBO’s series Silicon Valley. Obviously I had to read what he had to say about startups and business, cause lets face it, entrepreneurship is the coolest thing in the world and this guy sure looked like a rockstar.

So I got the book, grabbed some coffee and immersed myself into the book. Every point that he made were thought provoking. For someone who thought business books were boring and full of jargons, man was I proved wrong!

For those who aspire to create an influential startups, this book provides a whole new perspective. The very core idea of the book is reflected in the book’s name. Peter Thiel states that the next great company will be a new creation that takes the world from 0 to 1, not do something we already know and take the world from 1 to n. He also goes on to say that unless they invest in the difficult task of creating new things, companies will fail in the future no matter what and how big their profit remain today.

I will now try to break down key ideas presented in this book that I think are absolute gem for any aspiring entrepreneur.

Embrace monopoly

One of the many interesting ideas Thiel puts forward is the creating and embracing monopoly.

He says that a successful startup must be so good in the market that no other firm can offer a close substitute. Google has complete monopoly over search industry, and no company can provide even a close competition. Every business is successful exactly to the extent that it does something other cannot. Therefore, monopoly is the condition for every great business.

The only thing that allows a business to transcend the daily brute struggle for survival is profits derived from the advantage of having monopoly in the market. Monopoly drives progress in business because the promise of years of monopoly profits provide powerful incentive to innovate. Google, with its monopoly in search verifies this fact by its plethora of innovative product in other markets.

To sum it up, all great companies are different: each one earns a monopoly by solving unique problem. All failed companies are same: they failed to escape competition and came nowhere near to creating a monopoly.

Characteristics of a monopoly

Proprietary Technology

It is the most substantive advantage a company can have because it makes your product impossible to replicate. The technology must be 10 times better than its closest substitute in the same important dimension to lead to a real monopolistic advantage.

Network Effects

Network effects make a product more useful as more people use it.

The product must be valuable to its very first users when the network is necessarily small. This is essentially how Facebook gained its initial momentum at Harvard.

Economies of scale

A business must have the potential for great scale built into its first design.

Branding

Creating a strong brand can be a powerful way to claim a monopoly.

Building a monopoly

Thiel advises to choose the market carefully and then expand slowly and deliberately. He provides the following path for establishing monopoly.

Start small and monopolize

Start with a small market. Dominating a small market is easy. If you think your initial market is too big, it certainly is. The perfect target market for a startup is a small group of people concentrated together served by a few or no competitors. It is much easier to reach a few thousand people who really need your product than to try and compete for attention of millions of scattered individuals. Tesla pulled this off when it started out into a very narrow market of electric sportscar, and now is taking the world by storm by expanding with affordable electric car for the masses.

Scaling Up

Once you create and dominate a niche market, then you should expand into related and slightly broader markets. Most successful companies make core progression, to first dominate a specific niche, and then scale to adjacent markets. Amazon dominated the book selling industry completely before it evolved into a multidimensional ecommerce industry.

Don’t Disrupt

Try to avoid competition as much as possible.

Foundation

Peter Thiel famously has stated that a startup messed up at its foundation cannot be fixed. And according to him, a successful business has strong team right from the start.

He writes that choosing a cofounder is like getting married, and founder conflict is as ugly as a divorce. He continues that the founder’s technical abilities and complimentary skill sets matter, but how well the founders know each other and how well they work together matter just as much.

For any startup, assembling a great team might look expensive but Thiel writes that startups don’t need to pay high salaries as they can offer something better: part ownership of the company. 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 value in the future.

The are generally two significant questions you need to answer to the people who you want to be working with you.

  1. Are you doing something important that no one else is doing?
  2. Why is the company a unique match for him personally?

To sum it up, every great startup should promise the opportunity to do irreplaceable work on a unique problem alongside great people.

Distribution

Creating and shipping a great product is not easy, but taking it to the potential customers is whole different story.

Thiel advises that it is better to think of distribution not as an afterthought, but as something that is essential to the design of the product. He writes that If you have invented something new but haven’t invented an effective way to sell it, you have a bad business — no matter how good the product is.

He also states that a superior distribution can even create a monopoly, even with no product differentiation. However the converse is not true.

Distribution model of different businesses falls roughly in one of the five categories, based on the fact that higher the price of your product, the more you have to spend to make a sale.

Complex Sales

Complex refers to the scale of sale ranging to 7 figures. Complex sales works best when your don’t have a salesman at all. At this large scale of the deal, people will prefer to talk to the CEO, not a VP of sales. Business with complex sales succeed if they achieve 50% to 100% year over growth, just due to the sheer size of a single deal.

Personal Sales

Personal sales refer to large deals, around 5 and 6 figures, that should be made by personal approach from a sales team. The challenge in this scale of the sale isn’t about how to make any particular sale, but how to establish a process by which a sales team can move product to a wide audience.

Distribution Doldrum

A difficult range called Distribution Doldrum lies after Personal sales, in which the scale of the sale is of about 4 figures. The products in this price range need personal sales effort but at that price point you simply don’t have resources to send an actual person to close each deal. Finding an effective distribution channel can be make or break for the businesses in this category.

Marketing and Advertising

Marketing and advertising works for low priced products that have mass appeal but lack any method of viral distribution. Most of the daily consumer products fall into this group. It can work for startups too, but only when the customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.

Viral Marketing

A product is viral if its core functionality encourages users to invite friends to become users too. Not every product has a viral potential, but the ideal viral loop should be as quick and as frictionless as possible, allowing it exponentially expand in a short duration of time. By paying people to signup and paying them more to refer friends, Paypal achieved extraordinary growth within a critical time. Whoever is the first to dominate the most important segment of a market with viral potential will be last mover of whole market.

Thiel concludes distribution by saying that if you can get one distribution channel to work, you have a great business.

Question that every business must answer

These seven questions are what Thiel advises every entrepreneur to answer when starting your venture.

The Engineering Question

Can you create breakthrough technology instead of incremental improvements?

The Timing Question

Is now the right time to start a particular business?

The Monopoly Question

Are you starting with a big share of a small market?

The People Question

Do you have the right team?

The Distribution Question

Do you have a way to not just create but deliver your product?

The Durability Question

Will your market position be defensible in the next 10 years future?

The Secret Question

Have you identified a unique opportunity that others don’t see?

Zero To One is an inspiring and powerful book. It provides a window into the future of startups. With unique yet compelling theories on how a great business of the future will work, I would have to say that Zero To One has created its own monopoly in a group of rival business books.

Originally published at

Author: Paras Dahal


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