Zero to one

Seven questions every business must answer

Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer Open in Kindle

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

Lessons from the dot-com crash

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today: Open in Kindle

Make incremental advances Open in Kindle
Stay lean and flexible Open in Kindle
Improve on the competition Open in Kindle
Focus on product, not sales Open in Kindle

What important truth do very few people agree with you on?

WHENEVER I INTERVIEW someone for a job, I like to ask this question: “What important truth do very few people agree with you on?” This question sounds easy because it’s straightforward. Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is by definition agreed upon. And it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply than genius. Open in Kindle

A good answer takes the following form: “Most people believe in x, but the truth is the opposite of x.” I’ll give my own answer later in this chapter. What does this contrarian question have to do with the future? In the most minimal sense, the future is simply the set of all moments yet to come. But what makes the future distinctive and important isn’t that it 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. Open in Kindle

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. Without technological change, if China doubles its energy production over the next two decades, it will also double its air pollution. Open in Kindle

What valuable company is nobody building?

THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value is not enough—you also need to capture some of the value you create. Open in Kindle

The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business. Open in Kindle

If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive. Open in Kindle

Monopolies

Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can. Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. Open in Kindle

Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits. Open in Kindle

CREATIVE MONOPOLY means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. Open in Kindle

Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly. This advice can be hard to follow because pride and honor can get in the way. Open in Kindle

If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most. The next chapter is about how to use a clear head to build a monopoly business. Open in Kindle

Building a monopoly

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.) Open in Kindle

If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business. Open in Kindle

Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding. Open in Kindle

Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate. Open in Kindle

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. Open in Kindle

The clearest way to make a 10x improvement is to invent something completely new. Open in Kindle

Or you can radically improve an existing solution: once you’re 10x better, you escape competition. PayPal, for instance, made buying and selling on eBay at least 10 times better. Open in Kindle

You can also make a 10x improvement through superior integrated design. Before 2010, tablet computing was so poor that for all practical purposes the market didn’t even exist. “Microsoft Windows XP Tablet PC Edition” products first shipped in 2002, and Nokia released its own “Internet Tablet” in 2005, but they were a pain to use. Then Apple released the iPad. Design improvements are hard to measure, but it seems clear that Apple improved on anything that had come before by at least an order of magnitude: tablets went from unusable to useful. Open in Kindle

Network effects make a product more useful as more people use it. Open in Kindle

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. Open in Kindle

Paradoxically, then, network effects businesses must start with especially small markets. Open in Kindle

Economies of Scale 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. Open in Kindle

Branding A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly. Open in Kindle

Start small and monopolize

Start Small and Monopolize Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is. Open in Kindle

The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse. Open in Kindle

Scaling Up Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. Open in Kindle

The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative. Open in Kindle

Disruption

Don’t Disrupt Silicon Valley has become obsessed with “disruption.” 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. Open in Kindle

Disruption also attracts attention: disruptors are people who look for trouble and find it. Open in Kindle

As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible. Open in Kindle

The last will be first

THE LAST WILL BE FIRST Open in Kindle

It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision. In this one particular at least, business is like chess. Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.” Open in Kindle

Indefinite attitudes to the future explain what’s most dysfunctional in our world today. Process trumps substance: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options. Open in Kindle

Being a a definite person

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. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one. Open in Kindle

Optimists

You can also expect the future to be either better or worse than the present. Optimists welcome the future; pessimists fear it. Combining these possibilities yields four views: Open in Kindle

Indefinite Pessimism

The indefinite pessimist can’t know whether the inevitable decline will be fast or slow, catastrophic or gradual. All he can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime: hence Europe’s famous vacation mania. Open in Kindle

Definite Pessimism Open in Kindle

A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it. Open in Kindle

Every other country is afraid that China is going to take over the world; China is the only country afraid that it won’t. Open in Kindle

Definite Optimism

Definite Optimism To a definite optimist, the future will be better than the present if he plans and works to make it better. Open in Kindle

Indefinite Optimism

To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely. Open in Kindle

Planning, iteration and process

A business with a good definite plan will always be underrated in a world where people see the future as random. Open in Kindle

In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future. Open in Kindle

But iteration without a bold plan won’t take you from 0 to 1. A company is the strangest place of all for an indefinite optimist: why should you expect your own 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. Open in Kindle

