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

Published in 2014, Zero to One: Notes on Startups, or How to Build the Future, by Peter Thiel and Blake Masters, advocates for creating businesses that offer inspiring new products that lead their markets rather than slightly improved copies of other firm’s merchandise. Aimed at a general audience, the book is based on Masters’s notes on a Stanford business class taught by Thiel. It derides copycat thinking and encourages entrepreneurs to re-imagine the businesses they’re in, develop products that capture people’s attention with unique benefits, and reap the reward of big profits.

Multi-billionaire Thiel earned his bachelor’s and law degrees at Stanford University. He was the first outside investor in Facebook, a founding partner in PayPal, and he also helped fund Airbnb and Elon Musk’s SpaceX. Thiel built Palantir Technologies into a leading data analysis company, started the Founders Fund venture capital firm, and oversees the Thiel Foundation, which supports research into anti-aging, artificial intelligence, and other fields.

Blake Masters is a protégé of Thiel’s. He has led some of Thiel’s business ventures and founded the legal research company, Judicata. He has also run for political office. Both authors are outspoken and considered controversial for their conservative political views. They believe America has lost its edge and needs to rediscover inspiration and daring in order to build a better future.

The book contains several diagrams and illustrations; those most relevant to the guide are described. This study guide refers to the 2014 eBook edition.

Summary

Zero to One: Notes on Startups, or How to Build the Future is a book that presents Peter Thiel’s business strategies and philosophies, which sit outside of conventional wisdom about capitalism and economics. One of Thiel’s core arguments is that most businesses don’t present new ideas, but simply build off of existing ones. Entrepreneurs who simply copy what the great innovators have done will create businesses that have no advantage in the marketplace. Thiel argues it’s much better to create something brand-new that’s surprising and useful. This is hard to do, and there’s no formula for creative success, but doing so makes all the difference.

Companies like airlines, which sell products identical to their competitors, find themselves in a state of perfect competition, where everyone charges the same low prices and few make any profits. Companies that innovate and offer uniquely pleasing products, such as Google, can charge much more and make good profits for their investors. They become monopolies through innovation, what Thiel terms “creative monopolies,” the ultimate goal for a startup business. In Thiel’s view, the term monopoly loses its stigma in this context, and a company maintains their monopoly by earning the public’s trust and loyalty through innovative launches.

Thiel argues that companies are worth what they’ll make in the future. Even if they’re losing money today, rising cash flow suggests profits to come. Four characteristics mark potential creative monopoly companies: inspiring proprietary technology that people want, network effects that enhance user enrollment, economies of scale that lower costs, and strong branding that increases recognition and desirability. It’s also better to start small in a niche market with little competition and then expand into nearby markets.

While taking risks in young companies is important, Thiel cautions against reckless investing in the hopes of getting rich quick. He cites the dot-com boom of the late 1990s as an example. The market drew investors to companies that weren’t yet making profits in the hope that their investment would lead to future success. This unfettered growth with no material basis was unsustainable, and when that bubble burst, startups and investors learned to be cautious. They did not make big plans, copied other companies, and economized on marketing. The authors believe that this reaction to the crash was an overcorrection and that, while smart investing is important, no large gains can be made without thinking big.

Another core tenet that Thiel stresses is that, contrary to the widely-accepted ideas of how capitalism works, competition limits rather than encourages innovation. From grade school to investment banking, modern society stresses achievement through competition, and businesses glorify commerce as a war. This can be costly and destructive, and it leads firms away from inventing the truly worthwhile products that people want and need in favor of clinging to their market share. Thiel argues that companies should not waste energy on competition and focus all of their money and manpower into creativity; with hard work and inspiration, they can carve out their creative monopolies.

