Every startup dreams of becoming the next Google, PayPal, Amazon, and Tesla.
It isn’t an irrational thought, but what if we told you that copying these big names would lead you far from being successful?
Shaping a truly valuable business is more than copying how another business works.
To understand what it takes to build your startup from the ground level, we’ll take inspiration from the book Zero to One by Peter Thiel (with Blake Masters).
Peter Thiel is a billionaire entrepreneur, investor, and co-founder of PayPal and Palantir.
Theil has also invested in several successful startups like Facebook and SpaceX.
His book Zero to One carries an interesting background.
While Thiel gave lectures at Stanford University on a start-up course, one of his students, Blake Masters, took detailed class notes.
Thiel reworked those notes to compile Zero to One.
The book includes interesting business insights into companies like Google, Tesla, and others, all viewed from Thiel’s eyes.
So, let’s begin.
According to Thiel, progress can take two forms:
Horizontal progress – 1 to n
Horizontal or extensive progress comes from copying things that work.
For example, improving a typewriter and selling it globally brings you from 1 to n.
Vertical progressive – 0 to 1
Vertical or intensive progress comes from doing new things that no one has tried before.
For example, moving beyond typewriters to invent a word processor brings you from 0 to 1.
It’s interesting to note that successful businesses like Apple, Facebook, and Google achieved success not by copying others but by creating something entirely new.
The result? They moved from Zero to One.
Horizontal progress carries globalization at its heart, while vertical progress nestles technology.
The good thing is both can coexist.
What’s more, the most valuable companies became valuable after uncovering truths behind widely and incorrectly held beliefs.
Once these companies pursued alternative truths, an entirely different future emerged.
Much of it relates to the dot-com mania in the 1990s, followed by the dot-com bubble burst in 2000.
Here are the takeaways from those dismal global settings as Thiel sees:
- The dot-com mania was short-lived, but it reflected the growing concerns that the old economy wasn’t working. The internet held promises for a globalized world, which is what we see at present.
- Much of what we know comes from circumstances and reactions to past mistakes. But it doesn’t make them true. In fact, the business wisdom in the post-dot-com era was flawed.
Let’s look at Thiel’s business insights to identify those flaws.
Zero-to-One Business Insights
Creative Monopoly, Not Competition
We’ve all grown up learning competition is good, healthy, and essential.
Thiel says competition is destructive.
Instead, a creative monopoly is a way for the future.
A creative monopoly has no viable substitutes.
A good example is Google which has no competition.
Google works on the creative monopoly principle to create and retain value simultaneously.
In comparison, airlines create tremendous value through air travel but are barely profitable.
It’s important to note that monopolies can turn bad if nothing changes and customers are forced to pay high prices with limited choices.
Besides that, sometimes, businesses have to go all out and fight to win, but competition is usually unnecessary.
For example, Google and Microsoft hold their forts without reason to fight. And yet, they battled for years.
It wasn’t until Apple overtook them in 2013 with a market capitalization of $500b that both realized their mistake.
So, why do we compete?
The reality is that our society is ingrained with competitiveness from early on.
It starts with our education system, built on grades and ranking students against one another.
Our instincts kick in to beat the competition when we enter the practical world.
The Power Law of Venture Capital
Venture capitalists try to find, fund, and profit from promising early-stage companies.
VCs make money when these companies go public or are bought by larger companies.
Unfortunately, most startups fail soon after starting. Only a few companies outperform all others.
So, the best investment in a successful fund will outdo the rest of the companies combined.
A good VC invests in companies that carry the potential to return the value of the entire fund.
It’s challenging to predict, but every company in the VC’s portfolio must have the potential to go from 0 to 1.
In sum, all of us are investors.
Entrepreneurs invest time and money; employees invest time in their careers.
The question is, will your investment today still be valuable decades from now?
This business insight relates to valuable companies finding and building their business upon secrets.
These secrets are beliefs that the world thinks are false.
