On Peter Thiel, and going from Zero to One

How wisdom and controversy go hand in hand

They say that no press is bad press. I feel like when it comes to Peter Thiel, all press is bad press. Almost every article you read about him in the news is a tear-down of a statement or position he’s taken up. He’s the anti-hero of silicon valley, who evokes equal parts hate and adoration.

What makes Peter Thiel such a controversial figure? His opinions are a huge contributor. This man’s views are more against the grain than the gluten-free movement. In a world where most people have invested in a university degree, Peter believes that we’re in an education bubble, and that the “college system is as corrupt as a church 500 years ago” (put it more bluntly, will ya?)

Peter is also outspoken politically, famously support Donald Trump heavily in the 2016 election. Not commenting on this- but getting into politics is just bound to get you a lot of haters.

But here’s the thing- love him or hate him, he’s one of the greatest thinkers borne from the internet era. He has not only built companies, but watched hundreds grow as an investor. Importantly, he’s a more theoretical thinker than most, allowing him to see the underlying framework of how start-ups function and succeed.

He writes about this framework in Zero To One, where he discussed everything from the underlying mechanics of markets to how to recruit good talent. The rest of this article summarizes key points from the book, but I highly recommend you pick up a copy and read it yourself.

How do you create a successful company?

Peter talks about a lot of things in Zero to One. One of the things that was most valuable for me was discussing what ideas or opportunities will yield successful companies, and which ones won’t. Of course, there is way more to a company’s success or failure than just the core opportunity they’re addressing. But the most interesting part of the book was how Peter thinks about opportunities, and it’s what I’m going to be sharing with you today.

A company is dead if it is not making money, so all companies must care about money. Companies that can care about other things, like having employee good culture or benefits, can only do so because they have huge inflows of cash. As he puts it: “In business, cash is either an important thing, or the only thing.” Every successful business is different, but they all have one thing in common: they make money.

So, our question now becomes: “How do we create a business that makes money?”

Peter identifies one important characteristic: most successful companies are monopolies, or have characteristics of monopolies. Why is this important?

Zero to One argues against portraying monopolies as inherently greedy things. If you create a lot of value, capturing some leaves society at a net positive. This is only really true if you innovate.

If there is competition in the market for a good, margins are eventually competed away. When there is a monopoly, the monopolist can charge whatever he wants for a good, so there are naturally higher margins. These margins are what makes a successful business.

There are many ways to become a monopolist. The typical ways are anti-competitive, where companies deliberately try to crush competitors. This is why monopolies get such a bad rap in our society. But Peter proposes an entirely different way of becoming a monopoly: to create entirely new value.

Before Netflix came along, there was no way to get videos in your home, on an unlimited basis. You had to walk to a Blockbuster and rent movies one by one. Netflix came along and created a lot of value: it allowed you to watch as many movies as you wanted over the internet, without going to the store.

Netflix ended up creating a whole lot of value- and it was so good at what it did, that it was a monopoly for many years. Here’s the thing- although Netflix had a monopoly for a few years, it doesn’t anymore- competitors are popping up everywhere, and Netflix is actually in a bit of hot water. What happened?

It turns out, Netflix isn’t actually that great at what it does. It’s an awesome streaming service, but for the majority of the value it creates, it’s a middle-man: it brokers other people’s content to you. While brokering that content, it doesn’t do anything unique or especially well, which invites competition to the space. Netflix is planning on maintaining its monopoly through original content- we’ll see how effective that approach is in the coming years.

Peter actually writes about this too- he speaks about something called “last-mover’s advantage.” We’re all familiar with a first-mover’s advantage- that’s the benefit you get when you enter a market first, while your competition is scrambling to get their stuff together. The last mover’s advantage refers to doing something so well, that no one else enters the market after you.

Take Google for example. There are other players within search, but they have done search so well, that there is a very small chance another player will enter and knock them off of their throne. Their technology has given them a last-mover’s advantage. Peter says that when you enter a market, you want to do it so well, that no one else will enter the same market as you. You need to be 10x better than your competition.

Google owns a majority market share just because their technology is so great. Side note- who would have thought Bing has ~20% market share? Wow. Turns out, the average Bing user is 50 years old. Your dad probably uses Bing.

(By the way, there are many other ways besides technology that a company can create a monopoly. Curious? Read the book.)

This 10x number also comes up a lot within the book? Why do you need to have a 10x advantage? Well, Peter argues that anything lower than that won’t be good enough due to switching costs, marketing noise, and differences between theoretical performance and actual performance. Maybe 10x isn’t always attainable, but it’s a good goal.

Putting it together: secrets

Okay, we’ve identified some of the things that make a company successful. How do we actually find what we should work on?

Peter poses a question for us to answer:

“What valuable company is no one building?”

If someone was building it, then there would be competition. You aren’t creating your own value. So, you should build a company that no one else is building.

Okay, so we’ve gotten to the heart

The answer is, secrets.

If the information that you’re basing your company on is information that everyone has, then by nature you’re not starting a company that no one else will. Nowadays, more and more people are taking the position that “the world is figured out.” Truth is, there’s a lot of work to be done figuring stuff out, and the best start-ups have figured out a unique opportunity.

Wrapping Up

At the end of the day, you need more than just a good opportunity when starting a company. You need good skills, and you need to hire the right team. You need to be making the right decision at basically every turn. Startups are hard, and there is no way to make them easier.

But! A good opportunity is a start.

Jay