Book Notes - Zero to One

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Preface

• Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
• But every time we create something new, we go from 0 to 1.
• Today’s best practices lead to dead ends, the best paths are new and untried.
• Technology is miraculous because it allows us to do more with less, ratcheting up out fundamental capabilities to a higher level.

1/ The Challenge of the Future

• What important truth do very few people agree with you on?
• Brilliant thinking is rare, but courage is in even shorter supply than genius.
• But what makes the future distinctive and important isn’t that is hasn’t happened yet, but rather that it will be a time when the world looks different from today. In this sense, if nothing about our society changes for the next 100 years, then the future is over 100 years away.
• No one can predict the future exactly, but we know two things: it’s going to be different and it must be rooted in today’s world.
• At the macro level the single word for horizontal progress is globalization – taking things that work somewhere and making them work everywhere.
• Properly understood, any new and better way of doing things is technology.
• Globalization and Technology are different modes of progress.
• My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more.
• Spreading old ways to create wealth around the world will result in devastation, not riches.
• Then, after 10,000 years of fitful advance from primitive agriculture to medieval windmills and 16th century astrolabes, the modern world suddenly experienced relentless technological progress from the advent of the steam engine in the 1760s all the way up to about 1970.
• The easiest explanation for this is negative: it is hard to develop new things in big organizations, and it’s even harder to do it by yourself.
• In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes you company, you should quit now). At the other extreme, a lone genius might create a classic work of art or literature, but he could never create an entire industry.

2/ Party Like It's 1999

• “Madness is rare in individuals – but in groups, parties, nations, and ages it is the rule,” Nietzsche wrote (before he went mad). If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
• Conventional beliefs only ever come to appear arbitrary and wrong in retrospect: whenever one collapses, we call the old belief a bubble.
• In December ’96 – more than three years before the bubble actually burst – Fed chairman Alan Greenspan warned that “irrational exuberance” might have “unduly escalated asset values.” Tech investors were exuberant, but it’s not clear that they were so irrational.
• The euro launched in January 1999 to great skepticism and apathy. It rose to $1.19 on its first day of trading but sank to $0.83 within two years.
• 1. It is better to risk boldness than triviality. 2. A bad plan is better than no plan. 3. Competitive markets destroy profits. 4. Sales matters just as much as product.

3/ All Happy Companies Are Different

• The business version of our contrarian questions is: what valuable company is nobody building?
• Under perfect conditions, in the long run no company makes an economic profit.
• By “monopoly” we mean the kind of company that’s is good at what it does that no other firm can offer a close substitute.
• Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.
• If you lose sight of competitive reality and focus on trivial differentiating factors – maybe you think your nann is superior because of your great-grandmother’s recipe – your business is unlikely to survive.
• The competitive ecosystem pushes people towards ruthlessness or death.
• Do outsized profits come at the expense of the rest of society? Actually, yes: profits come out of customers’ wallets, and monopolies deserve their bad reputation – but only in a world where nothing changes.
• But it’s clear that something like Apple’s monopoly profits from designing, producing, and marketing the iPhone were the reward for creating greater abundance, not artificial scarcity: customers were happy to finally have the choice of paying high prices to get a smart phone that actually works.
• But the history of progress is a history of better monopoly businesses replacing incumbents.
• So why are economists obsessed with competition as an ideal state? It’s a relic of history.
• If your industry is in a competitive equilibrium, the death of your business won’t matter to the world: some other undifferentiated competitor will always be ready to take your place.

4/ The Ideology of Competition

• Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival.
• Elite students climb confidently until they reach a level of competition sufficiently intense to beat their dreams out of them.
• Had I actually clerked on the Supreme Court, I probably would have spent my entire career taking depositions or drafting other people’s business deals instead of creating anything new. It’s hard to say how much would be different, but the opportunity costs were enormous. All Rhodes Scholars had a great future in their past.
• But really it’s competition, not business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive.
• Inside a firm, people become obsessed with their competitors for career advancement. Then the firms themselves become obsessed with their competitors in the marketplace. Amid all the human drama, people lose sight of what matters and focus on their rivals instead.
• War is costly business.
• The hazards of imitative competition may partially explain why individuals with an Asperger’s-like social ineptitude seem to be at an advantage in Silicon valley today. If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you.
• Amid all the tactical questions – Who could price chewy dog toys most aggressively? Who could create the best Super Bowl ads? – these companies totally lost sight of the wider question of whether the online pet supply market was the right space to be in.
• Ellison’s theory was that it’s always hood to have an enemy, so long as it was large enough to appear threatening (and this motivational to employees) but not so large as to actually threaten the company.

