Book Review: Zero to One: Notes on Start Ups, or How to Build the Future
A law graduate turned tech entrepreneur, Peter Thiel, makes a strong case for innovation by challenging the conventional thinking about capitalism and redefining the monopolistic advantage
A member of the Paypal founding team, billionaire, venture capitalist and Trump supporter, Peter Thiel, defies the image of a typical Silicon Valley tech honcho by his support of Trump and pure right-wing capitalism. You would be forgiven for prejudging that reading his book, Zero to One: Notes on Start-Ups, or How to Build the Future, co-authored with Blake Masters, must be an unadulterated diet to extol the virtues of free-market capitalism and competitive enterprises generating wealth for the founders and value for shareholders, convincingly supported by Peter Thiel’s successful track record in founding two successful tech companies, Paypal and Palantir, running a tech venture fund and boasting an ivy-league school pedigree. This book should guide its readers in charting their course in building a successful tech enterprise. However, the lead author, Peter Thiel, builds his case by arguing against ivy-league education and expounds beating the competition by building a lasting monopoly with abundant cash flow to maintain its leadership position.
0 to 1 is a metaphorical phrase for an idea to build a product or a solution, which has never been done before (0), such that it offers a manifold improvement on an existing product or a solution (1). A 1 to n idea is a replication of a successful 0 to 1 idea across multiple markets. Several entrepreneurs replicated the idea behind the largest bookstore on the planet, Amazon, by building several successful Internet businesses across the globe, yet they never succeeded in beating Amazon in their game, because Amazon always maintained the lead by using superior technology and enjoyed near-monopoly in the e-commerce space. Leaving few such 0 to 1 examples aside, after rapid advancements of technology from pre-WW II period until the mid-1970, of which we still reap the benefits, such as ARPANET project, the belief in the technological end of the road has become prevalent. Challenging this belief, Peter Thiel, asserts that technology holds the answers to humankind’s most pressing problems such as sustainable energy and raising the standards of living in the developing world. And, such answers will emerge from 0 to 1 ideas and not from 1 to n ideas. Globalization, a 1 to n idea, is a replication of something that has worked elsewhere. Technology brings 0 to 1 ideas to reality through startups having small mission-focused teams, which is hard to achieve in large organizations with bureaucratic hierarchies and risk-averse culture. This is prevalent thinking reconfirmed by Peter Thiel.
Peter Thiel demolishes the principles learnt from the dot com era that saw a sharp boom in the valuations of the companies followed by nosediving valuations and bankruptcies. He does it by discarding a dot-com era lesson-learned principle of “improving upon competition” in the favour of another principle “Competitive markets destroy profits”. Quoting the example of automaker Tesla, Peter argues that Elon Musk did not compete with successful automakers by improving the existing internal combustion engine cars but offered a new product that the traditional automakers could not match and thereby created a monopolistic position for Tesla. Further, he adds that Google enjoyed 100 times the profit margin of the entire airlines industry in 2012 because it has no competition but airlines compete with each other destroying the profits as a result. So Google fits in the definition of a monopoly because no other enterprise can not offer a search product, which is comparable to Google’s search engine. How having a monopoly is better than competing? The answer to this question is hidden in the following quote from the book.
“In business, money is either an important thing or it is everything”
For a company caught in competition, money is everything but a company enjoying a monopolistic position can also create room to think about things that are not related to money. We all know of the fast disappearing annual R&D and innovation budgets to boost the bottom line in the fourth quarter of the year, to satisfy the investors and market analysts, leaving little space for long-term thinking necessary for 0 to 1 ideas. The competition, an anti-pattern of monopoly, gets deep-rooted in our psyche through our schooling system as the students who get excellent grades face exceedingly difficult competition from peers as they progress from a school to an ivy league college to an investment banking firm. The ultimate human product of this competitive system is a conformist person working in the professions such as law and investment banking. The book progresses to define the essential characteristics of a business that is set to reap the benefits of monopolistic advantage.
Building a non-competitive monopoly that creates a sustainable value will be founded on the following characteristics: 1. proprietary technology, 2. network effects, 3. economies of scale, and 4. Branding. The most fascinating characteristic of these four is proprietary technology because Peter Thiel is a serial tech entrepreneur. The book recommends that proprietary technology should be at least 10 times better on some important parameter to offer a monopolist advantage, otherwise it will be a marginal advantage exposed to competitive threats. Such ten-fold improvement is possible by inventing something new. A good example is the invention of LED lightbulb; the same lumens at 1/10th watts of power consumption. All other characteristics are either known, such as network effects and branding or based upon unsupported data such as building for scale in the first design when it is well known that Twitter and Amazon have rehauled their tech architecture several times to scale up the business.
In a chapter devoted to venture capital, the book covers The Power Law to explain the J shaped growth trajectory of startups, the high failure rate of ventures and even warns against starting your own new venture. Nevertheless, if a committed entrepreneur sets up a new venture then choosing a team with good technical abilities and skill set is as important as founders having a shared history and collaborative track record. The book highlight the importance of alignment in an enterprise, where equity ownership, responsibility for daily operations and corporate governance resting with three different sets of people could also lead to internal conflicts of interests.
To conclude, this book is loaded with both conventional and unconventional wisdom of a successful hands-on entrepreneur. It makes a strong case for innovation as the primary means of value creation. By suggesting to risk boldness against incremental advances, it strengthens its case for invention rather than innovation, which has become a more fashionable term in the corporate world since the demise of the successors of Bell Labs. Perhaps, the author yearns for the comeback of the era in which the inventors like Thomas Alva Edison implemented the 0 to 1 idea by building the first electric light bulb or the Wright Brothers did by building the first flying machine. The future of the loss of these monopolist advantages is well-known history as the world now has hundreds of light bulb manufacturers and tens of aircraft makers. So the monopolistic advantage is not permanent unless matched by the continuous invention of 10 times better products. The ideas covered in this book are strikingly similar to those covered in Blue Ocean Strategy. Peter Thiel’s support for Trump and Trump’s theme of dumping globalization which underscored his year 2016 campaign and its slogan Making America Great Again, shows the confluence of the political and technical lines of thoughts closely resembling the case, the late Intel CEO Andy Groves’ made against outsourcing jobs to Asian countries.
Peter Thiel has no qualms about making the visceral aversion towards the suite-clad tech CEOs public or attributing vacation frenzy among the Europeans to their strong belief in the bleak future ahead of them. By lamenting about ‘Lean Thinking’, which has become the dominant ideology among the tech circles, and putting forward the principle “Bad plan is better than no plan”, he exhibits a degree of unfamiliarity with the topic of Lean. Lean thinking does not go against planning but rather suggests every plan is a bad plan unless it is flexible.
The world desperately needs 0 to 1 ideas but instead of exploring unknown unknowns, it prefers to replicate the tried and tested or incremental improvements. The distribution of human creativity and curiosity also follows a bell-shaped curve. Those who fall on the brighter end of the bell-shaped curve should find honour and satisfaction in working on 0 to 1 ideas rather than working in the conformist professions. Stanford Law graduate, Peter Thiel, is the foremost example of his own theory. The majority in the mid-band of the bell curve would still find themselves taking solace in 1 to n ideas, There is nothing intrinsically wrong about it.