Power law

Most businesses never need to deal with venture capital, but everyone needs to know exactly one thing that even venture capitalists struggle to understand: we don’t live in a normal world; we live under a power law. Open in Kindle

Rather, they follow a power law: a small handful of companies radically outperform all others. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies Open in Kindle

The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. Open in Kindle

This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules. Open in Kindle

But life is not a portfolio: not for a startup founder, and not for any individual. An entrepreneur cannot “diversify” herself: you cannot run dozens of companies at the same time and then hope that one of them works out well. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve. Open in Kindle

It does matter what you do

Every university believes in “excellence,” and hundred-page course catalogs arranged alphabetically according to arbitrary departments of knowledge seem designed to reassure you that “it doesn’t matter what you do, as long as you do it well.” That is completely false. It does matter what you 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. Open in Kindle

You should not necessarily start your own company

For the startup world, this means you should not necessarily start your own company, even if you are extraordinarily talented. If anything, too many people are starting their own companies today. People who understand the power law will hesitate more than others when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast. The power law means that differences between companies will dwarf the differences in roles inside companies. You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing). Open in Kindle

If you do start your own company, you must remember the power law to operate it well. The most important things are singular: One market will probably be better than all others, as we discussed in Chapter 5. One distribution strategy usually dominates all others, too—for that see Chapter 11. Time and decision-making themselves follow a power law, and some moments matter far more than others—see Chapter 9. Open in Kindle

Secrets

To say that there are no secrets left today would mean that we live in a society with no hidden injustices. Open in Kindle

If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth. The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers. Open in Kindle

Where to look for secrets

The best place to look for secrets is where no one else is looking. Most people think only in terms of what they’ve been taught; schooling itself aims to impart conventional wisdom. So you might ask: are there any fields that matter but haven’t been standardized and institutionalized? Open in Kindle

Companies are like countries in this way. Bad decisions made early on—if you choose the wrong partners or hire the wrong people, for example—are very hard to correct after they are made. It may take a crisis on the order of bankruptcy before anybody will even try to correct them. As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation. Open in Kindle

Building a team and alignment

You need good people who get along, but you also need a structure to help keep everyone aligned for the long term. Open in Kindle

To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts:

Ownership: who legally owns a company’s equity?
Possession: who actually runs the company on a day-to-day basis?
Control: who formally governs the company’s affairs? Open in Kindle

In the boardroom, less is more

In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight. Open in Kindle

From the start, I wanted PayPal to be tightly knit instead of transactional. I thought stronger relationships would make us not just happier and better at work but also more successful in our careers even beyond PayPal. Open in Kindle

Max Levchin, my co-founder at PayPal, says that startups should make their early staff as personally similar as possible. Startups have limited resources and small teams. They must work quickly and efficiently in order to survive, and that’s easier to do when everyone shares an understanding of the world. Open in Kindle

Advertising matters because it works

In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works. It works on nerds, and it works on you. You may think that you’re an exception; that your preferences are authentic, and advertising only works on other people. Open in Kindle

Like acting, sales works best when hidden

Like acting, sales works best when hidden. This explains why almost everyone whose job involves distribution—whether they’re in sales, marketing, or advertising—has a job title that has nothing to do with those things. Open in Kindle

Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan. Open in Kindle

Humans and machines

The most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems? Open in Kindle

computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete. Open in Kindle

Customers and technology

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. Open in Kindle

Profit vs nonprofit corps

Progress isn’t held back by some difference between corporate greed and nonprofit goodness; instead, we’re held back by the sameness of both. Just as corporations tend to copy each other, nonprofits all tend to push the same priorities. Open in Kindle

Do something different

Doing something different is what’s truly good for society—and it’s also what allows a business to profit by monopolizing a new market. The best projects are likely to be overlooked, not trumpeted by a crowd; the best problems to work on are often the ones nobody else even tries to solve. Open in Kindle

Begin micro to go macro

An entrepreneur can’t benefit from macro-scale insight unless his own plans begin at the micro-scale. Open in Kindle

A complex system that works is invariably found to have evolved from a simple system that worked. A complex system designed from scratch never works and cannot be patched up to make it work. You have to start over, beginning with a working simple system. John Gall