5/ Last Mover Advantage

• Simply stated, the value of a business today is the sum of all the money it will make in the future. (To properly value a business, you also have to discount those future cash flows to their present worth, since a given amount of money today is worth more than the same amount in the future.)
• The overwhelming importance of future profits is counterintuitive even in Silicon Valley. For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.
• If you focus on near-term growth above all else, you miss the most important questions you should be asking: will this business still be around a decade from now?
• As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
• Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
• A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
• …the Apple Stores’ sleek minimalist design and close control over the consumer experience, the omnipresent advertising campaigns, the price positioning maker of premium goods, and the lingering nimbus of Steve Jobs’s personal charisma all contribute to a perception that Apple offers products so good as to constitute a category of their own.
• And it enjoys strong network effects from its content ecosystem: thousands of developers write software for Apple devices because that’s where hundreds of millions of users are, and those users stay on the platform because it’s where the apps are.
• Therefore, every startup should start with a very small market.
• Nobody needed out product, so we had no customers.
• The perfect target market for a startup is a small group of particular people concentrated together and served by a few or no competitors.
• Originally, “disruption” was a term of art to describe how a firm can use new technology to introduce a low-end product at low prices, improve the product over time, and eventually overtake even the premium products offered by incumbent companies using older technology.
• The concept was coined to describe threats to incumbent companies, so startups’ obsession with disruption means they see themselves through older firms’ eyes. If you think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixed on the obstacles in your path. But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create.
• PayPal could be seen as disruptive, but we didn’t try to directly challenge any large competitor. It’s true that we took some business away from Visa when we popularized internet payments: you might use PayPal to buy something online instead of using your Visa card to buy it in a store. But since we expanded the market for payments overall, we gave Visa far more business than we took. The overall dynamic was net positive, unlike Napster’s negative-sum struggle with the U.S. recording industry. As your craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.

6/ You Are Not A Lottery Ticket

• Every company starts in unique circumstances, and every company starts only once. Statistics doesn’t work when the sample size is one.
• Ralph Waldo Emerson captured this ethos when he wrote: “Shallow men believe in luck, believe in circumstances….Strong men believe in cause and effect.”
• If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it.
• A definite view, by contrast, favors firm convictions. Instead of pursuing many sided mediocrity and calling it “well-roundedness,” a definite person determines the one best thing to do and then does it.
• Be a monopoly of one.
• An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it.
  *Europeans just react to events as they happen and hope things don’t get worse.
• A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.
  *Every other country is afraid that China is going to take over the world; China is the only country afraid it won’t.
  **The easiest way for China to grow is to relentlessly copy what has already worked in the West.
  ***The Chinese public too, knows that winter is coming. Outsiders are fascinated by the great fortunes being made inside China, but they pay less attention to the wealthy Chinese trying hard to get their money out of the country. Poorer Chinese just save everything they can and hope it will be enough. Every class of people in China takes the future deadly seriously.
• To the definite optimist, the future will be better than the present if he plans and works to make it better.
  *Each generation’s inventors and visionaries surpassed their predecessors.
  **Americans continued to remake the face of the world in peacetime: the Interstate Highway System began construction in 1956, and the first 20,000 miles of road were open for driving by 1965.
  ***Reber was a schoolteacher, an amateur theater producer, and a self taught engineer. Undaunted by his lack of credentials, he publicly proposed to build two huge dams in the Bay, construct massive freshwater lakes for drinking water and irrigation, and reclaim 20,000 acres of land for development.
  ****Today a grand plan coming from a schoolteacher would be dismiss as crankery, and a long-range vision coming from anyone more powerful would be derided as hubris. You can still visit the Bay Model in that Sausalito warehouse, but today it’s just a tourist attraction: big plans for the future have become archaic curiosities.
• To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans.
  *It’s no surprise that these fields all attract disproportionate numbers of high-achieving Ivy League optionality chasers what could be more appropriate reward for two decades of resume-building than a seemingly elite, process-oriented career that promises to “keep options open”?
  **The strange history of Baby Boom produced a generation of indefinite optimists so used to effortless progress that they feel entitled to it.
  ***Every year of adulthood continued to get automatically better and better for the rich and successful. The rest of the generation was left behind, but the wealthy Boomers who shape public opinion today see little reason to question their naïve optimism. Since tracked careers worked for them, they can’t imagine that they won’t work for their kids too.
• While a definitely optimistic future would need engineers to design underwater cities and settlements in space, an indefinitely optimistic future calls for more bankers and lawyers.
• At no point does anyone in chain know what to do money in the real economy. But in an indefinite world, people actually prefer unlimited optionality; money is more valuable than anything you could possibly do with it. Only in a definite future is money a means to an end, not the end itself.
• And it’s not just the electoral process – the very character of government has become indefinite, too.
• ..fair political reasoning is supposed to be impossible for anyone with knowledge of the world as it concretely exists.
• Systematic knowledge of the current range of human lifespans has made that range seem natural. Today our society is permeated by the twin ideas that death is both inevitable and random.
• Eroom’s law – that’s Moore’s law backward – observes that the number of new drugs approved per billion dollars spent of R&D has halved every nine years since 1950.
• It’s easy for libertarians to clam that heavy regulation holds biotech back – and it does – but indefinite optimism may pose an even greater challenge for the future of biotech.
• The other three views of the future can work. Definite optimism works when you build the future you envision.
• Just as Newtonian physics can’t explain black holes or the Big Bang, it’s not clear that Darwinian biology should explain how to build a better society or how to create a new business out of nothing. Yet in recent years Darwinian (or pseudo-Darwinian) metaphors have become common in business.
• But business is a methodology, not a goal. Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum.
• A company is the strangest place of all for an indefinite optimist: why should you expect your business to succeed without a plan to make it happen? Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.
• It’s true that every great entrepreneur is first and foremost a designer.
• Apple imagined and executed definite multi-year plans to create new products and distribute them effectively.
• Founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough.
• A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.