These concepts tie into Thiel’s thesis about definite and indefinite optimism. According to Thiel, Western societies became generally optimistic about the future beginning in the 1500s. Especially in the US, this optimism, which Thiel terms definite optimism, was combined with big plans for the future, and the country grew steadily in wealth, standard of living, and major public works like space exploration. Beginning in the 1970s, though, definite optimism was replaced by indefinite optimism: Everything will get better, so why create lofty goals? The result of indefinite optimism is a lack of innovation and big projects in favor of the sure thing; reinvestment, a lack of risk taking, and small, incremental improvements. Thiel asserts that a revival of definite optimism—and the ambitious thinking that comes with it—is needed for a startup to succeed.

With these big-picture ideas in place, Thiel presents some business rules of thumb to guide would-be startup founders. One of these is the idea of “10x”: When creating the benchmarks for innovation, developers should aim for creating a product that is ten times better than what is already out there. Anything less than a 10x improvement is the sort of incremental improvement that traps companies in endless competition. Another rule of thumb is that business success follows the 80-20 rule: Most profits go to a small handful of companies. Venture capitalists look for new firms with a strong potential to grow exponentially; usually, one of the startups becomes worth more than all the others in its fund group.

According to the authors, creating such a company requires a willingness to look for secrets. Contrary to conventional belief, Thiel asserts that there are still plenty of hidden truths, in both the natural world and in people, waiting to be discovered. The companies that find these truths and figure out how to make products that benefit from that knowledge can make a fortune. First, though, a startup must begin on the right foot. A startup with a poor foundation will never recover, but a well-formed one—one that hires the right people, pays them well so they’re aligned with the company’s purpose, and encourages them to be dedicated to the work of the team—will have the right stuff to succeed.

Thiel also emphasizes the role of founders in a company’s success. Whereas most people possess typical, average personality traits, company founders tend to have extreme traits, both good and bad. This affords them the daring and creative spark to develop highly-successful products, but it also can cause them to misbehave and self-destruct. Societies may admire such entrepreneurs in one moment but condemn them in the next, so founders must beware of the risks of eccentricity. Regardless, such company leaders are essential to the vitality of the marketplace.

Strong ideas, bold leadership, and a good foundation are not enough to guarantee success. To move a new product, ads, sales forces, and other forms of marketing are critical. A product can go viral if customers invite their friends to join in as well. In general, though, great products don’t market themselves: To get strong word-of-mouth, a startup must announce its product in the smartest ways possible to get the buzz going.

Thiel cites his own successes as proof that these techniques work. After he and the other founders of PayPal sold their company to eBay for $1.5 billion, he went on to fund Tesla, SpaceX, YouTube, Yelp, and other companies that each became worth over $1 billion.

In later sections, the book turns its gaze towards the future. Much of the economic growth in recent decades has been dominated by digital technology, and some people fear that advanced computers will make most or all workers obsolete. Thiel assuages these fears by distinguishing between the abilities of computers and people. Computers, while powerful, are weak at using judgment, especially in complex situations—something humans are quite good at. Smart firms that find ways to combine human skill with the number-crunching power of computers will lead the economy toward a better future without sacrificing jobs.

Thiel also emphasizes that a company’s use of technology is not enough to guarantee its status as an innovator. One sector that suffered a disaster was the green-oriented cleantech industry. To Thiel, most US solar power companies had grandiose dreams during the early 2000s, but little innovation and weak planning. They ended up simply copying each other’s ideas, overestimating their chances, and competing head-to-head with better-mobilized Chinese producers of solar power devices. The result was an expensive purge. Meanwhile, other cleantech firms with innovative products and good marketing, such as Tesla Motors, did well. Thiel insists that all companies, no matter how cutting-edge their technologies, must not succumb to indefinite optimism. Likewise, he cautions against thinking that only tech companies can innovate, urging other sectors to adopt a definite optimist mindset as they approach their work and products.

Zero to One concludes that the future may be one of growth followed by stagnation, competition, and perhaps even war, or it can be a time of exponential technological advances towards a world of unimagined prosperity. A better world won’t happen by itself; it must be created deliberately by optimistic people with a definite vision for a better world.