A contrarian’s philosophy on startups
— Book notes on Peter Thiel’s “Zero to One”
Reading through its laconic text over a weekend, I was astounded by how a book could be like Janus that conveys inspiring ideas along with vicious thoughts upon which I shook my head vehemently. Zero to one became a popular must-read in Silicon Valley and the tech community since it was published in 2014 based on class notes of Peter Thiel’s Stanford CS 183 “Startup”. Being a founding member of the PayPal mafia and a rare republican in Silicon Valley, Peter is widely beloved and hated in the VC and tech world and this book epitomizes this fact.
- Avoid competition, Build a monopoly
One of the core ideas of this book is the inherent conflict between capitalism and competition. As opposed to the common sense that competition invigorates startups and society, the book suggests competition drains up all profit margins and bogs the company down in a survival swamp. As entrepreneurs, we should build a monopoly and avoid competition as much as possible.
The absurd part of this idea is that you cannot avoid competition in building your startup, since that’s the premise of survival and prosperity if you have ever had any entrepreneurial experience, ranging from finding partners, crafting a business plan, pitching to VC, to negotiating a term sheet, customer and talent acquisition. A rectified version makes way more sense to me: You still compete to death, just on another battlefield. Every entrepreneur should be able to distinguish between vicious and benevolent competition, withdraw from a crowded space, and find a niche market given her team and business model. Finding an unseen and lucrative market is way harder than competing in a crowded one.
The book states that the history of progress is a history of better monopoly businesses replacing incumbents. But monopoly is not opposed to perfect competition, but benign competition. Despite Rockefeller being able to reduce the gas price to cents per gallon, Americans might not enjoy decades of low-price gas should Standard Oil had not been dissembled into 27 companies. Let alone you have to compete to death to establish a monopoly!
Peter also suggests would-be entrepreneurs be the last movers — that is, to make the last great development in a specific market and enjoy decades of monopoly profits. I do agree every startup should find its niche market and scale up, vertically or horizontally, towards the long-term vision, but the last mover approach is partially contradicting avoiding competition and finding a new market strategy.
Besides all cons above, Peter does deliver thoughtful insights threefold:
(1) A brilliant side of this idea and my all-book favorite is the observation that “Monopolists downplay their monopoly to avoid scrutiny, while competitors exaggerate their uniqueness.” Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets: British food ∩ restaurant ∩ Palo Alto. Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets: search engine ∪ mobile phones ∪ wearable computers ∪ self-driving cars. The framework could help us read between lines in every IPO S-1 form, Quarterly earnings, and press release.
(2) The best way to avoid competition is to expand the market. Taking Visa as an example, PayPal brings more business than it takes since PayPal cultivates customers on online payments and allows the binding of credit cards. The overall dynamic was net positive, unlike Napster’s negative-sum struggle with the U.S. recording industry. As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
(3) On the regulation side, the government is equivocal towards monopolies, seeking powerhouses of economic growth without harming the mid-size and small businesses’ ambition to be one. As Peter puts it: “Even the government knows this: that’s why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases).”
- Be definite optimistic instead of being a lottery ticket
I find Peter’s four quadrants, defined by optimism, pessimism, definite, and indefinite, misleading and ambiguous. He tries to represent engineering and precise planning as definite, as well as finance and capital circulation as indefinite. On that note, he asserts that “if you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it.” (Ironically, he is a successful venture capitalist.)
Capital represents the allocation of resources, either in material or labor forms, and no engineering would be possible without the right allocation of resources. Realizing our future is indefinite does not keep human’s curiosity and footsteps in check, because every baby step brings unprecedented satisfaction and helps fight inequality and ignorance to a greater extent.
The book’s sophism and ambiguity expand to the section of “You are not a lottery ticket”. Peter points out: “Baby boomers miss the even bigger social context for their preferred explanations: a whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.” What he means is: Baby boomers are a lucky generation, hence they attribute every success to luck, as what Malcolm Gladwell did to Bill Gates. Can’t you still read superiority complex between lines? Completely rooting out the stochastic factors in success and life is either arrogant or stupid. People who enjoy luck don’t necessarily attribute everything to fortune. For what it’s worth, they realize more clearly that pure luck doesn’t lead them any further. No success is accidental, and no success hasn’t been supported more or less by chance, since after all the earth and human beings’ existence is a miracle among an astronomical number of celestial objects.
An intelligent point of this section comes with the investing strategy of venture capital: Opposite to the “Spray and pray” approach, hoping the winners counterbalance the losers in VC’s portfolio, investors should only narrow down their shooting range to potential bellwethers in different verticals. I know it’s hard to combat FOMO, but “Whenever you shift from the substance of business to a diversified hedging strategy, venture investing starts to look a lot like buying lottery tickets. And once you think you are playing lottery, you have already psychologically prepared yourself to lose. “
- Sales and Distributing channel matters
The book becomes less contrarian in the later part when Peter emphasizes the importance of sales and distribution in the startups’ landscape. Sales are ubiquitous for products, thoughts, social patterns, or simply a person, considering in an interview or proposal, but the best sale is hidden because none of us wants to be reminded when we are being sold. As an engineer, you might not see superior advantages in Snowflake’s data warehouse over AWS Redshift, but its customers, along with Wall Street, are sold on Snowflake’s top sales team given its IPO price.
- Bonus point
Though this book is lacking details on incorporating and funding a startup, (I recommend “Venture Deals” and “Secrets of Sand Hill Road” on that), it does provide some insights into the startups’ management structure: Ownership — Stockholders; Possession — C-suites; Control — Board members. The trio separation of powers, resembling a modern government, ensures the smooth operation of a company.
- Summary
It’s a bittersweet experience to read this fragmented book. Along with all the pros and cons above, Peter singled out that “without new technology to relieve competitive pressures, stagnation is likely to erupt into conflict”, which partially explains the occurring Eastern Europe crisis. I do like his quote: “Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.” To me, this is another rendition of “Stay hungry! Stay foolish!”