7/ Follow the Money

• This extraordinarily stark pattern, in which a small few radically outstrip all rivals, surrounds us everywhere in the natural and social world.
• Since investors spend most of their time making new investments and attending to companies in their early stages, most of the companies they work with are by definition average.
• An entrepreneur makes a major investment just by spending her time working on a startup. Therefore every entrepreneur must think about whether her company is going to succeed and become valuable. Every individual is unavoidably an investor , too. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now.
• Our schools teach the opposite: institutionalized education traffics in a kind of homogenized, generic knowledge,. Everybody who passes through the American school system learns not to think in power law terms. Every high school course period lasts 45 minutes whatever the subject. Every student proceeds at a similar pace.
• It does matter what to do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.

8/ Secrets

• Every one of today’s most famous and familiar ideas was once unknown and unsuspected.
• Consider the trivial but revealing hallmarks of urban hipsterdom: faux vintage photography, the handlebar mustache, and vinyl record players all hark back to an earlier time when people were still optimistic about the future. If everything worth doing has already been done, you may as well feign an allergy to achievement and become a barista.
• Why has so much of our society come to believe that there are no hard secrets left? It might start with geography. There are no blank spaces left on the map anymore. If you grew up in the 18th century, there were still new places to go.
• ...four social trends have conspired to root out belief in secrets.
  *First is incrementalism. From an early age, we are taught that the right way to do things is to proceed one very small step at a time, day by day, grade by grade. If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it.
  ** Second is risk aversion. People are scared of secrets because they are scared of being wrong. By definition, a secret hasn’t been vetted by the mainstream. If you goal is to never make a mistake in your life, you shouldn’t look for secrets.
  ***Third is complacency. Social elites have the most freedom and ability to explore new thinking, but they seem to believe in secrets the least. Why search for a new secrete if you can comfortably collect rents on everything that has already been done?
  ****Fourth is “flatness”. As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace: the world is “flat.”
• You can’t find secrets without looking for them.
• We could cure cancer, dementia, and all the diseases of age and metabolic decay. We can find new ways to generate energy that free the world from conflict over fossil fuels. We can invent faster ways to travel from place to place over the surface of the planet; we can even learn how to escape it entirely and settle new frontiers. But we will never learn any of these secretes unless we demand to know them and force ourselves to look.
• Airbnb saw untapped supply and unaddressed demand where others saw nothing at all.
• If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
• What secrets is nature not telling you? What secretes are people not telling you?
• Secrets about people are relatively underappreciated. Maybe that’s because you don’t need a dozen years of higher education to ask the questions that uncover them: What are people not allowed to talk about? What is forbidden or taboo?
• ..what are people running companies not allowed to say?
• The opposite of physics might be astrology, but astrology doesn’t matter.
• There’s plenty more to learn: we know more about the physics of faraway stars than we know about human nutrition. It won’t be easy, but it’s not obviously impossible: exactly the kind of field that could yield secrets.
• So who do you tell? Whoever you need to, and no more. In practice, there’s always a golden mean between telling nobody and telling everybody – and that’s a company. The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside.

9/ Foundations

• Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce. Optimism abounds at the start of every relationship.
• Now when I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they star a company together – otherwise they-re just rolling dice.
• Freud, Jung, and every other psychologist has a theory about how every individual mind is divided against itself, but in business at least, working for yourself guarantees alignment. Unfortunetly, it also limits what kind of company you can build. It’s very hard to go from 0 to 1 without a team.
• The clerks and petty tyrants who operate the DMV, however, enjoy very real possession of their small-time powers.
• The potential for conflict increases over time as interests diverge: a board member might want to take a company public as soon as possible to score a win for his venture firm, while the founders would prefer to stay private and grow the business.
• A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
• A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
• Cash is attractive. It offers pure optionality: once you get your paycheck, you can do anything you want with it. However, high cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future.
• Sending out a company-wide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.
• Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.
• The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops.

