Product #48

Product #48


Zero to One · Peter Thiel · 2015

A contrarian author often makes a great book. Thiel challenges conventional wisdom in places and offers a unique perspective on how to create a successful company. The central thesis is compelling; he encourages entrepreneurs to focus on building a monopoly by dominating a specific niche and scaling to adjacent markets. I enjoyed his seven questions that every company must answer.

Key Insights

What important truth do very few people agree with you on? The most contrarian thing of all is not to oppose the crowd but to think for yourself. Vertical progress, going from 0 to 1, requires doing something nobody else has ever done. It is better to risk boldness than triviality. What valuable company is nobody building? You need to create AND capture value.

Competition and Monopoly

Monopolists conceal themselves by exaggerating the power of their competition and claim to be part of a larger market to make themselves look small. Non-monopolists tell the opposite lie.

Monopolists can afford to think about things other than making money; non-monopolists can't. Competitive markets destroy profits. Creative monopolies also bring innovations and stable profits; they can invest in projects others involved in the struggle for survival can’t.

Growth, Endurance, and Measuring Success

For a company to be valuable, it must grow AND endure. The value of a business is the sum of all the money it will make in the future, but many entrepreneurs focus only on short-term growth. Growth is easy to measure, but durability isn't.

Don't succumb to measurement mania and obsess about weekly active user statistics, monthly revenue targets, and quarterly earnings reports. Look for deeper, harder-to-measure problems that threaten the durability of your business. The most important question is always: will this business still be around a decade from now?

Characteristics of Monopolies

Monopolies usually share some combination of the following characteristics:

  • Proprietary Technology: When technology makes your product difficult or impossible to replicate, aim to be 10 times better than your closest substitute in some important dimension.
  • Network Effects: When each additional user makes your product more valuable for the existing base. Network effect businesses must start with especially small markets.
  • Economies of Scale: When the fixed costs of creating a product (engineering, management) can be spread out over ever greater quantities of sales. Software startups enjoy dramatic economies of scale because the marginal cost of producing another copy of the product is zero.
  • Branding: Polishing the surface doesn't work without a strong underlying substance.

Building a Monopoly

Choose your market carefully and expand deliberately at the start:

  • Start with a small market and monopolize it. It's easier to dominate a small market than a large one.
  • Scaling Up: Once you create and dominate a niche market, gradually expand into related and slightly broader markets.
  • Don't Disrupt. The act of creation is far more important. Disruption also attracts attention, so don't pick fights you can't win.
  • The last will be first. Generating cash flows in the future is what matters. Being the first mover isn't valuable if you're unseated. Be the last mover and enjoy years or even decades of monopoly profits.

Luck is something to be mastered, dominated, and controlled.

Thiel is not a fan of the lean startup approach

He paraphrases it as ‘nothing can be known in advance, so listen to what customers say they want, make an MVP and iterate to success’. Leanness is a methodology, not a goal. Making small changes to things that already exist will lead you to a local maximum, but it won't help you find the global maximum. Darwinism is a fine theory in other contexts, but in startups, intelligent design works best.

You Are Not a Lottery Ticket

We live under a power law. The best investment in a successful VC fund equals or outperforms the entire rest of the fund combined. Your life is not a portfolio - you can't run dozens of companies at the same time. Focus relentlessly on something you're good at doing. What valuable company is nobody building?

Building the Right Team and Culture

Every great company is unique. Pick the right founder. You'll need pre-history - technical abilities, complementary skills, and how you work together are key.

Make every person in the company responsible for doing just one thing. Everyone gets evaluated on their one thing. This simplifies the task of management and reduces conflict.

Cultures of total dedication look crazy from the outside.

Sales and Distribution

We underestimate the importance of distribution (everything it takes to sell a product). They won't come - you need to make it happen and it's hard. Think of distribution as something essential to the design of your product. Superior sales and distribution can create a monopoly, even with no product differentiation, but the converse is not true.

The Two Key Metrics of Distribution:

  • CLV: Customer Lifetime Value (total net profit you earn on the average customer over your relationship)
  • CAC: Customer Acquisition Cost (the amount you spend on average to acquire a new customer)
  • CLV must exceed CAC. Higher-priced products allow for higher costs of sales.

Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market. PayPal targeted the 20,000 eBay PowerSellers who were constantly making payments.

One distribution method is likely to be far more powerful than every other for any given business. If you can get just one distribution channel to work, you have a great business. If you try for several but don't nail one, you're finished.

The 7 Questions Every Company Must Answer

  1. Engineering: Can you create breakthrough technology instead of incremental improvements?
  2. Timing: Is now the right time to start your particular business?
  3. Monopoly: Are you starting with a big share of a small market?
  4. People: Do you have the right team?
  5. Distribution: Do you have a way to not just create but deliver your product?
  6. Durability: Will your market position be defensible 10 and 20 years into the future?
  7. Secret: Have you identified a unique opportunity that others don't see?

Entrepreneurs are usually unusual people. Be tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.

Full Book Summary · Amazon

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Ironies of Automation · Lisanne Bainbridge · 1983

Therefore one can draw the paradoxical conclusion that automated systems still are man-machine systems, for which both technical and human factors are important." This paper suggests that the increased interest in human factors among engineers reflects the irony that the more advanced a control system is, so the more crucial may be the contribution of the human operator.

This paper discusses the unintended effects of automation. When a process is automated, most of the remaining work involves system monitoring. However, if the system fails, manual control may be necessary. The issue is that the operators' manual and cognitive skills are likely to have deteriorated due to infrequent use. Furthermore, they may not know the system's state when they take over, complicating manual operation.

Ironically, the more reliable the automation, the less prepared the operators will be to repair it or assume control if a problem arises. By eliminating the simpler aspects of a task, you can inadvertently make the more challenging parts difficult. It's essential to consider the human-machine interactions.

The paper suggests several mitigation strategies, including proactive monitoring to detect problems at the earliest stage.

View the Paper


Book Highlights

A problem is a difference between things as desired and things as perceived. Gerald M Weinberg, Donald C Gause, and Sally Cox · Are your lights on?
Successful technology for the Internet of Things era will have to become very simple, with minimal interfaces. It is my belief that the future of the Internet of Things will be driven by “Calm Technology”: elegant, humane, and unobtrusive Amber Case · Calm Technology
Good critique is comprised of three key elements: It identifies a specific aspect of the idea or a decision in the design being analyzed. It relates that aspect or decision to an objective or best practice. It describes how and why the aspect or decision work to support or not support the objective or best practice Adam Connor and Aaron Irizarry· Discussing Design
We need to design products and ideas that are frequently triggered by the environment and create new triggers by linking our products and ideas to prevalent cues in that environment. Top of mind leads to tip of tongue. Jonah Berger · Contagious

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I meet a lot of Seed Stage founders that still haven't mapped out their ideal customer profile. So, so important. If you haven't yet, get to it. Will save you and your team lot of pain.

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Ladder of inference. Whenever you make a conclusion about something or are making decisions based on your conclusions, it's good to stop and question your reasoning. Ladder of inference is a tool that helps make decisions based on reality.

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What I’m Listening to.