For instance, Airbnb and Uber saw untapped supply and unmet demand in lodging and transportation.
So, they created businesses to address those needs.
You can follow the same lead by asking, ‘what valuable company is nobody building?’
Answering this question will lead you to uncover one of the two types of secrets.
- Secrets of nature are undiscovered aspects of the physical or natural world.
- Secrets about people that people hide or don’t know about themselves.
The best way to uncover secrets is by looking at places where no one else does.
Remember, your secret or viewpoint is likely the opposite of what the masses believe.
Sharing your secret means enlisting fellow conspirators, so be discreet.
Last Mover Advantages
Let’s face it – it feels exhilarating to be the first mover.
After all, it gives you a clear head start.
But in the long run, cashflows matter, so it would be useless to be the first mover if you get dethroned later.
In comparison, being the last mover has its advantage.
As the last mover, you can:
- Study the end game
- Dominate a small niche
- Scale up
Eventually, it helps you develop and enjoy years of monopoly profits.
That said, you must be durable to become a valuable company.
How to Build a Monopoly
Successful companies have the following characteristics:
Proprietary Technology – which makes your product hard or impossible to replicate. Your technology must be 10x better than any substitute for a fair monopolistic advantage.
Network Effects – that make a product more useful as more people use it. For example, a business may grow to include a wide range of audience, but it should remain valuable to the initial users and small markets.
Economics of Scale – which helps spread out business fixed costs over more users and sales. This makes the marginal production cost of an extra unit negligible.
Branding – which is the key to monopoly but must be backed by substance.
The Monopoly Process
So, how can you combine the four elements – technology, network effects, scale, and brand to form your eventual monopoly?
Start Small & Monopolize – remember that you may start small, but to form your monopoly, you must dominate a large market share.
So, don’t settle for 1% of a $100 billion market.
Though your target market is small, make sure it exists.
This is to avoid the fiasco that happened with PayPal.
PayPal launched a product allowing PalmPilot users to beam money to each other.
But PalmPilot users were scattered geographically, had little in common, and didn’t need to beam each other money. So, PayPal had virtually no customers.
But after switching to eBay auctions, Amazon secured 25% of the market within three months.
Scale Up Progressively – Once you start dominating a niche, you can expand and scale to broader markets.
Just like Amazon, which wanted to dominate online retail but started with online books.
After that, it expanded to CDs, videos, and software, until it became the world’s general store.
Don’t Disrupt – Disruption is about using new technology to introduce a low-end product at low prices, improving the product time to overtake incumbents.
It’s like mobile devices disrupting PCs.
You’re less likely to succeed with the disruption model as a startup. Because startups that try doing so end up in fights, they can’t win.
Instead, focus on creating something unique, expand it gradually to adjacent markets, and avoid competition as much as possible.
Building Strong Foundations
Thiel emphasizes building strong foundations because if not for a concrete base, you cannot find your footing.
Besides, some foundations can never be undone, so starting wrong can lead you to a quick downfall.
Here’s how you can build a strong foundation for your startup:
Synergize – with the right partners, ownership, possession, and control
Focus on long-term value and alignment – with everyone in your company engaging full-time or owning stock options.
Apart from that, you must compensate people properly.
It doesn’t have to be in cash, as it fosters short-term thinking.
Instead, create long-term value by giving outcome-based cash bonuses, equity, etc.
Build a tribe – by hiring people with a shared obsession and building a culture of openness and ongoing invention.
In the book Zero to One, Thiel also shared the seven important questions that relate to Tesla’s success.
To secure massive success, you must address most, if not all, of these questions:
- Can you create breakthrough technology instead of incremental improvements?
- Is now the right time to start your particular business?
- Are you starting with a big share of a small market?
- Do you have the right team?
- Do you have a way to not just create but deliver your product?
- Will your market position be defensible after ten or twenty years from now?
- Have you identified a unique opportunity that others don’t?
Once you’ve found these answers, nothing can stop you from becoming a value-driven company.
Let the quest begin!