10/ The Mechanics of the Mafia

• You can’t accomplish anything meaningful by hiring an interior decorator to beautify your office, a “human resources” consultant to fix your policies, or a branding specialist to home your buzzwords.
• A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.
• But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s note even rational.
• Since time your most valuable asset, it’s off to spend it working with people who don’t envision any long-term future together.
• If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well – even in purely financial terms.
• General and undifferentiated pitches don’t say anything about why a recruit should join your company instead of many others.
• But there are two general good answers: answers about your mission and answers about your team. You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no on else is going to get done.
• Just cover the basics like health insurance and then promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.

11/ If you buid it, will they come?

• The U.S. advertising industry collects annual revenues of $150 billion and employs more than 600,000 people. At $450 billion annually, the U.S. sales industry is even bigger.
• It’s easy to resist the most obvious sales pitches, so we entertain a false confidence in our own independence of mind. But advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later. Anyone who can’t acknowledge its likely effect on himself is doubly deceived.
• In engineering disciplines, a solution either works or it fails. You can evaluate someone else’s work with relative ease, as surface appearances don’t matter much. Sales is the opposite: an orchestrated campaign to change surface appearances without changing the underlying reality.
• What nerds miss is that it takes hard work to make sales look easy.
• All salesmen are actors: their priority is persuasion, not sincerity.
• It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented as effective way to sell it, you have a bad business – no matter how good the products.
• SpaceX shows that it can be done. Within just a few years of launching his rocket startup, Elon Musk persuaded NASA to sign billion-dollar contracts to replace the decommissioned space shuttle with a newly designed vessel from Space X.
• If I had started off by trying to sell the president of the university on an enterprise-wide solution, Box would have sold nothing. A complex sales approach would have made Box a forgotten startup failure; instead, personal sales made it a multibillion-dollar business.
• A product is viral it its core functionality encourages users to invite their friends to become users too.
• The ideal viral loop should be as quick and frictionless as possible.
• This strategy costs us $20 per customer, but it also led to 7% daily growth, which meant that our user base nearly doubled every 10 days.
• Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
• If you can get just one distribution channel to work, you have a great business. If you try several but don’t nail one, you’re finished.
• Your company needs to sell more than its product. You must also sell your company to employees and investors.
• Everybody has a product to sell – no matter whether you’re an employee, a founder, or an investor. It’s true even if your company consists of just you and your computer. Look around. If you don’t see any salespeople, you’re the salesperson.

12/ Man and Machine

• Neither side questions the premise that better computers will necessarily replace human workers. But that premise is wrong: computers are complements for humans, not substitutes. The most valuable business of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
• …since every person has a relative strength at some particular job, in theory the economy maximizes wealth when people specialize according to their advantages and then trade with each other.
• Gains from trade are greatest when there's a big discrepancy advantage, but the global supply of workers willing to do repetitive tasks for an extremely small wage is extremely large.
• The stark differences between man and machine mean that gains from working with computers are much higher than gains from trade with other people. We don’t trade with computers any more than we trade with livestock or lamps. And that’s the point computers are tools, not rivals.
• Properly understood, technology is the one way for us to escape competition in a globalizing world.
• We have let ourselves become enchanted by big data only because we exoticize technology. We’re impressed with small feats accomplished by computers alone, but we ignore big achievements from complementarity because the human contribution makes them less uncanny.
• Technology supposed to increase our mastery over nature and reduce the role of chance in our lives; building smarter-than-human computers could actually bring chance back with a vengeance.

13/ Seeing Green

• 1. The Engineering Question
  Can you create breakthrough technology instead of incremental improvements?
• 2. The Timing Question
  Is now the right time to start your particular business?
• 3. The Monopoly Question
  Are you starting with a big share of a small market?
• 4. The People Question
  Do you have the right team?
• 5. The Distribution Question
  Do you have a way to not just create but deliver your product?
• 6. The Durability Question
  Will your market position be defensible 10 and 20 years into the future?
• 7. The Secret Question
  Have you identified a unique opportunity that others don’t see?
• Customers won’t care about any particular technology unless it solves a particular problem in a superior way. And if you can’t monopolize a unique solution for a small market you’ll be stuck with vicious competition.
• Exaggerating your own uniqueness is an easy way to botch the monopoly question.

14/ The Founder's Paradox

• ...perhaps founders aren’t really as extreme as they appear. Might they strategically exaggerate certain qualities? Or is it possible that everyone else exaggerates them? All of these effects can be present at the same time, and whenever present they powerfully reinforce each other.